Middlesex Water Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Middlesex Water provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, as well as non-regulated contract operations. Financial figures below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $27.173 | $27.038 | Up 0.5% |
| Operating income | $5.967 | $5.865 | Up 1.7% |
| Operating margin | 22.0% | 21.7% | Up about 0.3 percentage points |
| Net income | $3.169 | $3.177 | Down 0.3% |
| Common earnings / diluted EPS | $3.126 / $0.20 | $3.125 / $0.20 | EPS unchanged |
| Operating cash flow | $8.361 | $10.255 | Down $1.894 |
| Utility plant expenditures | $4.165 | $4.506 | Down $0.341 |
Revenue was nearly flat as growth at Tidewater and TESI was partly offset by lower Middlesex and USA revenues. Middlesex revenue declined about $0.5 million, principally reflecting Hess Corporation’s refinery closure and the loss of Sayreville as a wholesale customer. Operations and maintenance expense was essentially unchanged: lower employee benefit costs were offset in part by winter-related overtime and water-main repair costs. Depreciation increased, while interest expense declined. Net income was approximately flat; the effective tax burden rose.
Balance sheet, debt and liquidity
- At March 31, cash was $5.902 million, current assets $25.665 million and current liabilities $52.520 million; the current ratio was approximately 0.49.
- Long-term debt was $129.034 million, with $5.377 million classified as current. Notes payable were $27.500 million. The filing reports $60 million of credit lines, with $27.5 million outstanding at a weighted-average rate of 1.43%.
- The outstanding credit-line borrowings were due in April 2014 and were extendable at the company’s discretion. The company expected to fund its capital program with operating cash, stock-plan proceeds, SRF financing and, if needed, short-term borrowing.
- Operating cash flow covered Q1 utility plant expenditures. Cash increased by $1.068 million to $5.902 million. The company attributed lower operating cash flow year over year mainly to timing of vendor and long-term debt interest payments, partly offset by income-tax payment timing.
- Common dividends paid were $0.1900 per share, versus $0.1875 a year earlier.
Outlook, regulatory matters and risks
- The company budgeted approximately $31.4 million of 2014 capital expenditures, with about $4.2 million spent through March 31; it projected approximately $56.5 million of capital projects for 2015–2016. Project timing and final costs remain subject to scheduling and engineering estimates.
- Middlesex had requested a $10.6 million annual base-rate increase in New Jersey; Tidewater had requested a $3.9 million annual increase in Delaware. Decisions were not expected until the second half of 2014. Tidewater implemented a 6.5% interim rate increase in February, subject to refund.
- Tidewater’s agreement to serve Dover Air Force Base was approved in April 2014. Service was expected to begin in September 2014, initially generating approximately $0.6 million of annual revenue.
- Management expected 2014 revenue to benefit from rate increases if approved, Dover Air Force Base service, the full-year effect of Middlesex’s distribution-system charge and TESI’s Plantations wastewater acquisition. Lower retirement-plan expenses and cash contributions were also expected, reflecting investment performance and a higher discount rate.
- Management cited continued weak water consumption, particularly among Middlesex commercial and industrial customers, and uncertainty over when demand may recover. Other risks include weather, water supply, regulatory decisions, operating-cost control, capital availability and development activity.
- Middlesex guaranteed performance by Applied Water Management on a Monmouth County leachate-treatment facility project. The company considered payment under the guarantee unlikely and reported a $0.4 million recognized liability; the guarantee could extend through 2028 if no acceptable replacement guarantor is found. Pending lawsuits were described as ordinary-course matters not expected to have a material adverse effect.
- The filing reported no material change in risk factors from the 2013 Form 10-K, no material impact expected from recent accounting guidance, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Regulatory outcomes, timing and any refund exposure associated with the New Jersey and Delaware rate proceedings.
- Whether Dover Air Force Base service began as expected and whether projected revenue is achieved.
- Actual 2014–2016 capital spending and the related mix and cost of financing, including the April 2014 credit-line maturities and planned New Jersey SRF borrowing.
- Trends in commercial and industrial water demand and the financial effects of the Hess and Sayreville customer losses.
- Any change in exposure under the Monmouth County project guarantee or in the status of litigation and other contingencies.