Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services for municipal systems. The company serves approximately 59,800 retail customers in New Jersey and 32,800 in Delaware. Operations are subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Delaware Public Service Commission (PSC).
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) | Change |
|---|---|---|---|
| Operating Revenues | $43,665,000 | $43,890,000 | -$225,000 (-0.5%) |
| Operating Income | $8,549,000 | $11,171,000 | -$2,622,000 (-23.5%) |
| Net Income | $4,207,000 | $5,569,000 | -$1,362,000 (-24.5%) |
| Earnings Per Share (Diluted) | $0.31 | $0.41 | -$0.10 |
| Cash Flow from Operations | $7,361,000 | $9,033,000 | -$1,672,000 |
| Capital Expenditures | $11,943,000 | $14,444,000 | -$2,501,000 |
| Long-Term Debt | $128,845,000 | $118,217,000 | +$10,628,000 |
| Short-Term Borrowings | $39,010,000 | $25,877,000 | +$13,133,000 |
Liquidity: Cash and cash equivalents totaled $3,456,000 as of June 30, 2009. The company maintains $53.0 million in lines of credit, with $39.0 million outstanding.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased slightly due to a 6.7% decline in water consumption in the Middlesex system (New Jersey) driven by economic conditions affecting commercial/industrial customers and unseasonably cool, wet weather. This was partially offset by rate increases and customer growth in the Tidewater system (Delaware).
- Expense Increases: Operating expenses rose 8.9% year-over-year. Key drivers included a $0.6 million increase in labor costs (wages and overtime for main breaks), a $0.5 million increase in retirement benefit plan expenses due to asset performance declines, and higher chemical costs due to lower quality untreated water.
- Profitability Compression: Operating margins contracted significantly as revenue remained flat while costs rose. Net income fell 24.5% to $4.2 million.
- Debt Structure: Long-term debt increased by approximately $10.6 million due to new borrowings ($12.0 million proceeds) to fund capital projects and retire short-term debt. Short-term borrowings increased by $13.1 million to fund the capital program.
Guidance, Outlook, and Risks
Rate Matters and Outlook
- Delaware (Tidewater): A 12.79% interim rate increase was effective March 27, 2009. A settlement for a 15.0% base rate increase was reached on July 27, 2009, pending PSC approval in September.
- New Jersey (Middlesex): Implemented a Purchased Water Adjustment Clause (PWAC) on July 1, 2009, to recover $1.0 million in increased water costs. A base rate increase petition is expected to be filed with the BPU in Q3 2009, seeking recovery for approximately $25.0 million in capital investment since 2007.
Capital Program
- 2009 Forecast: Total capital spending is estimated at $25.5 million. $11.9 million has been expended YTD, with $13.6 million projected for the remainder of the year.
- 2010-2011 Forecast: Projected capital expenditures range between $55.7 million and $72.6 million, dependent on housing starts and customer growth.
Risks and Contingencies
- Economic Sensitivity: Continued decline in water demand from commercial and industrial customers in New Jersey poses a risk to revenue growth.
- Regulatory Risk: No assurance that requested rate increases in New Jersey or Delaware will be approved in full or on time.
- Guarantees: The company guarantees approximately $21.4 million of Series C Serial Bonds for the City of Perth Amboy, though reimbursement mechanisms (taxing powers) exist.
- Weather: Unseasonable weather patterns continue to impact water consumption volumes.
Investor Verification Checklist
- Rate Approval Status: Verify the final approval status of the 15.0% Delaware rate settlement and the timing of the New Jersey base rate filing.
- Commercial Consumption Trends: Monitor the trajectory of water usage among large industrial and commercial customers in New Jersey to assess revenue recovery potential.
- Debt Servicing Costs: Review the impact of the increased short-term borrowing ($39M outstanding) on interest expense, noting the current low weighted average rate of 1.59%.
- Capital Expenditure Execution: Confirm the company's ability to fund the remaining $13.6M of 2009 capital projects without further dilution or significant debt increases.
- Pension Plan Funding: Track the $2.5M expected additional cash contribution to the defined benefit pension plan for the remainder of 2009.