Middlesex Water Company — Q2 2018 Form 10-Q
Business context and period. The filing reports unaudited results for the three and six months ended June 30, 2018, compared with the same 2017 periods. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, and non-regulated system operations services.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $34.9 million, up 5.8% | $66.1 million, up 4.7% |
| Operating income | $10.7 million, up 14.6% | $17.1 million, up 0.8% |
| Net income | $8.7 million, up 61.2% | $13.2 million, up 34.1% |
| Diluted EPS | $0.52 vs. $0.33 | $0.80 vs. $0.59 |
| Operating margin | 30.7% vs. 28.3% | 25.8% vs. 26.8% |
| Net margin | 24.8% vs. 16.3% | 19.9% vs. 15.5% |
For the first half, operating cash flow was $19.2 million, down from $20.2 million; capital expenditures were $28.4 million, up from $21.2 million. Cash and cash equivalents were $2.7 million at June 30, 2018. The company had $39.0 million drawn on $92.0 million of credit lines, leaving $53.0 million available. Long-term debt was $142.1 million, excluding the $7.2 million current portion; notes payable were $39.0 million. Common dividends paid were $0.2238 per share for Q2 and $0.4475 for the first half.
Material changes and drivers
- Revenue growth reflected the New Jersey base-rate increase effective April 1, 2018, higher customer usage and customer growth in Delaware, and new non-regulated contracts.
- Q2 net income rose substantially as income-tax expense fell to $0.8 million from $2.9 million, primarily due to Tax Act effects and regulatory accounting for tangible-property tax benefits. First-half income-tax expense declined to $1.9 million from $5.4 million.
- First-half operations and maintenance expense increased $1.9 million, driven by purchased-water and treatment costs, labor and overtime, and insurance. Depreciation rose with the larger utility plant in service.
- Interest expense increased to $3.2 million for the first half from $2.5 million, reflecting higher debt balances and rates and interest accrued in connection with an IRS examination.
- Other income benefited from the sale of wastewater franchise rights and higher allowance for funds used during construction.
Outlook, risks and unusual items
- A New Jersey rate-case settlement provides an annual revenue increase of $5.5 million, effective April 1, 2018, and an authorized return on equity of 9.6%. The settlement permits four-year amortization of $28.7 million in specified deferred tax benefits.
- The company expects to spend approximately $78 million on construction in 2018; about $28 million had been spent through June. It projects approximately $190 million of capital projects in 2019–2020. Funding plans include internal cash, investment-plan proceeds, revolving credit and state infrastructure financing.
- In July 2018, USA-PA was awarded a $67 million base professional-services contract to continue operating Perth Amboy’s water and wastewater systems through December 31, 2028.
- At June 30, the company recorded $32.6 million of regulatory liabilities for excess income taxes collected through rates under the lower federal tax rate; timing and treatment of some Delaware rate adjustments remained subject to regulatory action.
- The IRS examination of the 2014 federal return led the company to increase its reserve for disputed tangible-property repair deductions from $2.3 million to $3.7 million. The final liability could differ; $0.4 million of related interest expense was recorded for the quarter and first half.
- Management cited weather, rate relief, cost control, customer growth, water supply, regulation, capital availability and operating costs among factors that could affect results. It expected residential customer growth in 2018 to be consistent with recent years. Litigation was described as not expected to have a material adverse effect.
- Operating cash flow funded approximately 43% of first-half utility-plant expenditures; the remaining investment requirements imply continued use of external financing.
Important facts for investors to verify
- How much of the earnings increase is sustainable versus attributable to lower taxes and the wastewater franchise-rights sale.
- The outcome and potential financial effect of the IRS examination and related reserve.
- Regulatory decisions on tax-related customer refunds or rate reductions, particularly in Delaware, and recovery of regulatory assets.
- Capital-project timing and costs, availability and terms of planned NJIB/SRF financing, and future borrowing needs.
- Whether operating-cost pressures, interest rates, weather and water-supply conditions affect margins and cash generation.