Middlesex Water Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results. The company provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, as well as non-regulated contract operations.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $31.2 million | $30.1 million | +3.5% |
| Operating income | $6.4 million | $7.6 million | -16.2% |
| Operating margin | 20.4% | 25.1% | -4.7 percentage points |
| Net income | $4.5 million | $4.4 million | +1.2% |
| Common EPS, basic and diluted | $0.27 | $0.27 | Unchanged |
| Operating cash flow | $9.0 million | $10.1 million | Down $1.1 million |
Revenue growth reflected higher commercial and industrial water usage, increased purchased-water adjustment revenues, customer additions at Tidewater, and new non-regulated contracts. Operations and maintenance expense rose $1.9 million, including higher costs from winter-related main breaks, purchased water and treatment, overtime and insurance. Lower income taxes—reflecting the Tax Act and approved tax-related regulatory accounting—helped lift net income despite lower operating income and higher interest expense. Cash dividends paid were $0.2238 per common share, versus $0.2113.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $2.0 million; current assets were $25.2 million and current liabilities $64.0 million. Cash, cash equivalents and restricted cash totaled $2.8 million at quarter-end, down from $6.4 million at the start of the period.
- Long-term debt was $140.1 million, current maturities $7.0 million, and notes payable $27.5 million. These components total approximately $174.5 million, compared with approximately $173.9 million at December 31, 2017.
- The company had $92.0 million of credit lines, with $27.5 million outstanding and $64.5 million available. Outstanding borrowings carried a 2.96% weighted-average rate and matured from April through June 2018, with extensions at the company’s discretion.
- Utility plant expenditures were $10.0 million; operating cash flow funded approximately 83% of these expenditures. Investing cash use was $10.0 million, while financing activities used $2.6 million.
Material changes, outlook and risks
- New Jersey rate settlement: A negotiated base-rate settlement approved in March provides for $5.5 million in annual operating-revenue increases, effective April 1, 2018. The rates reflect a $245.5 million rate base and a 9.6% authorized return on equity. The original request was $15.3 million; the company reduced it after the Tax Act lowered the corporate tax rate.
- Taxes and regulation: The company recorded $32.0 million of regulatory liabilities for excess income taxes collected through rates. Much relates to accelerated depreciation and is subject to IRS normalization limits on customer refunds. Delaware rate-reduction compliance filings reflecting the Tax Act were pending; timing and acceptance were uncertain.
- Capital program and funding: Management forecast approximately $78 million of 2018 construction spending, with about $68 million remaining after Q1, and projected approximately $188 million in 2019–2020. Planned projects include transmission and distribution improvements, treatment upgrades, storage and resiliency investments. Funding is expected from internal cash, investment-plan proceeds, state revolving-fund financing and, if needed, short-term borrowing.
- Debt approvals: NJBPU approved borrowing of up to $57 million for a transmission pipeline and up to $55 million for treatment-plant upgrades in April 2018; it had approved up to $14 million for the 2018 RENEW program in March. Delaware approved up to $0.9 million for a distribution-system replacement.
- Operating outlook: Management expected 2018 residential customer growth to remain consistent with recent years and cited weather, rate relief, cost control and customer growth as key earnings drivers. It said operating costs were expected to increase and that it was pursuing cost-control measures. No earnings or revenue forecast was provided.
- Risks and contingencies: Severe winter weather increased repair and operating costs. Other identified risks include water availability and quality, regulatory decisions, weather, cost and availability of capital, commodity suppliers, and operating costs. The IRS was examining the company’s 2014 federal return and repair-cost deductions; the company recorded a $2.3 million provision against refunded taxes. Management said pending litigation was not expected to have a material adverse effect; the filing reported no legal proceedings in Part II.
- The Perth Amboy operating contract expires in December 2018; the municipality sought proposals for a new ten-year agreement, and USA-PA intended to submit a proposal.
Important facts for investors to verify
- Whether the New Jersey rate increase and tax-benefit amortization translate into expected earnings and cash-flow improvements after becoming effective.
- How Delaware regulators resolve the proposed Tax Act-related rate reductions and how excess tax collections will be returned to customers.
- Construction timing, total project costs and financing terms for the large capital program, including approved but not yet closed state loans.
- Renewal outcome for the Perth Amboy contract and refinancing or extension of short-term borrowings maturing in April–June 2018.
- Outcome of the IRS examination and any resulting changes to the recorded tax provision.