MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services. The company serves approximately 59,200 retail customers in New Jersey and 30,000 in Delaware. Operations are divided into two segments: Regulated (88% of revenue) and Non-Regulated.

Key Financial Metrics

Capital Expenditures: $3.6 million for the quarter (Regulated: $3.5 million; Non-Regulated: $0.1 million).
Dividends: $0.1725 per common share paid in Q1 2007.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4.2% ($0.8 million) driven by customer growth and rate relief in Delaware service territories. A 12% final rate increase implemented in February 2007 contributed $0.5 million.
• Expense Increases: Operating expenses rose 7.6% ($0.8 million), primarily due to a $0.6 million increase in labor and benefit costs. Severe winter weather in New Jersey also drove up overtime costs for system repairs.
• Profitability: Operating income decreased 6.3% ($0.25 million) due to higher operating expenses outpacing revenue growth. Net income declined slightly by 2.4% ($0.04 million).
• Earnings Per Share: Basic EPS decreased from $0.15 to $0.13. This decline is attributed to a higher number of shares outstanding following a 1.5 million share issuance in November 2006, rather than a significant drop in net earnings.
• Interest Expense: Decreased by $0.1 million due to the absence of short-term borrowings in Q1 2007 compared to the prior year.

Guidance, Outlook, and Risks

• Rate Matters: On April 18, 2007, Middlesex filed for an $8.9 million (16.5%) base rate increase with the New Jersey Board of Public Utilities (BPU) to recover increased costs and capital investments. A decision is not expected until Q1 2008. Southern Shores implemented a 3% rate increase on January 1, 2007.
• Capital Program: The 2007 capital spending estimate was revised downward to $32.1 million (from a previous $54.6 million estimate) due to slowing residential development in Delaware. Projects include $12.1 million for Delaware water systems and $3.9 million for the RENEW main cleaning program in New Jersey.
• Liquidity: The company funded all utility plant expenditures internally in Q1. It maintains $37.0 million in available lines of credit with no outstanding borrowings as of March 31, 2007. Future funding will rely on internal cash flows, State Revolving Fund (SRF) loans, and potential equity offerings.
• Risks and Contingencies:
  • Delaware Fire Protection Litigation: Pending appeal regarding fire protection requirements for one system; approximately 67 other systems may be affected if the current interpretation is upheld. Costs could be significant if rate increases are not approved to offset them.
  • Housing Market: Revenue growth in Delaware is dependent on new housing starts, which may decline due to economic conditions.
  • Weather: Consumption revenues are highly sensitive to weather variations.

Investor Verification Checklist

• Rate Case Outcome: Monitor the BPU's decision on the $8.9 million rate increase request filed in April 2007, expected in Q1 2008.
• Capital Spending Revision: Verify if the reduced 2007 capital program ($32.1 million) aligns with actual execution and if the slowdown in Delaware development persists.
• Delaware Litigation: Track the status of the Delaware State Fire Marshal appeal and potential cost implications for the 67 potentially non-compliant systems.
• Share Count Impact: Assess the long-term impact of the increased share count (13.18 million outstanding) on future EPS growth relative to net income growth.
• Debt Maturities: Review the schedule of long-term debt maturities, with approximately $2.6 million maturing in the next 12 months.