S&P Raises Outlook on Middlesex Water (MSEX) to Positive; Sees N-T Regulatory Risk Improvement

Standard & Poor's Ratings Services revised its rating outlook on New Jersey-based Middlesex Water (Nasdaq: MSEX) to positive from stable. At the same time, we affirmed our ratings on Middlesex Water, including the 'A-' corporate credit rating. We are also affirming the ratings on the company's senior secured first-mortgage bonds at 'A'.

"We base the positive outlook on the probability that Middlesex Water will continue to improve its management of regulatory risk over the next 24 months," said Standard & Poor's credit analyst Gabe Grosberg.

This partially reflects the company's recent credit supportive rate case outcomes and the company's ability to use constructive regulatory mechanisms such as the Distribution System Improvement Charge (DSIC) that is available in both its New Jersey and Delaware jurisdictions. Furthermore, we expect consistent customer growth in the company's Delaware service territory that includes the company's new water service contract with the Dover Air Force Base. Collectively, we believe these developments will support consistent and modestly improved profitability measures so that the company is able to earn close to its allowed return on equity (ROE).

Standard & Poor's bases its rating on Middlesex Water on our assessment of its "excellent" business risk profile and "significant" financial risk profile as defined by our criteria. Middlesex Water has "adequate" liquidity, in our view, and can more than cover its needs for the next 12 months, even if EBITDA declines by 10%. Middlesex Water is a rate-regulated water and wastewater utility that serves approximately 107,000 customers primarily in New Jersey and Delaware. Middlesex Water also provides long-term contracted water and wastewater services.

The positive outlook reflects our expectation for continuing improvements in the company's management of regulatory risk that could be sustained for the longer term. This is supported by constructive regulatory mechanisms such as the DSIC and recent credit supportive rate case increases. The outlook also reflects our expectation that the company will maintain financial measures that are consistent with the middle of the range for the "significant" financial risk profile category.

We could affirm the rating and revise the outlook to stable if the company is unable to reduce regulatory lag. We could also lower the rating if core financial measures deteriorate such that FFO to debt is consistently lower than 15%. This could occur if the company's management of regulatory risk weakens or if the company debt-finances a large acquisition.

We could raise the rating if the company continues to demonstrate improved management of regulatory risk and can consistently earn close to its allowed ROE. At the same time, the company must maintain financial measures that are consistent with the middle of the range for the "significant" financial risk profile.

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