Middlesex Water Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Comparisons are with the three months ended March 31, 2012 unless stated otherwise. Middlesex operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, as well as non-regulated contract operations.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $27.038 million | $23.546 million | +14.8% |
| Operating income | $5.865 million | $3.877 million | +51.3% |
| Net income | $3.177 million | $1.807 million | +75.8% |
| Earnings applicable to common stock | $3.125 million | $1.755 million | +78.1% |
| Basic and diluted EPS | $0.20 | $0.11 | Up $0.09 |
| Operating margin | 21.7% | 16.5% | Up 5.2 percentage points |
| Net margin | 11.7% | 7.7% | Up 4.0 percentage points |
Revenue growth was driven principally by Middlesex’s July 2012 base-rate increase, higher Tidewater revenues, and the Avalon operations contract that began in July 2012. Operating and maintenance expense rose $1.055 million to $15.430 million, reflecting higher labor and treatment costs, more main breaks, and Avalon contract costs. Depreciation increased $0.161 million; other taxes increased $0.288 million. Interest expense fell $0.199 million, primarily following the refinancing of $57.5 million of First Mortgage Bonds in Q4 2012. Other income, net, declined $0.063 million.
Cash flow, liquidity and debt
- Operating cash flow was $10.255 million, versus $7.147 million. The company said improved earnings following rate increases were the primary driver and that operating cash flow funded Q1 utility-plant expenditures internally.
- Investing cash outflow was $5.158 million, including $4.506 million of utility-plant expenditures and a $0.750 million joint-venture investment. Financing cash outflow was $3.614 million. Cash increased $1.483 million to $4.508 million.
- At March 31, cash was $4.508 million, current assets $25.297 million, and current liabilities $51.770 million. Current borrowings were $27.450 million; the current portion of long-term debt was $5.122 million. The filing reports a $60 million aggregate credit-line capacity, with $27.5 million outstanding at a 1.39% weighted-average rate. Those borrowings matured in April 2013 and were extendable at the company’s discretion.
- Long-term debt, net of current maturities, was $130.528 million; total capitalization was $316.159 million. The company reported $133.421 million of long-term debt before the current portion and premium adjustments. Total debt including current maturities and notes payable was approximately $163.1 million.
- Cash dividends paid were $0.1875 per common share, compared with $0.1850. Q1 capital expenditures were $4.506 million. The 2013 construction program was budgeted at approximately $22.7 million; projected spending for 2014–2015 was approximately $50.3 million.
Material changes and developments
- Middlesex revenue increased $2.0 million, largely from its 2012 rate increase; Tidewater revenue rose $0.5 million, and USA revenue rose $0.7 million, primarily from Avalon contract operations. Regulated operations accounted for most consolidated operating income and net income.
- Employee-benefit-plan obligations and related regulatory assets were reduced by $10.2 million effective January 1, 2013, following a postretirement-plan amendment that increases required retiree contributions for eligible employees retiring in 2013 and later. The balance sheet shows employee benefit plans of $43.915 million, down from $54.768 million at year-end.
- Total assets declined to $546.144 million from $561.726 million at December 31, 2012, mainly alongside decreases in regulatory assets, restricted cash and employee-benefit liabilities. Net utility plant increased to $437.645 million from $435.218 million.
- In March 2013, the NJBPU approved combined annual base-revenue increases of $0.2 million for Pinelands Water and Pinelands Wastewater, below the $0.3 million requested. Middlesex’s foundational filing for a Distribution System Improvement Charge (DSIC) was approved in February; implementation was permitted beginning September 2013, subject to qualifying investment, with maximum annual revenue recovery of $1.4 million. In April, the NJBPU approved recovery of $0.1 million of increased purchased-water costs through a Purchased Water Adjustment Clause.
- The company’s $57.5 million bond refinancing in Q4 2012 is reflected in lower Q1 interest expense. In January 2013, the NJBPU approved borrowing up to $4.0 million through the New Jersey State Revolving Fund; the company expected to close in May to fund its 2013 RENEW main-cleaning and cement-lining program.
Outlook, risks and contingencies
- Management expected 2013 revenue to benefit from the full-year effect of approved rate increases and from Tidewater’s DSIC and Middlesex’s PWAC and DSIC. It expected the benefit-plan amendment and improved investment performance to reduce 2013 employee-benefit expenses by approximately $2.8 million versus 2012. Additional 2013 pension and other-benefit cash contributions were estimated at approximately $2.7 million and $1.5 million, respectively.
- Sayreville, a wholesale water customer, notified Middlesex that it would not renew its contract, which runs through August 12, 2013. 2012 gross water-sale revenue from Sayreville was $1.9 million. Hess, Middlesex’s largest retail water customer, ceased refining operations at its Port Reading facility in February 2013; 2012 revenue from Hess was $2.6 million. Management said either loss could accelerate the need for a Middlesex base-rate filing in 2013 and was exploring Sayreville emergency-supply options.
- Management reported that economic conditions continued to weigh on water consumption, particularly among Middlesex commercial and industrial customers. Weather, rate relief, cost control and customer growth also affect results. It warned that weak home construction could leave preliminary survey and investigation costs unrecoverable; costs determined unlikely to be recovered would be charged to income.
- TESI’s proposed purchase of the Plantations wastewater system in Delaware, and a requested approximate $0.1 million rate increase, remained subject to DEPSC approval and other conditions. Hearings were scheduled for June 2013, with a decision not expected until Q3; the outcome was uncertain.
- The company budgeted approximately $22.7 million for 2013 construction and planned to use internal funds, DRP stock proceeds, SRF funding and, if needed, credit lines. Key risks include regulatory decisions, water supply and quality, weather, operating costs, capital availability, customer demand, and supplier non-performance. The filing says pending ordinary-course litigation was not expected to have a material adverse effect; it reports no legal proceedings under Part II, Item 1. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Timing and amount of revenue loss from the Sayreville nonrenewal and Hess refinery closure, and whether a Middlesex base-rate filing follows.
- Actual timing, eligible capital investment and revenue recovery under the Middlesex and Tidewater DSIC mechanisms, including the $1.4 million Middlesex annual cap.
- DEPSC decision on TESI’s Plantations acquisition and associated rate request.
- Execution and funding of the 2013–2015 capital program, including the expected $4.0 million SRF borrowing and April-maturity credit-line extensions.
- Whether customer consumption, benefit-plan savings and rate increases develop as management expected, and whether unrecoverable survey and investigation costs arise.