MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
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 August 4, 2008, there were 13,281,961 shares of common stock outstanding.

Key Financial Metrics

Note: Operating margins for the six months ended June 30, 2008, were approximately 25.5% ($11,171 / $43,890).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 5.9% ($1.3 million) for the quarter and 7.8% ($3.2 million) for the six months compared to the prior year. This was primarily driven by a 9.1% base rate increase in the Middlesex system implemented in October 2007 and rate increases in Delaware (Tidewater).
• Profitability: Net income increased 7.6% for the quarter and 9.5% for the six months. Basic EPS rose from $0.25 to $0.26 (quarter) and $0.38 to $0.41 (six months).
• Expense Increases: Operating expenses rose due to higher water production costs (power, chemicals), labor costs, and pass-through charges for the Perth Amboy contract. Depreciation increased due to a higher level of utility plant in service.
• Debt Structure: Long-term debt decreased by approximately $15.0 million due to the reclassification of First Mortgage Bond Series U (maturing Feb 2009) to the current portion. Short-term borrowings increased to $17.0 million outstanding against $33.0 million in available credit lines.

Guidance, Outlook, and Risks

• Capital Program: The 2008 capital spending program is estimated at $32.7 million, a reduction of $4.2 million from prior estimates due to slowing residential development in Delaware. Approximately $13.6 million has been expended through June 30, 2008.
• Future Projects: The company projects capital expenditures of $73.3 million to $93.4 million for 2009 and 2010 combined. A major transmission pipeline project in New Jersey is under prudence review by the BPU, with initial estimates of $26.2 million.
• Rate Matters: Pinelands Water and Wastewater filed for base rate increases of 19.8% and 22.9% respectively in April 2008. Tidewater received approval for Distribution System Improvement Charge (DSIC) increases effective January and July 2008.
• Risk Factors: Key risks include the impact of weather on water consumption, the ability to secure timely rate increases, and the potential decline in housing starts in Delaware affecting customer growth. The company also faces interest rate risk, though it is mitigated by fixed-rate long-term debt.
• Controls and Procedures: Management concluded that disclosure controls regarding the classification of Long-term Debt were not effective as of June 30, 2008. Remedial procedures were implemented on August 1, 2008.

Investor Verification Checklist

• Rate Approval Status: Verify the outcome of the Pinelands Water and Wastewater rate increase requests filed in April 2008.
• Debt Refinancing: Monitor the refinancing of the $15.0 million Series U bond maturing on February 1, 2009.
• Capital Expenditure Execution: Track the $19.1 million remaining capital spend for 2008, specifically the RENEW program and Delaware system upgrades.
• Delaware Housing Market: Assess the impact of the slowing residential construction market in Delaware on future organic growth and revenue projections.
• Internal Controls: Confirm the effectiveness of the new debt classification controls implemented in August 2008 in future filings.