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Coverage Initiation: Middlesex Water Company
Value Line has initiated coverage of Middlesex Water Company (MSEX) in The Value Line Investment Survey. Established in 1897, the corporation offers regulated water service to residential and commercial customers in New Jersey, Delaware, and Pennsylvania. It also owns and operates nonregulated wastewater systems.
Headquartered in Iselin, New Jersey, the bulk of the company’s operations are located in Middlesex County. Its Middlesex System, which accounted for 64% of 2010 revenues, has more than 60,000 customers, and treats, stores, and distributes water for residential, industrial, and fire prevention purposes. The Tidewater System (25% of total revenues), together with its wholly-owned subsidiary Southern Shores, offers water services to more than 34,000 customers in New Castle, Kent and Sussex Counties, Delaware. The company has about 300 employees and, in 2010, achieved revenues of more than $100 million. Its market capitalization was about $280 million at the end of the third quarter of 2011.
Water is an essential part of life and, typically, the demand for water only grows along with the population. However, in order to keep the water flowing, Middlesex, and all other providers, must invest heavily in repairing and improving its infrastructure. Annual capital expenditures often reach lofty levels, which commonly hampers profits. Also, just like electric utilities, water providers are regulated, meaning that their rates allow for the earning of a particular return on their investment.
A utility’s rates are designed to produce revenues necessary to provide an adequate return on its investment. The revenue requirement incorporates capital spending and other expenses. Accordingly, filing a rate case is often necessary to recover the cost of a utility’s capital investments, earn a fair rate of return on them, and recover higher operating expenses. The cost of capital is also a key part of rate cases. Utilities base their filings on a desired return on equity and a specific common-equity ratio. State regulatory commissions try to strike a balance between the utility’s need to earn a fare rate of return on its invested capital, while ensuring that the company’s customers avoid paying excessive prices. We suggest that interested investors familiarize themselves with the rate-case process.
Due to water’s essential nature, Middlesex’s business is highly consistent and, in turn, the stock price is typically not subject to wide price swings, even during times of economic uncertainty. Overall, this stock may interest some conservative, income-oriented investors, and we suggest that interested subscribers await our ongoing Middlesex coverage for more information.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.