Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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. It also operates non-regulated contract services for municipal systems. The company is subject to rate regulation by the New Jersey Board of Public Utilities (BPU) and the Delaware Public Service Commission (PSC).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Operating Revenues | $20,583 | $20,855 |
| Operating Income | $3,002 | $4,347 |
| Net Income | $1,361 | $2,004 |
| Earnings Per Share (Basic) | $0.10 | $0.15 |
| Cash Flow from Operations | $5,718 | $5,731 |
| Capital Expenditures | $5,976 | $7,008 |
| Total Assets | $443,351 | $440,000 |
| Long-term Debt | $124,351 | $118,217 |
| Short-term Borrowings | $37,010 | $25,877 |
Liquidity: Cash and cash equivalents totaled $3.16 million as of March 31, 2009. The company has $53.0 million in available lines of credit, with $37.0 million outstanding.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 1.3% to $20.6 million. The Middlesex system saw a $0.6 million drop due to a 6.5% decline in water consumption by retail metered customers, driven by reduced output from industrial clients and lower commercial usage. Conversely, Tidewater revenues increased slightly due to customer growth and rate adjustments.
- Profitability Compression: Operating income fell 31% to $3.0 million. Net income declined 32% to $1.4 million. This was primarily due to lower revenues and increased operating expenses.
- Expense Increases: Operations and maintenance expenses rose 7.8% ($0.9 million). Drivers included a $0.4 million increase in labor costs (Delaware expansion), higher retirement benefit plan expenses, and increased water production costs. Depreciation expense increased 8.0% due to a larger utility plant base.
- Debt Structure: Long-term debt increased by approximately $6.1 million, while short-term borrowings increased by $11.1 million. Interest expense decreased slightly ($0.1 million) due to lower rates on short-term borrowings.
Guidance, Outlook, and Risks
Rate Matters and Regulatory Outlook
- Tidewater (Delaware): Implemented a 32.54% base rate increase request (pending approval) and a 12.79% interim rate increase effective March 27, 2009. A Distribution System Improvement Charge (DSIC) was increased to 5.25% effective Jan 1, 2009.
- Middlesex (New Jersey): Filed for a Purchased Water Adjustment Clause (PWAC) to recover $1.0 million in increased water costs. The company is evaluating a base rate increase petition but does not expect a decision in 2009.
- Southern Shores: Implemented a 3% rate increase effective Jan 1, 2009.
Capital Program
The 2009 capital spending program is estimated at $28.8 million. Approximately $6.2 million was spent in Q1. Remaining spending includes infrastructure upgrades, an information system upgrade, and the RENEW program (cleaning and lining water mains).
Risks and Contingencies
- Economic Conditions: Declining consumption from commercial and industrial customers due to the economic downturn poses a risk to revenue growth.
- Regulatory Approval: Future earnings depend on the approval of rate increase requests by the BPU and PSC, which are not guaranteed.
- Retirement Benefits: Actuarial valuations indicate retirement benefit expenses could increase by up to $1.1 million for the remainder of 2009.
- Guarantees: The company guarantees approximately $21.4 million of Series C Serial Bonds for the City of Perth Amboy, though provisions make performance under the guarantee unlikely.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the status of the Tidewater base rate increase (32.54%) and the Middlesex PWAC and base rate filings.
- Consumption Trends: Verify if the 6.5% decline in retail water consumption stabilizes or worsens in subsequent quarters.
- Debt Servicing: Review the impact of the increased short-term borrowings ($37M) on future interest expenses as rates fluctuate.
- Capital Expenditure Funding: Confirm the company's ability to fund the remaining $22.6 million of 2009 capital projects using internal cash flow and SRF loans.
- Retirement Plan Costs: Track actual retirement benefit expenses against the projected $1.1 million increase for the remainder of the year.