Middlesex Water Company — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Middlesex provides regulated water and wastewater services in New Jersey and Delaware and non-regulated water and wastewater system operations and maintenance services.
Financial performance
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $36.7 | $35.3 | $69.2 | $67.0 |
| Operating income | $9.8 | $9.4 | $15.4 | $15.9 |
| Operating margin | 26.7% | 26.6% | 22.3% | 23.7% |
| Net income | $10.9 | $9.7 | $17.8 | $17.4 |
| Basic / diluted EPS | $0.62 / $0.62 | $0.55 / $0.55 | $1.02 / $1.01 | $0.99 / $0.99 |
| Operating cash flow | Not separately reported | Not separately reported | $14.6 | $20.8 |
| Utility plant expenditures | Not separately reported | Not separately reported | $46.5 | $45.4 |
Revenue and earnings changes. Q2 revenue rose $1.4 million, mainly from increased demand in Middlesex’s New Jersey system, Tidewater customer growth, and the Highland Park operations contract. Q2 operating income increased $0.4 million; lower retirement-plan non-service expense and higher revenue helped offset higher maintenance, depreciation, and interest costs. Six-month revenue rose $2.2 million, but operating income fell $0.5 million as operating and depreciation costs increased. Six-month net income nevertheless rose $0.4 million, reflecting higher other income and a larger income tax benefit. Income tax benefits were $1.6 million for Q2 and $2.6 million for the six-month period; accordingly, net income exceeded pretax income.
Q2 operating margin was approximately flat year over year, while the six-month margin declined from 23.7% to 22.3%. Regulated six-month operating income decreased $1.1 million; non-regulated operating income increased $0.6 million.
Cash, liquidity and debt
- Six-month operating cash flow decreased $6.2 million to $14.6 million, primarily due to timing of vendor payments and increased income tax payments. Investing used $46.5 million; financing provided $27.7 million.
- At June 30, cash and cash equivalents were $6.0 million, with restricted cash of $0.2 million. Current assets were $37.2 million and current liabilities $80.7 million.
- Long-term debt was $272.5 million, with $7.2 million classified as current; short-term notes payable were $31.5 million. The company had $78.5 million available under its $110 million credit lines. Outstanding line borrowings carried a 1.11% weighted-average rate and matured in July 2021; the company renewed and rolled them over.
- Common dividends paid during the first half were $9.5 million. The balance sheet showed total capitalization of $629.7 million.
Outlook, management commentary and significant matters
- Rates: Middlesex filed in May 2021 for an approximately $31 million annual increase in base water revenues, principally to support infrastructure investment. The NJBPU decision was pending; the company could not predict the outcome. The NJBPU approved a purchased-water adjustment expected to recover $1.1 million in additional costs, effective April 4, 2021.
- Capital program: Forecast 2021 construction spending was reduced to $85 million due to scheduling coordination; $47 million had been spent through June 30, with approximately $38 million expected for the balance of 2021. The company projected approximately $190 million of capital expenditures in 2022–2023. Funding may include operating funds, debt, credit lines, SRF financing, and common-stock issuance.
- Financing: Middlesex received approval to refinance up to $45.5 million of first mortgage bonds at an overall lower cost of debt, with completion expected by December 31, 2021. Tidewater entered into a $20 million CoBank facility but had not drawn it by the filing date.
- Regulatory item: Tidewater reset its DSIC rate to zero effective April 1 after the regulator found its earned return exceeded the authorized return. It recorded a $0.8 million after-tax reserve for customer refunds and issued account credits in Q2.
- COVID-19 and operating risks: Operations and construction had not been materially disrupted, but economic effects, customer payment difficulties, and liquidity impacts remained uncertain. Regulators permitted tracking incremental COVID-related costs for potential future recovery, without a defined recovery timetable. Management cited weather, rate relief, cost control, customer growth, water supply, regulation, capital availability, and commodity costs as factors affecting results.
- Contingencies: A Pennsylvania proceeding concerning the potential acquisition of Twin Lakes included an administrative law judge recommendation for a $1.7 million escrow contribution by Middlesex; the company objected and the final decision was pending. Management stated Twin Lakes’ financial results and obligations were not material. Management also did not expect the Monmouth County guarantee litigation or other routine matters to materially affect financial condition or results.
The filing provides no specific earnings or EPS guidance. Management expected Tidewater residential customer growth to continue at the 5% pace achieved in 2020 and said this delayed any foreseeable need for a 2021 base-rate increase there.
Important facts for investors to verify
- Progress and final outcome of the pending $31 million Middlesex rate case, including timing and any approved recovery.
- Execution and cost of the planned $45.5 million refinancing and conversion of New Jersey SRF construction loans to long-term financing.
- Actual capital spending versus the $85 million 2021 forecast and the projected $190 million for 2022–2023, along with associated funding and leverage.
- Whether customer payment patterns, COVID-related bad debts, or the end of New Jersey’s service-termination moratorium affect collections and liquidity.
- Final disposition of the Tidewater DSIC refund, Twin Lakes proceeding, and guarantee litigation.