Middlesex Water Company — Q3 2012 Form 10-Q
Business context and period. The filing covers the three and nine months ended September 30, 2012. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated contract operations. Financial amounts below are in millions, except per-share data and percentages.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $32.353 | $28.671 | $83.300 | $78.769 |
| Operating income | $10.843 | $8.516 | $21.930 | $20.022 |
| Operating margin | 33.5% | 29.7% | 26.3% | 25.4% |
| Net income | $6.138 | $5.143 | $11.670 | $11.398 |
| Basic / diluted EPS | $0.39 / $0.38 | $0.33 / $0.32 | $0.73 / $0.73 | $0.72 / $0.72 |
| Common dividends per share | $0.1850 | $0.1825 | $0.5550 | $0.5475 |
| Operating cash flow | Not presented by quarter | $21.182 | $17.071 | |
| Utility plant expenditures | Not presented by quarter | $17.886 | $17.647 |
Balance sheet and liquidity at September 30, 2012: Cash was $1.798 million; current assets were $25.627 million versus current liabilities of $49.859 million. Long-term debt was $132.410 million, current maturities $5.064 million, and notes payable $27.750 million. The company had $60 million in credit lines, with $27.8 million drawn at a 1.41% weighted-average rate; those borrowings matured in October 2012 and were extendable at the company’s discretion. Total capitalization was $317.188 million.
Changes versus comparable periods
- Q3 revenue increased 12.8%, operating income 27.3% and net income 19.4% year over year. Q3 EPS rose to $0.39 basic and $0.38 diluted from $0.33 and $0.32.
- For the first nine months, revenue increased 5.8%, operating income 9.5% and net income 2.4%; EPS increased by one cent. Net income growth was restrained by higher operating costs, interest expense and lower other income.
- Q3 revenue gains reflected New Jersey and Delaware rate increases, increased connection fees, and new operating contracts. Regulated operations drove the improvement; non-regulated nine-month net income declined to $0.600 million from $1.023 million.
- Operating and maintenance expense rose $0.9 million in Q3 and $2.0 million year to date, mainly from higher employee-benefit costs. Benefit-plan expense for the nine months increased to $6.007 million from $3.768 million.
- Other income was lower year over year, in part because Q3 2011 included a $0.6 million gain from the sale of LineCare contracts. Nine-month interest expense increased $0.310 million.
Outlook, developments and risks
- Management expected 2012–2013 revenue to benefit from approved rate increases at Middlesex, Tidewater, TESI, Southern Shores and Twin Lakes. Middlesex’s $8.1 million annual base-rate increase took effect July 20, 2012; the approved amount was below its $11.3 million request. Tidewater received a $3.9 million annual increase and TESI a $0.6 million increase, with part of TESI’s phased in through 2015.
- Pinelands sought annual rate increases of approximately $0.2 million for water and $0.1 million for wastewater; a decision was expected in the first half of 2013. Middlesex also requested recovery of $0.1 million in increased purchased-water costs. Outcomes were uncertain.
- The company expected to refinance $57.5 million of bonds in Q4 2012, following regulatory approval to refinance up to $60 million; management expected lower annual interest costs. It budgeted $21.8 million in 2012 capital expenditures, of which $17.9 million had been spent by September 30, and projected approximately $34 million for 2013–2014.
- Management said weak economic conditions continued to suppress commercial and industrial water consumption, particularly in Middlesex’s service area, and could persist. Weather, customer growth, cost control, water availability, regulatory decisions, capital costs and financing availability were also identified as factors affecting results.
- Actuarial assumption changes and lower retirement-plan asset returns increased benefit obligations and expenses. The company expected about $1.0 million of additional pension contributions and $1.0 million of additional other-benefit contributions in the remainder of 2012.
- Preliminary survey and investigation costs could be charged to income if management determines recovery through rates is unlikely. The company reported ordinary-course litigation and stated it did not expect pending matters to have a material adverse effect.
- Operating cash flow funded 100% of utility-plant expenditures in the first nine months. Cash declined by $1.308 million from year-end 2011; financing included $3.5 million of net short-term borrowings and $8.720 million of common dividends paid.
- USA’s new ten-year Avalon operations contract began July 1, 2012 and was expected to contribute less than $0.01 to annual EPS. A 20-year Ridgewood wastewater-treatment energy project was expected to begin operating in Q1 2013.
Investor verification checklist
- Track rate-case outcomes, timing of rate recovery, and whether customer water demand stabilizes or remains depressed.
- Verify completion and realized savings from the planned $57.5 million bond refinancing, and the extension or repayment of October 2012 credit-line borrowings.
- Compare subsequent cash flow and capital spending with the $21.8 million 2012 budget and approximately $34 million 2013–2014 outlook.
- Monitor employee-benefit expense, funding contributions, and actuarial assumptions, as well as potential write-offs of unrecoverable survey and investigation costs.
- Assess whether non-regulated earnings recover and whether the Avalon and Ridgewood projects deliver the expected contribution.