Middlesex Water Company — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, plus non-regulated water and wastewater system operations and maintenance services.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Operating revenue | $33.4 million | $34.9 million | $64.1 million | $66.1 million |
| Operating income | $9.0 million | $10.7 million | $16.0 million | $17.1 million |
| Net income | $8.1 million | $8.7 million | $14.7 million | $13.2 million |
| Diluted EPS | $0.49 | $0.52 | $0.88 | $0.80 |
| Operating margin | 26.8% | 30.7% | 24.9% | 25.8% |
| Operating cash flow | Not provided by quarter | $11.6 million | $19.2 million | |
| Capital expenditures | Not provided by quarter | $35.7 million | $28.4 million |
Margins are calculated from reported revenue and operating income. Q2 common-stock EPS was $0.49 basic and diluted, versus $0.53 basic and $0.52 diluted in 2018. The common dividend was $0.24 per share for Q2, compared with $0.2238 a year earlier.
Balance sheet, debt and liquidity
- At June 30, 2019, total assets were $807.6 million, net utility plant was $654.2 million, and common equity was $263.3 million.
- Long-term debt was $163.6 million, with $7.4 million classified as current. Short-term notes payable were $59.4 million, leaving $40.6 million available under the company’s $100 million credit lines. Outstanding line borrowings carried a 3.41% weighted-average rate at quarter-end and matured July through September 2019, with extensions at the company’s discretion.
- Cash and cash equivalents were $3.0 million; restricted cash was $1.2 million. Current liabilities were $102.5 million versus current assets of $32.3 million.
- Construction-work-in-progress rose to $56.2 million from $32.9 million at December 31, 2018. Total assets increased to $807.6 million from $767.8 million.
Changes versus prior period and management commentary
- Q2 revenue fell $1.5 million year over year, largely due to weather-related reductions in water demand and a $0.8 million decline in non-regulated contract revenue. Management attributed the latter principally to the new Perth Amboy contract structure; the lower revenue was accompanied by lower subcontractor expense.
- For the first half, revenue declined $2.0 million. Middlesex’s April 2018 rate increase added revenue, but was offset by lower demand; the new Perth Amboy contract reduced both non-regulated revenue and related operating expense.
- Q2 operating income decreased $1.8 million, while first-half operating income decreased $1.1 million. Depreciation rose in both periods with higher utility plant in service. Lower operating income notwithstanding, first-half net income increased $1.5 million, principally reflecting lower income tax expense; Q2 net income declined $0.5 million.
- Operating cash flow fell $7.6 million in the first half, which management attributed primarily to timing of vendor payments and higher income tax payments. Investing cash outflow increased $7.3 million to $35.7 million; financing cash inflow increased to $22.6 million, reflecting increased long-term debt and common-stock issuance proceeds.
- Management said weather, timely rate relief, cost management and customer growth are key determinants of results. It reported continued low water demand associated with recent weather patterns, expected higher actuarially determined non-service retirement-benefit costs in 2019, and residential customer growth through June consistent with recent years.
Outlook, capital plan and notable items
- The company forecast approximately $116 million of capital spending in 2019; about $36 million had been spent through June, with roughly $80 million expected for the rest of the year. It projected approximately $204 million of capital projects in 2020–2021. Contractual construction commitments were estimated at $77 million.
- Planned funding sources include internally generated funds, the Investment Plan, state revolving-fund financing, First Mortgage Bonds through the New Jersey Economic Development Authority, possible common-stock sales and short-term credit lines. Regulators authorized up to 1.5 million additional common shares through 2022 and up to $140 million of bonds through 2022. The company selected an underwriter to market up to $60 million of bonds in August 2019.
- Projects include a 4.6-mile transmission pipeline, water-main replacements, treatment enhancements and emergency power. New Jersey subsidiaries sought annual base-rate increases of approximately $0.2 million and $0.5 million; a Pennsylvania subsidiary filed for approximately $0.2 million annually. Outcomes were uncertain at filing.
- Tidewater’s Delaware rates were reduced 3.35% effective March 1, 2019, lowering annual revenue by about $1.0 million, with a one-time $0.7 million customer credit. A distribution-system improvement charge reset effective July 1 was expected to generate about $0.5 million annually.
- The IRS concluded its examination of the company’s 2014 return and related 2015 matters following accounting-method modifications. The company paid $0.8 million in taxes and $0.1 million in interest and reduced its tax reserve to $3.1 million and interest liability to $0.2 million. IRS examinations of 2016 and 2017 returns remained ongoing; final liability could differ from the recorded reserve.
- New lease accounting adoption added a right-of-use asset and lease liability; at June 30, the balance sheet reported a $6.3 million lease asset and $6.1 million non-current lease obligation, plus a current lease liability.
- The company reported no legal proceedings in Part II and stated that pending claims were not expected to have a material adverse effect. It recognized an approximately $1.5 million liability for a performance guarantee related to an unaffiliated wastewater contractor.
- No specific full-year earnings or EPS guidance was provided. Forward-looking risks include water supply and quality, weather, rate decisions, cost control, capital availability, regulatory requirements and non-regulated market competition.
Important facts for investors to verify
- Whether lower demand and weather effects persist, and the pace and approval of pending rate cases.
- Execution, timing and total cost of the large capital program, and the availability and cost of planned debt and equity funding.
- Liquidity and refinancing plans for short-term borrowings, including extensions of the $59.4 million outstanding at quarter-end.
- Outcome of the IRS examinations for 2016 and 2017 and any resulting change to tax reserves or cash payments.
- Whether first-half earnings improvement from tax effects can be sustained despite lower revenue and operating income.