Middlesex Water Company — Q3 2016 Form 10-Q
Business and period: Regulated water and wastewater utility and contract-services provider operating in New Jersey, Delaware and Pennsylvania. This unaudited report covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $37.8 | $34.7 | $101.1 | $95.1 |
| Operating income | $14.2 | $11.5 | $32.8 | $27.4 |
| Net income | $8.8 | $6.7 | $19.5 | $15.5 |
| Diluted EPS | $0.54 | $0.41 | $1.19 | $0.95 |
| Operating margin | 37.5% | 33.1% | 32.4% | 28.8% |
Operating margins are calculated from reported operating income and revenue. Quarterly revenue rose about 9%; operating income rose 24% and net income 31%. For the nine-month period, revenue increased about 6%, operating income 20% and net income 26%.
- Drivers: Management attributed revenue growth chiefly to the full-period benefit of Middlesex’s August 2015 rate increase, higher water demand and favorable Q3 weather. Nine-month demand was mixed: Tidewater had lower demand in late spring and early summer.
- Costs and other items: Nine-month operations and maintenance expense declined $0.9 million, mainly from lower employee benefit costs, fewer cold-weather main breaks and lower variable production costs, partly offset by higher labor costs. Depreciation and other taxes increased. Other income included recognition of previously deferred HomeServe marketing-agreement income, contributing to the increase versus 2015.
- Dividends: Common dividends paid per share were $0.1988 in Q3 and $0.5963 year to date, versus $0.1925 and $0.5775, respectively, in 2015.
Cash flow, capital spending and financial position
- Nine-month operating cash flow was $30.7 million, up from $29.2 million. Investing cash outflow was $34.1 million, versus $17.9 million, reflecting higher utility-plant spending. Financing provided $1.5 million, compared with a $9.3 million outflow in 2015.
- Utility-plant expenditures were $34.1 million through September, versus $19.3 million a year earlier. Management estimated 2016 capital spending at approximately $46 million and projected approximately $112 million for 2017–2018; timing and amounts remained subject to project schedules and engineering estimates.
- At September 30, cash was $1.5 million; current assets were $30.5 million and current liabilities $44.4 million. The company had $13.6 million outstanding on $60 million of credit lines, with $46.4 million available. The outstanding borrowings matured in October and were extendable at the company’s discretion.
- Long-term debt was $130.9 million, with $6.1 million classified as current; notes payable were $13.6 million. Total capitalization was $351.5 million. Utility plant, net, was $507.0 million, up from $481.9 million at year-end 2015.
Outlook, risks and contingencies
- Management expected 2016 revenue to benefit from the full-year effect of the 2015 Middlesex rate increase, increased wholesale customer needs, 2016 rate increases at Pinelands and Twin Lakes, and Tidewater’s higher distribution system improvement charge. Tidewater expected approximately $0.3 million of annual revenue from the charge.
- Management cautioned that 2016 demand increases may not recur in 2017 and anticipated operating-cost increases in 2017. It also expected lower market-driven discount rates to increase retirement benefit expenses in 2017. No earnings or revenue guidance range was provided.
- Management planned to fund remaining 2016 capital spending with internal cash, investment-plan stock proceeds, state revolving-fund financing and, if needed, short-term borrowing. Middlesex had approved financing of up to $16 million for its RENEW main-replacement program and up to $4 million for a booster-station upgrade; the RENEW construction loan was a zero-interest arrangement pending conversion to long-term financing under program terms.
- Risks identified include regulatory decisions and rate recovery, water supply and quality, weather, operating-cost control, capital availability, commodity supplier performance, customer defaults and changes in Delaware housing development. The company said litigation in the ordinary course was not expected to have a material adverse effect; no legal proceedings were listed in Part II.
- The IRS was examining the company’s 2014 federal tax return, which included a previously claimed $17.6 million tax reduction and refunds for 2012–2014. The filing said the examination’s outcome was unknown.
Investor verification priorities
- Verify the extent to which revenue and earnings growth reflects approved rate increases and durable customer demand versus favorable Q3 weather and the HomeServe income recognition.
- Track capital spending, project timing and funding needs against the $46 million 2016 estimate and approximately $112 million projected for 2017–2018, including debt draws and short-term credit maturities.
- Monitor rate recovery and regulatory proceedings, including the phased-in Pinelands and Twin Lakes increases and approved revolving-fund financing.
- Assess the IRS examination, 2017 retirement-benefit expense sensitivity to discount rates, water-supply and quality risks, and the outlook for operating costs.