Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: Middlesex operates as a regulated water utility in New Jersey and Delaware, providing water and wastewater services to residential, commercial, and industrial customers. The company also operates non-regulated contract services for municipal and private systems. As of June 30, 2006, the company served approximately 58,500 retail customers in New Jersey and 29,100 in Delaware.
Key Financial Metrics
| Metric (Six Months Ended June 30) | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $39,267,201 | $35,173,654 |
| Operating Income | $10,122,285 | $7,429,885 |
| Net Income | $4,780,200 | $3,325,830 |
| Earnings Per Share (Diluted) | $0.40 | $0.28 |
| Cash Flow from Operations | $7,364,694 | $4,615,306 |
| Capital Expenditures | $11,895,711 | $11,592,836 |
| Total Assets | $337,433,450 | $324,383,124 |
| Long-Term Debt | $127,482,314 | $128,174,944 |
| Current Ratio (Current Assets / Current Liabilities) | 0.59 | 0.79 |
Note: Current ratio calculated as Total Current Assets ($18,056,949) divided by Total Current Liabilities ($30,533,754) for 2006.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 11.6% year-over-year. This was driven by a $2.1 million increase in New Jersey due to a base rate increase granted in December 2005, favorable weather conditions increasing consumption, and growth in Delaware service territories.
- Profitability: Net income rose 43.7% to $4.78 million. Operating income increased 36.2% to $10.12 million. The increase in earnings per share (from $0.28 to $0.40) reflects higher net income and a slight increase in the weighted average shares outstanding.
- Expense Increases: Operating expenses rose 4.2%, primarily due to higher electricity costs for pumping and treatment, increased payroll and benefits, and higher wastewater treatment costs. Interest expense increased 12.3% due to higher average long-term borrowings.
- Cash Flow: Net cash provided by operating activities increased significantly by $2.7 million to $7.4 million, attributed to higher earnings and improved timing of receivables collections.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Program: The company projects a 2006 capital program of approximately $37.8 million. For 2007-2008, projected capital expenditures range between $85.9 million and $112.2 million.
- Financing: The company plans to fund capital needs through internally generated funds, State Revolving Fund (SRF) loans, and a potential common stock offering of up to 1.5 million shares (pending BPU approval).
- Rate Matters:
- Tidewater (Delaware): Filed for a 38.6% base rate increase ($5.5 million) on April 28, 2006. A 15% interim rate increase went into effect on June 27, 2006.
- Pinelands (NJ): Received approval for base rate increases of 7.02% and 0.98% effective April 13, 2006.
- Southern Shores: Implemented a 3% annual rate increase on January 1, 2006.
Risks and Contingencies
- Regulatory Risk: Future earnings depend on the approval of rate increase requests, particularly the pending 38.6% request for Tidewater in Delaware.
- Legal Proceedings:
- Delaware Fire Marshal: Tidewater is appealing a Notice of Violation regarding fire protection services. An unfavorable outcome could require capital investments of $0.9 million to $1.6 million for one system, with potential material costs for over 60 other systems.
- Perth Amboy Guarantee: Middlesex guarantees approximately $23.9 million of Series C Serial Bonds for the City of Perth Amboy. While the company believes performance under the guarantee is unlikely due to contractual provisions, it remains a contingent liability.
- Accounting Changes: The company is evaluating the impact of FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes and an exposure draft regarding pension plan underfunding, which could materially reduce shareholders' equity if adopted as proposed.
Investor Verification Checklist
- Rate Case Outcome: Monitor the Delaware Public Service Commission's decision on Tidewater's 38.6% base rate increase request.
- Fire Protection Appeal: Track the status of the appeal against the Delaware Office of State Fire Marshal to assess potential capital cost exposure.
- Equity Offering: Verify the approval and execution of the proposed 1.5 million share common stock offering to fund capital projects.
- Weather Sensitivity: Assess the impact of weather variations on water consumption and revenue, particularly in the Delaware service territory.
- Debt Maturities: Review the schedule of long-term debt maturities, noting approximately $2.1 million maturing within the next 12 months.