Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Middlesex operates as a regulated water utility in New Jersey, Delaware, and Pennsylvania, 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 May 6, 2011, there were 15,592,288 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating Revenues | $23,996 | $21,645 |
| Operating Income | $4,768 | $3,288 |
| Net Income | $2,630 | $1,560 |
| Earnings Per Share (Basic) | $0.17 | $0.11 |
| Operating Cash Flow | $8,058 | $5,927 |
| Capital Expenditures | $4,888 | $5,449 |
| Total Assets | $490,030 | $489,185 |
| Long-term Debt | $133,012 | $133,844 |
| Short-term Borrowings | $17,800 | $17,000 |
| Cash and Cash Equivalents | $3,796 | $6,838 |
Margins: Operating margin for Q1 2011 was approximately 19.9% ($4,768 / $23,996), compared to 15.2% in Q1 2010.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by $2.4 million (10.9%) year-over-year. This was primarily driven by the full-year effect of a 13.5% rate increase implemented in March 2010 for the Middlesex System ($2.0 million increase), customer growth in the Tidewater System ($0.1 million), and additional non-regulated services ($0.1 million).
- Profitability: Net income increased by $1.1 million (68.6%) to $2.63 million. Earnings per share rose from $0.11 to $0.17.
- Expenses: Operating expenses increased by $0.9 million. Notable increases included labor costs ($0.2 million), employee healthcare ($0.2 million), and IT platform implementation ($0.2 million). These were partially offset by decreases in chemical/residuals disposal costs and main break repair costs.
- Interest Charges: Interest charges decreased by $0.2 million due to lower average short-term debt outstanding in Q1 2011 compared to Q1 2010.
- Cash Flow: Net cash provided by operating activities increased by $2.1 million to $8.1 million, driven by higher earnings and a decrease in accounts receivable.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Capital Program: The company expects to spend approximately $22.9 million on construction in 2011. Through March 31, $4.9 million has been expended, with $18.0 million projected for the remainder of the year. Future capital needs for 2012-2013 are projected at approximately $43 million.
- Rate Matters: Middlesex filed an application in January 2011 with the New Jersey Board of Public Utilities (NJBPU) to establish a Purchased Water Adjustment Clause (PWAC) to recover $0.4 million in increased water purchase costs. Approval is not guaranteed. Southern Shores reached an agreement for phased-in rate increases starting May 1, 2011, to fund facility upgrades.
- Weather and Consumption: While 2010 saw high consumption due to hot, dry weather, the company notes that ongoing economic conditions continue to negatively impact commercial and industrial water usage. There is no assurance that 2010 consumption levels will continue.
Risks and Contingencies:
- Regulatory Risk: Future earnings depend on the approval of rate increase requests by regulators in New Jersey, Delaware, and Pennsylvania.
- Economic Conditions: Slow residential home construction may result in Preliminary Survey & Investigation (PS&I) costs that are not recoverable in rates, potentially requiring charges against income.
- Water Supply: The company relies on agreements with the New Jersey Water Supply Authority (NJWSA) and other utilities for purchased water, subject to pricing adjustments.
Investor Verification Checklist
- Rate Approval Status: Verify the status of the Purchased Water Adjustment Clause (PWAC) application filed with the NJBPU and the implementation timeline for Southern Shores' rate increases.
- Capital Expenditure Funding: Confirm the company's ability to fund the remaining $18.0 million of 2011 capital expenditures using internal cash flows, existing SRF loans, and credit lines.
- Customer Consumption Trends: Monitor commercial and industrial water usage trends to assess the impact of economic conditions on revenue stability.
- Debt Maturities: Review the schedule for the $4.4 million of long-term debt maturing within the next twelve months and refinancing plans.
- Regulatory Assets: Assess the recoverability of Preliminary Survey & Investigation (PS&I) charges given the pace of housing development.