Middlesex Water Company — Q1 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated contract operations.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $28.780 million | $27.173 million | +5.9% |
| Operating income | $6.685 million | $5.967 million | +12.0% |
| Net income | $3.636 million | $3.169 million | +14.7% |
| Earnings applicable to common stock | $3.600 million | $3.126 million | +15.2% |
| Basic and diluted EPS | $0.22 | $0.20 | +10.0% |
| Operating cash flow | $11.431 million | $8.361 million | +$3.070 million |
| Utility plant expenditures | $4.885 million | $4.165 million | +$0.720 million |
Operating margin was approximately 23.2%, versus 22.0% a year earlier; net margin was approximately 12.6%, versus 11.7%. Operating cash flow covered Q1 utility-plant expenditures. The cash-flow increase was attributed principally to timing of vendor payments, income tax payments and retirement-plan contributions.
Balance sheet and liquidity
At March 31, 2015, cash was $5.046 million and current assets were $25.635 million, against current liabilities of $43.644 million (current ratio approximately 0.59). The filing reports $15.0 million drawn on $60.0 million of credit lines, with the outstanding borrowings maturing in April 2015 and extendable at the company’s discretion. Long-term debt was $137.811 million, with $6.092 million current; notes payable were $15.0 million. Cash ended the quarter $2.373 million higher than at year-end.
Capital expenditures were $4.885 million in Q1. The company budgeted approximately $23.6 million for 2015 and projected approximately $72.0 million for 2016–2017. The common dividend paid was $0.1925 per share, versus $0.1900 in Q1 2014.
Material changes and management commentary
- Revenue increased $1.607 million, primarily from approved rate increases, greater Tidewater customer demand and higher contract-service revenues; lower Middlesex water demand partly offset these gains.
- Operating and maintenance expense rose $0.650 million, including a $0.7 million increase in employee-benefit expense. Management cited a lower discount rate and updated mortality assumptions as drivers of higher retirement-plan costs. Lower cold-weather main-break activity partly offset cost increases.
- Regulated-segment operating income rose to $6.165 million from $5.404 million; non-regulated operating income declined to $0.520 million from $0.563 million.
- Interest charges were $1.058 million, down from $1.103 million, as lower average short-term debt costs offset interest on higher average long-term debt.
Outlook, regulation and risks
- On March 31, Middlesex filed for a New Jersey base water-rate increase of approximately $9.5 million annually. The regulator must decide within nine months; approval, timing and final amount remain uncertain.
- A Middlesex distribution-system improvement charge (DSIC) was expected to take effect in May 2015 and generate approximately $0.3 million in annual revenue initially. Tidewater’s Delaware DSIC, effective January 1, was expected to generate $0.1 million annually. Middlesex’s approved DSIC framework permits up to $3.6 million in annual revenue.
- Management expected 2015 revenue to benefit from the full-year effect of prior rate increases and a contract that began in October 2014. It also cited weather, water consumption, cost management and customer growth as important results drivers; no earnings guidance was provided.
- The 2015 RENEW main-rehabilitation project was delayed until 2016 following changes to New Jersey SRF loan requirements and a review of mains needing rehabilitation. The company expected to seek a revised financing timetable.
- Middlesex guarantees a contractor’s performance on a Monmouth County facility through at least August 2018 and potentially through 2028 absent an acceptable replacement guarantor. Management considered payment under the guarantee unlikely; the recognized liability was approximately $0.3 million.
- Management identified risks including regulatory decisions, water supply and quality, weather, operating costs, capital availability and development activity. It said pending routine litigation was not expected to materially affect the financial statements; no legal proceedings were listed in Part II.
Important facts for investors to verify
- Progress and final outcome of the $9.5 million New Jersey rate case and implementation and recovery under the DSIC mechanisms.
- Whether operating cash flow remains sufficient as retirement-benefit contributions and the capital program increase; management expected approximately $3.3 million of pension and $1.7 million of other-benefit contributions for the remainder of 2015.
- Availability, cost and timing of capital funding, including the April 2015 credit-line maturities, remaining Tidewater loan proceeds and delayed RENEW financing.
- Actual capital spending versus the $23.6 million 2015 budget and the projected $72.0 million for 2016–2017, along with the effects of consumption and benefit costs on margins.
- The potential exposure under the Monmouth County guarantee and any material change in the company’s stated view that payment is unlikely.