Middlesex Water Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results; amounts below are in millions unless stated otherwise. The company provides regulated water and wastewater services, primarily in New Jersey and Delaware, plus non-regulated contract operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $31.285 | $32.353 | $87.424 | $83.300 |
| Operating income | $10.270 | $10.843 | $24.306 | $21.930 |
| Net income | $5.807 | $6.138 | $13.465 | $11.670 |
| Diluted EPS | $0.36 | $0.38 | $0.83 | $0.73 |
| Operating cash flow | Not separately reported | Not separately reported | $21.165 | $21.182 |
| Utility plant expenditures | Not separately reported | Not separately reported | $14.585 | $17.886 |
Q3 revenue fell 3.3% year over year, and operating income and net income declined 5.3% and 5.4%, respectively. Nine-month revenue rose 4.9%, operating income 10.8%, and net income 15.4%. Nine-month operating margin was approximately 27.8% versus 26.3% in 2012; net margin was approximately 15.4% versus 14.0%.
For the first nine months, cash from operations was essentially flat year over year; higher income tax payments offset higher net income. The company said operating cash flow funded all utility plant expenditures during the period. Cash and equivalents were $2.937 million at September 30, 2013, compared with $3.025 million at year-end 2012. Current assets were $27.315 million and current liabilities $52.291 million; the current ratio was approximately 0.52.
At September 30, long-term debt was $130.596 million, current maturities of long-term debt $5.373 million, and short-term notes payable $30.450 million. Available credit lines totaled $60.0 million, with $30.5 million drawn at a weighted-average rate of 1.46%; those borrowings matured in October 2013 and were extendable at the company’s discretion. Common dividends paid were $0.1875 per share for Q3 and $0.5625 year to date.
Material changes and drivers
- Q3 revenue decreased $1.1 million, mainly from lower Middlesex system sales: weaker demand due to above-expected precipitation, the loss of Sayreville wholesale sales after its contract ended in August, and reduced Hess consumption after its refinery ceased operations. The July 2012 rate increase partly offset these effects.
- Nine-month revenue growth reflected prior rate increases, new customer connections and contract operations, including Avalon. Growth was partly offset by reduced weather-related demand and lower Hess usage.
- Q3 operations and maintenance expense declined $0.5 million, primarily due to lower employee benefit expense. Nine-month expense rose $1.0 million, as higher labor, production, main-break and contract-operation costs outweighed lower employee benefits.
- Interest expense declined $0.7 million for the nine-month period, primarily following the 2012 refinancing of $57.5 million of first mortgage bonds. Utility plant net increased to $442.846 million from $435.218 million at year-end.
Outlook, risks and notable items
- Middlesex and Tidewater expected to file base-rate increase applications in November 2013. Decisions were not expected until the second half of 2014; approval or the amount of any increases was uncertain. The company also expected a Middlesex distribution system improvement charge in Q4 2013, designed to generate about $0.3 million of annual revenue, subject to approval.
- Management expected 2013 revenue to benefit from the full-year effect of approved rate increases and certain adjustment mechanisms. It estimated 2013 construction spending at about $18.5 million and projected approximately $54 million of capital projects for 2014–2015.
- Sayreville generated $1.9 million of 2012 revenue. Hess generated $2.6 million in 2012, and its water consumption had declined about 74% after refinery operations ceased. Management said the impact and duration of weaker commercial and industrial demand were uncertain.
- Retiree healthcare plan changes and improved 2012 investment performance reduced employee benefit plan expense by approximately $2.8 million in 2013 versus 2012. The plan amendment reduced the reported employee-benefit liability and related regulatory asset by $10.2 million at January 1, 2013.
- In September, Tidewater entered a 50-year Dover Air Force Base water-service agreement, subject to Delaware regulatory approval; initial annual revenue could be about $0.6 million. The company also guaranteed a contractor’s performance on a Monmouth County leachate facility, with a $0.4 million liability recognized. Middlesex believed payment under the guarantee was unlikely, but its contractual guarantee could extend through 2028 absent an acceptable replacement guarantor.
- Other risks include weather and water demand, timely regulatory rate relief, operating and capital costs, water supply and quality requirements, economic conditions, and the possibility that some preliminary survey and investigation costs may not be recoverable. The company reported no material change in risk factors from its 2012 Form 10-K and no material adverse effect expected from pending ordinary-course litigation.
Investor verification points
- Track the NJBPU and DEPSC outcomes, timing and allowed amounts for the anticipated base-rate filings and Middlesex improvement charge.
- Assess ongoing revenue exposure from Sayreville’s departure, Hess’s lower consumption and weather-sensitive demand against rate increases and customer growth.
- Verify October 2013 credit-line maturities were extended or refinanced and monitor short-term borrowing needs relative to planned capital spending.
- Monitor execution and regulatory approval of the Dover Air Force Base contract, and potential obligations under the Monmouth County performance guarantee.
- Review actual capital spending, pension and postretirement contributions, and whether the stated operating cash generation remains sufficient to support investment and dividends.