Utility Expects Growth From Green Consulting

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by Debra Fiakas CFA

Middlesex Water Company (MSEX: Nasdaq) has been providing the good people of New Jersey and Delaware with water services for a long time.  Its longevity in the marketplace is probably one of the reasons, Middlesex can claim a string of successive revenue and earnings increases.  The company achieved a net profit of $16.4 million on $115 million in total sales in the most recently reported twelve months.  More importantly, Middlesex turned 27.7% of those sales into operating cash flow, an achievement that helps support the company’s investment plans and dividend.
Like any other water company Middlesex makes a living delivering water to residential and commercial customers.  They also handle waste water.  The water business requires heavy investment in infrastructure  –  miles of pipes and valves.  Over the last three years Middlesex has invested an average of $21.7 million per year in capital expenditures.  Those water system investments have driven growth by 7.6% annually over the past five years.

Middlesex leadership thinks there is more than water in the company’s future growth.  A frugal operating culture has made it possible to leave an average of $6.0 million per year in free cash flow after covering capital spending.  The company is deploying that capital in industries where its water and flow process knowledge can make a difference  – namely biomass recycling and renewable energy production.

Teaming up with Natural Systems Utilities, a private consulting firm, Middlesex has carved out new niche business, advising waste water treatment plants on energy efficiency.  Its first project is in The Village of Ridgewood, New Jersey.  The waste water treatment plant will divert methane gas emissions into anaerobic digesters rather than burning it off into the atmosphere.  Using a biogas-drive generator, the plant will produce enough electricity to run the entire plant. A net grid agreement with the local electricity generator means the waste water treatment plant can maximize the value of its equipment investment.  Middlesex management sees its new service as a smart way to leverage its expertise without the capital costs usually associated with expansion of its water distribution business.

Apparently, the few analysts who follow Middlesex are not quite on board just yet with the new business plan.  The compound growth rate projected for the company over the next five years is only about 3%, suggesting those analysts who have published estimates for Middlesex see slowing growth in profits for the company.  Still in an industry beset by rising capital and operating costs, slow growth is an achievement.

MSEX shares have appreciated in recent trading sessions, but the stock still offers an attractive dividend yield of 3.7%.  I would wait for a pullback in price to accumulate shares.  That said, a review of recent trading patterns suggests a line of support may have developed in the $20.00 price level.  So it does not seem likely that a major price decline will occur unless macroeconomic or market conditions lead to a correction in equity prices across the board.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.


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