Middlesex Water Company — Q2 2011 Form 10-Q
Business and period. The filing covers the quarter and six months ended June 30, 2011. 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 except per-share data.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $26.102 | $26.538 | $50.098 | $48.184 |
| Operating income | $6.738 | $7.894 | $11.506 | $11.184 |
| Net income | $3.625 | $4.424 | $6.255 | $5.984 |
| Basic EPS | $0.23 | $0.31 | $0.40 | $0.43 |
| Diluted EPS | $0.23 | $0.31 | $0.40 | $0.42 |
- Q2 operating margin was approximately 25.8%, versus 29.8% a year earlier; six-month operating margin was approximately 23.0%, versus 23.2%.
- Six-month operating cash flow was $12.084, compared with $11.782. Utility-plant expenditures were $11.039, down from $15.981; operating cash flow covered reported plant expenditures for the period. Cash ended June at $4.283, up from $2.453 at year-end 2010.
- At June 30, long-term debt was $134.709, plus $4.448 current maturities; notes payable were $20.250. Total debt including current maturities and notes payable was approximately $159.4, versus $159.7 at year-end. The company had $58.0 of credit lines, with $20.3 drawn; the drawn balance was scheduled to mature in July and August 2011.
- Current assets were $25.451 and current liabilities $43.660. Common dividends paid were $0.1825 per share in Q2 and $0.3650 for the six months.
Changes versus comparable periods
- Q2 revenue declined 1.6%, operating income 14.6%, and net income 18.1%. Management attributed lower revenue mainly to expired temporary municipal water-supply contracts and cooler, wetter weather that reduced residential demand; higher commercial and industrial use partly offset the latter.
- Q2 operating and maintenance costs rose $0.486, including higher labor, healthcare/postretirement and information-technology costs. Lower main-break costs partly offset the increases. Depreciation also rose with the larger utility-plant base.
- Six-month revenue rose 4.0%, mainly reflecting the full-period effect of Middlesex’s 13.5% rate increase effective in March 2010 and higher Perth Amboy contract fees. Net income increased 4.5%, but EPS fell as the average share count rose following the June 2010 public offering of 1.9 million shares.
Outlook, risks and notable items
- Management estimated 2011 capital expenditures of $22.9, with approximately $11.9 expected in the second half; it projected approximately $43 of capital projects for 2012–2013. Funding sources include operating cash, DRP share sales, state revolving-fund financing and short-term credit.
- Management expected revenue to benefit from the full-year effect of the 2010 Middlesex rate increase, the Tidewater distribution-system charge and anticipated Middlesex purchased-water recovery. It cautioned that 2010’s hot, dry weather may not recur and that economic conditions continued to affect commercial and industrial water use. No specific earnings guidance was provided.
- A New Jersey purchased-water adjustment request would recover approximately $0.4 of increased costs. A settlement was approved by an administrative law judge; final NJBPU action was expected in late August 2011, and the outcome was uncertain. Tidewater’s Delaware system-improvement charge rose from 1.34% to 1.98% effective July 1, 2011.
- Southern Shores received approval for phased rate increases, including approximately $0.1 of additional annual revenue for each increase scheduled from 2012 through 2015. Twin Lakes requested approximately $0.2 of annual base-rate increases; TESI requested approximately $0.8 and a 15% interim increase subject to refund. Decisions on these applications were uncertain and generally expected in early 2012.
- The company expected additional 2011 cash contributions of approximately $2.0 to its pension plan and $2.3 to its other-benefits plan. It warned that some preliminary survey and investigation costs could be charged to income if recovery through rates becomes unlikely.
- TESI acquired a small Delaware wastewater system for approximately $0.1. Management said ordinary-course litigation was not expected to materially affect the financial statements; the filing reports no separate legal proceedings. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Final regulatory decisions and timing for the Middlesex purchased-water adjustment and the Twin Lakes and TESI rate requests, including the interim TESI increase and refund exposure.
- Whether customer demand, weather and economic conditions support revenue expectations, and whether operating-cost increases can be contained.
- Delivery and funding of the 2011–2013 capital program, including use of short-term borrowing and near-term maturities of credit-line borrowings.
- Actual pension and other-benefit contributions, and whether any preliminary survey and investigation costs require write-offs.