Middlesex Water Company — Q3 2018 Form 10-Q
Business context and reporting period. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, with a smaller Pennsylvania presence, alongside non-regulated system-operation contracts. This filing covers the quarter and nine months ended September 30, 2018; financial statement amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $38.7 | $36.2 | $104.8 | $99.3 |
| Operating income | $12.9 | $12.6 | $30.0 | $29.5 |
| Net income | $12.3 | $7.6 | $25.5 | $17.5 |
| Diluted EPS | $0.74 | $0.46 | $1.54 | $1.06 |
| Operating margin | 33.4% | 34.8% | 28.6% | 29.7% |
Revenue increased 7.0% in Q3 and 5.5% for the first nine months. Q3 operating income rose 2.5%, while nine-month operating income rose 1.5%. Operating margin contracted as operating expenses increased faster than revenue. Growth in net income and EPS was substantially influenced by lower income taxes: Q3 included a $0.3 million tax benefit versus $3.9 million expense in Q3 2017; nine-month tax expense was $1.7 million versus $9.3 million. The company attributed the reduction mainly to the Tax Act and regulatory accounting treatment of tangible-property tax deductions.
Q3 revenue growth mainly reflected the New Jersey base-rate increase and higher contract-customer demand, with additional contribution from Tidewater customer growth. Nine-month operating and maintenance expense rose $3.6 million, including higher production, labor, insurance and retiree-healthcare costs. Interest expense increased $1.0 million for the nine months, reflecting higher debt and short-term rates and interest related to the IRS examination.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $32.9 million, up from $28.6 million; the filing says the increase primarily reflected timing of vendor and income-tax payments. It funded about 41% of utility plant spending internally.
- Capital expenditures were $49.5 million, versus $35.2 million a year earlier. Investing cash outflow was $49.5 million; financing cash inflow was $15.8 million. Cash and cash equivalents were $3.6 million at September 30; including restricted cash, the cash-flow statement reports $5.5 million.
- At September 30, the company had $48.5 million drawn on $92.0 million of credit lines, at a 3.23% weighted-average rate, leaving $43.5 million available. The drawn amounts matured October–December 2018 and were extendable at the company’s discretion.
- Balance-sheet debt comprised $141.1 million long-term debt, $7.3 million current portion and $48.5 million notes payable. Debt and notes payable together were approximately $196.9 million. Total assets were $752.8 million; current assets were $35.4 million and current liabilities $94.4 million.
- Common dividends paid were $0.2238 per share in Q3 and $0.6713 per share for the nine months, up from $0.2113 and $0.6338, respectively, in 2017.
Material developments, outlook and risks
- New Jersey regulators approved a base-rate settlement producing $5.5 million in annual revenue, effective April 1, 2018. The approved rate base was $245.5 million, with a 9.6% authorized return on equity. The company also sought recovery of less than $0.1 million of additional treated-water costs; approval was uncertain.
- The company recorded $32.5 million of regulatory liabilities for excess income taxes collected under rates following the federal corporate tax-rate reduction. Timing and treatment of customer refunds, particularly amounts subject to IRS normalization rules, remain relevant.
- USA-PA won a $67 million base professional-services contract to operate Perth Amboy’s water and wastewater systems through December 31, 2028.
- Management estimated 2018 capital spending of approximately $73 million, including infrastructure replacement, a transmission pipeline and treatment-plant upgrades. It projected approximately $200 million of capital projects in 2019–2020. Timing and costs depend on project scheduling and engineering estimates; about $40 million of construction commitments were outstanding.
- Financing plans for the remainder of 2018 included internal funds, investment-plan proceeds, about $11 million from state revolving-fund programs depending on construction timing, and short-term borrowing if needed. The company had drawn $8.3 million of a $43.5 million construction loan for a transmission pipeline and $8.7 million of an approved loan for its RENEW program by September 30.
- Material risks identified include regulatory decisions and rate recovery, water availability and quality, weather and main breaks, operating-cost control, access and cost of capital, commodity-supplier performance, and customer usage and growth. The IRS examination of the 2014 federal return continued; the company increased its reserve for disputed repair deductions to $3.7 million, and the ultimate tax liability could differ.
- The company said pending litigation was not expected to have a material adverse effect. It reported no legal proceedings in Part II and no material change in risk factors from its 2017 Form 10-K. Disclosure controls were judged effective.
Investor verification points
- How much of reported earnings growth is recurring operating improvement versus tax benefits, including the treatment and amortization of deferred tax items?
- What is the timing and regulatory outcome for tax-related customer refunds and the pending purchased-water adjustment request?
- Can the company execute its large capital program on schedule and within estimates, and how will 2019–2020 spending be funded?
- How will higher operating costs, interest rates and short-term borrowing affect margins and liquidity?
- What will the IRS examination ultimately determine regarding the 2014 tax deductions and the $3.7 million reserve?