Middlesex Water Company — 2017 Q3 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated contract operations. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $36.2 | $37.8 | $99.3 | $101.1 |
| Operating income | $12.8 | $14.2 | $30.1 | $32.8 |
| Net income | $7.6 | $8.8 | $17.5 | $19.5 |
| EPS, basic / diluted | $0.47 / $0.46 | $0.54 / $0.54 | $1.06 / $1.06 | $1.19 / $1.19 |
| Operating margin | 35.4% | 37.5% | 30.3% | 32.4% |
| Net cash from operations | — | — | $28.6 | $30.7 |
| Utility plant expenditures | — | — | $35.2 | $34.1 |
For the nine-month period, cash used in investing was $35.2 million and financing provided $5.3 million; cash declined $1.2 million to $2.7 million. Operating cash flow funded about 41% of utility-plant expenditures internally. Common dividends paid were $0.6338 per share for the nine months, versus $0.5963 in 2016.
At September 30, total current assets were $30.1 million and current liabilities $59.0 million, a current ratio of about 0.51. Cash was $2.7 million. Long-term debt was $135.8 million, current long-term debt $6.5 million, and short-term notes payable $24.5 million. Credit lines totaled $92.0 million, with $67.5 million available; outstanding borrowings carried a 2.28% weighted-average rate.
Changes and management commentary
- Q3 revenue declined 4.3% and nine-month revenue declined 1.8%; net income fell 13.3% and 10.5%, respectively. Lower water consumption—attributed largely to 2017 weather—and reduced bulk water sales to neighboring systems were key revenue factors. Favorable weather and emergency-related bulk sales had benefited the comparable prior periods.
- For nine months, operating expenses rose $0.9 million overall. Higher labor, water production, main-break repair and depreciation costs were partly offset by lower retirement-plan and liability-insurance costs. Q3 operations and maintenance expense declined $0.4 million, including lower retirement-plan and water-production costs.
- Other income was lower year over year, in part because 2016 included recognition of previously deferred HomeServe-related income. Interest expense increased modestly with higher short-term borrowing balances and rates.
- The company expects approximately $52 million of capital expenditures in 2017, including about $17 million for the remainder of the year; it projects approximately $163 million for 2018–2019 and describes a multi-year program of about $106 million through 2018. Funding sources include internal cash, investment-plan proceeds, SRF loans and short-term borrowing.
- Management said 2017 residential customer growth, largely from Delaware housing development, was expected to be consistent with recent years. It continues to focus on cost control and timely recovery of infrastructure investment. No earnings or EPS guidance was provided.
Rates, contingencies and risks
- After quarter-end, Middlesex filed in New Jersey for a $15.3 million annual base water-rate increase, citing infrastructure investment and higher operating costs. Approval, timing and the amount ultimately granted were uncertain; the regulator was required to decide within nine months of filing.
- After quarter-end, New Jersey approved a purchased-water adjustment expected to recover $1.2 million in annual costs, effective November 1, 2017. Tidewater’s Delaware system reset its distribution-system improvement charge effective July 1, expected to generate $0.4 million annually.
- The company’s 2017 construction program and rate recovery depend on project timing, regulatory decisions and financing availability. Other stated risks include weather and water supply, water-quality requirements, operating-cost control, capital costs, customer growth and supplier performance.
- The IRS was examining the company’s 2014 federal return, which included a previously claimed $17.6 million tax reduction and refunds for 2012–2014; the outcome was unknown. The company reported no material expected adverse effect from ordinary-course litigation and no legal proceedings in Part II.
- Middlesex guarantees an unaffiliated contractor’s performance on a county facility through 2028; the recorded liability was approximately $0.1 million. The Perth Amboy operations contract expires in December 2018.
Most important facts for investors to verify
- Progress and final outcome of the $15.3 million New Jersey base-rate case, and realization of the approved purchased-water adjustment and Delaware improvement-charge revenues.
- Actual capital spending versus plans, project schedules, and funding mix—particularly SRF loan closings, available credit and short-term borrowing costs.
- Whether water consumption, weather and bulk-water sales recover, and whether cost increases continue to outpace revenue growth.
- Outcome of the IRS examination and any resulting tax or cash consequences.
- Cash-flow and liquidity trends, debt maturities, and the company’s ability to sustain capital investment and dividends.