Middlesex Water Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results include regulated water and wastewater operations and non-regulated contract services, primarily in New Jersey and Delaware, as well as a smaller Pennsylvania operation. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $30.1 | $30.6 | Down 1.5% |
| Operating income | $7.8 | $8.3 | Down 6.3% |
| Net income | $4.4 | $4.8 | Down 7.3% |
| Basic and diluted EPS | $0.27 | $0.29 | Down $0.02 |
| Operating margin | 25.8% | 27.1% | Down 1.3 percentage points |
| Net cash from operations | $10.1 | $12.3 | Down $2.2 |
| Utility plant expenditures | $9.6 | $6.7 | Up $2.9 |
Revenue weakness reflected lower water usage at Middlesex, including lower commercial and industrial consumption and lower usage by regulated contract customers; Tidewater’s revenue increased with customer growth. Operations and maintenance expense declined slightly, including a $0.3 million benefit from insurance refunds, partly offset by higher labor costs. Depreciation rose $0.2 million as utility plant in service increased. Interest charges were $1.0 million, compared with $1.0 million in the prior-year quarter.
At March 31, cash and cash equivalents were $5.6 million, current assets $27.0 million, and current liabilities $49.5 million. The resulting current ratio was approximately 0.55. Long-term debt was $136.2 million, with a further $6.1 million current portion and $14.5 million of short-term borrowings. Common dividends paid per share increased to $0.2113 from $0.1988.
Material changes and capital funding
- Operating cash flow fell primarily due to the timing of vendor payments, partly offset by increased customer payments. Management said operating cash flow funded about 62% of Q1 utility plant expenditures.
- Capital expenditures increased to $9.6 million. The company estimated a 2017 construction program of approximately $60 million and projected approximately $163 million of capital projects in 2018 and 2019. It also described its Water for Tomorrow program as an approximately $149 million investment through 2018.
- Management expected to fund the remainder of 2017 capital spending with internally generated funds, Investment Plan proceeds, New Jersey State Revolving Fund (SRF) financing and, if needed, short-term borrowing. The company reported $45.5 million of unused credit capacity at quarter-end.
- New Jersey regulators approved requests for up to $37 million of SRF borrowing for a transmission pipeline and up to $10 million for the 2017 RENEW water-main replacement program. A separate request for up to $4 million for a booster-station upgrade had also been approved.
Outlook, risks and contingencies
No earnings or revenue guidance was provided. Management cautioned that weather patterns that supported revenue in 2015 and 2016 may not recur in 2017; it expected residential customer growth to be consistent with recent years and anticipated operating-cost increases. It said it was pursuing further operating efficiencies. Tidewater’s Delaware-approved distribution system improvement charge, effective January 1, 2017, was expected to generate approximately $0.3 million of annual revenue.
Key risks cited include weather and water availability, regulatory decisions and the timing of rate relief, operating-cost control, water-quality requirements, competition for non-franchised growth, availability and cost of capital, and commodity-supplier performance. The company has water-supply purchase agreements, including an untreated-water agreement through November 2023. Its Perth Amboy water and wastewater operating agreement expires in 2018. The company budgeted approximately $60 million for construction in 2017; actual timing and costs depend on project schedules and engineering estimates.
The company reported ordinary-course lawsuits and stated their resolution was not expected to have a material adverse effect. It had a performance guarantee related to an unaffiliated wastewater contractor; the recorded liability was approximately $0.1 million. An IRS examination of the company’s 2014 federal tax return was ongoing, and the company said it did not yet know whether it would result in changes. Pension contributions were $0.5 million in Q1, with approximately $2.8 million expected over the remainder of 2017; other postretirement-plan contributions were $0.2 million in Q1, with approximately $1.4 million expected for the rest of the year.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Recent accounting standards adopted in 2017 had no material impact; assessments of certain forthcoming standards remained preliminary.
Most important facts for investors to verify
- Whether lower Middlesex customer usage persists and how weather, customer growth and the Tidewater DSIC affect revenue.
- Progress, final cost and timing of the large capital program; the filing gives both a $149 million program through 2018 and a separate $163 million 2018–2019 capital projection.
- Timing and terms of SRF loan closings and the company’s planned mix of internal cash, equity-plan proceeds and borrowings to fund construction.
- Short-term liquidity and refinancing: $14.5 million of credit-line borrowings were due in April 2017, with maturities extendable at the company’s discretion; confirm subsequent repayment or extension.
- Outcomes of the IRS examination and pending ordinary-course legal matters, and renewal or replacement of the Perth Amboy contract expiring in 2018.