Middlesex Water Company — Q1 2016 Form 10-Q
Business and period: Regulated water and wastewater utility serving parts of New Jersey, Delaware and Pennsylvania, with a smaller non-regulated contract-services business. This filing covers the three months ended March 31, 2016; financial statements are unaudited. Unless stated otherwise, amounts below are in millions.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $30.579 | $28.780 | +$1.799 (6.3%) |
| Operating expenses | $22.277 | $22.095 | +$0.182 |
| Operating income | $8.302 | $6.685 | +$1.617 (24.2%) |
| Operating margin | 27.2% | 23.2% | +4.0 percentage points |
| Net income | $4.790 | $3.636 | +$1.154 (31.7%) |
| EPS, basic and diluted | $0.29 | $0.22 | +$0.07 |
| Operating cash flow | $12.335 | $11.431 | +$0.904 |
| Capital expenditures | $6.672 | $4.885 | +$1.787 |
Revenue growth was primarily driven by the full-quarter benefit of Middlesex’s August 2015 rate increase, higher contract-customer demand, and customer growth at Tidewater. Lower non-regulated supplemental-service revenue partly offset gains. Operating and maintenance expense declined $0.259 million, reflecting lower benefit costs, fewer cold-weather main breaks, and reduced billable service costs, partly offset by higher labor costs. Depreciation and other taxes increased. Interest charges fell to $0.978 million from $1.058 million.
Financial position and liquidity
- At March 31, 2016, total assets were $585.963 million; utility plant, net, was $486.468 million.
- Long-term debt was $131.445 million, compared with $132.908 million at year-end 2015; the current portion was $5.691 million. Notes payable were $2.0 million.
- Cash and cash equivalents were $3.646 million. Current assets of $24.602 million were below current liabilities of $30.535 million.
- Cash from operations covered Q1 utility-plant spending. Investing used $6.672 million; financing used $5.486 million, including $3.226 million of common dividends. Cash increased $0.177 million during the quarter.
- The company had $60.0 million of credit lines, with $2.0 million outstanding and $58.0 million available at quarter-end. The outstanding borrowings matured in April and were extendable at the company’s discretion.
- Cash dividends paid per common share were $0.1988, versus $0.1925 a year earlier.
Outlook, regulatory matters and risks
- Management budgeted approximately $47.3 million for 2016 capital spending; $6.7 million had been spent through March 31. It projected approximately $112 million of capital projects for 2017–2018, subject to project timing and revised estimates.
- Planned funding includes internally generated cash, investment-plan stock sales, SRF borrowings of up to $16.0 million in New Jersey and $1.2 million in Delaware, and short-term credit lines as needed. Middlesex expected to close its New Jersey SRF borrowing in November 2016; Tidewater closed its Delaware loan in February and expected to draw proceeds in Q2.
- Management expected 2016 revenue to benefit from the full-year effect of Middlesex’s 2015 rate increase, Pinelands rate increases, Tidewater’s DSIC, and a Twin Lakes increase if approved. It cited weather, timely rate relief, cost control and customer growth as important earnings drivers. No specific EPS or earnings forecast was provided.
- In April 2016, New Jersey regulators approved annual base-rate increases of $0.2 million for Pinelands Water and $0.1 million for Pinelands Wastewater; the water increase will be phased in over two years. Tidewater’s DSIC, effective January 1, was expected to produce $0.2 million annually. Twin Lakes’ proposed settlement recommended a $0.1 million annual increase phased in over two years; regulatory approval remained pending. Middlesex also sought recovery of less than $0.1 million for purchased treated water, with approval uncertain.
- Risks identified include regulatory decisions and cost recovery, weather and water availability, water-quality requirements, operating-cost control, capital availability and commodity-supplier performance. The company noted exposure to interest rates, customer credit and retirement-plan asset values, while describing mitigation measures and cost recovery through rates.
- Contingencies include a performance guaranty related to a municipal leachate facility, for which the company considered payment unlikely and recorded a liability of approximately $0.2 million. Management said pending ordinary-course lawsuits were not expected to materially adversely affect the financial statements; Part II reports no legal proceedings. The IRS was examining the company’s 2014 federal return following a tax refund claim, and the outcome was unknown.
- Management said a higher discount rate was expected to reduce 2016 employee-benefit expense. The company expected remaining-2016 pension and other postretirement cash contributions of approximately $2.8 million and $1.3 million, respectively.
Most important facts for investors to verify
- Whether approved and pending rate changes are implemented as expected, and their realized revenue and earnings effects.
- Execution, timing and financing of the 2016–2018 capital program, including expected SRF closings and draws.
- Whether operating-cash generation remains sufficient relative to capital spending, dividends and debt maturities.
- The outcome of the IRS examination and any developments involving the recorded guaranty liability or other contingencies.
- Actual impacts of weather, customer demand, water-supply conditions, benefit costs and operating-cost trends on results.