Middlesex Water Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey, Delaware, and Pennsylvania, with a smaller non-regulated contract-services business.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $39.9 million | $37.8 million | $107.0 million | $101.9 million |
| Operating income | $13.2 million | $12.0 million | $29.1 million | $28.0 million |
| Net income | $12.7 million | $11.1 million | $30.1 million | $25.8 million |
| Common diluted EPS | $0.72 | $0.66 | $1.71 | $1.55 |
| Operating margin | 33.0% | 31.7% | 27.2% | 27.5% |
Revenue increased 5.7% for the quarter and 5.0% year to date. Management attributed growth principally to increased water consumption in the Middlesex system, customer additions in Tidewater, rate increases, and the new Highland Park contract. Nine-month earnings also benefited from a larger income-tax benefit, primarily related to regulatory accounting for tax benefits associated with IRS tangible-property rules.
Cash flow, investment, and financial position
- Nine-month operating cash flow was $37.3 million, up from $23.3 million. Utility-plant expenditures were $70.8 million, compared with $61.2 million.
- Financing cash flow was $15.2 million, versus $89.3 million in the prior-year period, when long-term debt and common-stock proceeds were substantially higher. The company paid $13.4 million in common dividends.
- At September 30, cash and cash equivalents were $5.3 million; restricted cash was $22.8 million. Cash, cash equivalents, and restricted cash totaled $28.2 million.
- Long-term debt, net of current maturities, was $234.5 million; current maturities were $7.2 million, and short-term notes payable were $36.5 million. Total capitalization was $578.7 million.
- The company had $103.5 million available under $140 million of credit lines. Outstanding short-term borrowings bore a 1.18% weighted-average rate and matured between October and December 2020, subject to renewal.
- Utility plant, net, rose to $766.0 million from $705.7 million at year-end 2019. The company forecast approximately $113 million of 2020 capital spending and approximately $179 million for 2021–2022.
Changes, outlook, and risks
- Operating income rose year over year in Q3, while nine-month operating margin was slightly lower. Higher production, treatment, benefit-plan, and depreciation costs partially offset revenue growth.
- The company plans a $40 million private-placement loan, expected to close around November 18, 2020, at 2.90% with a November 2050 maturity. It received regulatory approval to borrow up to $100 million in one or more private placements.
- USA began a ten-year, $8.3 million contract to operate Highland Park’s water and wastewater systems on July 1, 2020. Rate mechanisms and approvals during 2020 included Middlesex’s purchased-water adjustment, Tidewater’s system-improvement charge, and a Twin Lakes base-rate increase.
- Management gave no specific earnings guidance. It identified weather, rate relief, cost control, customer growth, usage patterns, and COVID-19 effects as important to results. Residential usage increased in part as commercial activity declined; customer collection efforts were suspended under state emergency orders. New Jersey and Delaware regulators allowed potential future recovery of certain incremental pandemic costs, but had not established a recovery timetable or method.
- COVID-19 had not significantly disrupted operations or construction through the filing date, but its future effects on customers, vendors, demand, collections, costs, liquidity, and capital-project timing were uncertain.
- The company forecast approximately $3.0 million of pension-plan cash contributions for the remainder of 2020. Construction commitments were estimated at $41 million; project timing and costs could change.
- Middlesex is a third-party defendant in litigation related to a county wastewater-treatment contract terminated in 2019. Management did not expect the outcome to materially affect results or financial condition. Management also stated that other routine disputes and contingencies were not expected to have a material adverse effect.
Investor verification points
- Track whether increased water consumption and customer growth persist, and how COVID-related changes in commercial and residential demand affect revenue.
- Verify collections, bad-debt expense, and any regulatory process or timetable for recovery of pandemic-related costs.
- Monitor capital spending against the $113 million 2020 estimate and the $179 million 2021–2022 projection, including project delays or cost changes.
- Confirm completion and terms of the planned $40 million private placement, renewal or repayment of short-term borrowings, and funding needs for the capital program.
- Assess the sustainability of earnings growth, including the contribution from tax benefits and allowance for funds used during construction, as well as rising operating and depreciation costs.
- Follow the county-contract litigation and any material developments in regulatory, water-quality, or other contingencies.