Middlesex Water Company — Q1 2019 Form 10-Q
Business context and period. The company provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated municipal and private system operations. Results cover the three months ended March 31, 2019, compared with the same period in 2018; balance-sheet figures are compared with December 31, 2018. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $30.7 | $31.2 | Down $0.5 (1.5%) |
| Operating income | $7.0 | $6.4 | Up $0.7 (10.7%) |
| Operating margin | 22.9% | 20.4% | Up 2.5 percentage points |
| Net income | $6.6 | $4.5 | Up $2.1 (45.8%) |
| Basic / diluted EPS | $0.40 / $0.39 | $0.27 / $0.27 | Higher |
| Operating cash flow | $7.7 | $9.0 | Down $1.3 |
| Utility plant expenditures | $12.3 | $10.0 | Up $2.3 |
Revenue from regulated operations rose to $27.9 million from $27.2 million, while non-regulated revenue declined to $2.8 million from $4.0 million. The company attributed much of the non-regulated decrease, and a corresponding reduction in operating and maintenance expense, to the new Perth Amboy contract. Lower water use and demand also affected revenue and production costs.
Operating and maintenance expense fell $1.7 million, including $1.4 million of lower subcontractor costs under the Perth Amboy contract and lower winter water-main break and production costs. Depreciation increased $0.4 million as utility plant in service grew. Interest expense increased $0.1 million. Net margin was approximately 21.3%, versus 14.4%.
Tax item: Income tax expense was a $0.3 million benefit in Q1 2019, versus $1.2 million of expense in Q1 2018. The filing attributes the reduction primarily to regulatory accounting for tax benefits related to the tangible-property tax accounting method. This benefit materially contributed to the increase in net income.
Balance sheet, debt and liquidity
- Total assets were $783.0 million at March 31, up from $767.8 million at year-end; net utility plant rose to $628.6 million from $618.5 million.
- Long-term debt was $158.4 million, current maturities were $7.3 million, and short-term notes payable were $49.5 million. The company had $100 million of credit lines, with $51.5 million available; outstanding short-term borrowings carried a 3.61% weighted-average rate at quarter-end and matured from April through June 2019, extendable at the company’s discretion.
- Cash and cash equivalents were $5.0 million; restricted cash was $1.8 million. Combined cash, cash equivalents and restricted cash were $6.8 million at quarter-end.
- Operating cash flow funded approximately 41% of Q1 utility plant expenditures. Investing used $12.3 million; financing provided $5.8 million, principally reflecting debt and stock issuance proceeds. Cash, cash equivalents and restricted cash increased $1.1 million during the quarter.
- Common dividends paid were $0.2400 per share, versus $0.2238 a year earlier.
Outlook, financing and other material matters
- Management forecast approximately $112 million of capital investment in 2019, with about $100 million expected for the remainder of the year, and approximately $177 million of capital projects in 2020–2021. Planned work includes a transmission pipeline, water-main replacements, treatment upgrades, a Delaware wastewater plant and emergency power. Construction commitments were estimated at $17 million.
- Management said 2019 revenue should benefit from the full-year effect of Middlesex’s April 2018 base-rate increase, but lower water demand could recur. It expected organic residential customer growth to remain consistent with recent years, retirement-benefit costs to rise, and continued cost-control efforts. Results remain sensitive to weather, rate relief, cost management and customer growth.
- Pinelands Water and Pinelands Wastewater sought annual base-rate increases of approximately $0.2 million and $0.5 million, respectively. A New Jersey regulator decision was not expected before Q4 2019. Tidewater’s Delaware rates were reduced 3.35% effective March 1, 2019, with an annual revenue impact of approximately $1.0 million and a one-time $0.7 million customer credit; its improvement-charge rate was reset to generate about $0.2 million annually.
- Middlesex sought approval to issue up to 1.5 million common shares through 2022 to help fund infrastructure investment; management expected a decision during Q2 2019. The company also had approval to issue up to $140 million of First Mortgage Bonds through the New Jersey Economic Development Authority. An NJIB commitment for the C.J. Olsen plant project had not yet been secured; SRF program changes reduce the share of eligible loans at zero interest.
- The company adopted lease accounting on January 1, 2019, recording a $6.7 million right-of-use asset, $7.1 million lease liability and $0.4 million regulatory asset. At March 31, the balance sheet reported a $6.5 million lease asset and $6.3 million non-current lease obligation.
- The IRS concluded its examination of the 2014 federal return and the company agreed to accounting-method modifications affecting 2014–2017 returns. It paid $0.8 million for 2014 and 2015 tax years and reduced its tax reserve to $3.1 million; IRS examinations of 2016 and 2017 remained ongoing, so the final liability could differ. Pending litigation was described as ordinary-course and not expected to have a material adverse effect. The company’s performance guarantee for a wastewater contractor carried a recorded liability of approximately $1.5 million.
Most important facts for investors to verify
- How much of the earnings increase reflects the tax benefit and tax-reserve adjustments, and what tax expense is expected in future periods.
- Regulatory outcomes and timing for the Pinelands rate filings, the proposed common-stock issuance and planned debt financing.
- Whether the company can execute its capital program on schedule and obtain expected SRF funding, particularly for the C.J. Olsen project.
- Effects of water demand, weather, rate changes and the Perth Amboy contract transition on recurring revenue and margins.
- Funding needs, credit-line renewals and debt costs as the company pursues its substantial multi-year capital plan.