Middlesex Water Company — Q2 2014 Form 10-Q
Business and period. The company provides regulated water and wastewater services, primarily in New Jersey and Delaware, alongside non-regulated utility operations. This unaudited report covers the quarter and six months ended June 30, 2014; comparative figures are for 2013. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Operating revenue | $29.19 | $29.10 | $56.36 | $56.14 |
| Operating income | $8.75 | $8.17 | $14.71 | $14.04 |
| Net income | $4.73 | $4.48 | $7.90 | $7.66 |
| EPS, diluted | $0.29 | $0.28 | $0.49 | $0.47 |
| Operating margin | 30.0% | 28.1% | 26.1% | 25.0% |
Cash flow and investment. First-half operating cash flow was $13.81 million, down from $16.20 million; management attributed the decline mainly to timing of vendor payments and employee benefit contributions, partly offset by income-tax payment timing. Utility-plant expenditures were $8.51 million versus $10.22 million. Cash at June 30 was $5.07 million.
Debt and liquidity. At June 30, long-term debt was $132.23 million, with a further $5.52 million current portion and $28.0 million drawn on credit lines. The company reported $60.0 million of aggregate credit lines, leaving $32.0 million undrawn. The $28.0 million borrowings carried a 1.40% weighted-average rate and matured in July 2014, extendable at the company’s discretion. Current assets were $28.57 million and current liabilities $54.47 million.
Changes and key developments
- Second-quarter revenue was nearly flat year over year; first-half revenue rose 0.4%. Increased Tidewater revenue, customer connections and demand, interim rates, and Plantations wastewater operations largely offset lost Middlesex revenue from the Sayreville wholesale contract ending and Hess’s refinery closure.
- Operating income and net income improved in both reported periods. Lower employee-benefit costs helped reduce first-half operations and maintenance expense by $0.58 million, despite higher winter-related main-break and overtime costs. Depreciation increased with utility plant in service.
- In June, New Jersey regulators approved a $4.2 million annual base-rate revenue increase, below the revised $8.1 million request; it took effect July 20, 2014 and therefore was not in effect for Q2. The approved rate case used a $208.6 million rate base and 9.75% return on equity.
- Tidewater’s Delaware rate request was revised from approximately $3.9 million to $2.5 million annually; a decision was expected in Q3 2014. A 6.5% interim increase, subject to refund, was in effect from February, with $0.5 million deferred pending the final decision.
Outlook, risks and contingencies
- Management expected 2014 revenue to benefit from the New Jersey rate increase, a potential Tidewater increase, Dover Air Force Base service expected to begin in October (initially about $0.6 million annual revenue), and a full-year contribution from Plantations. These are expectations, not reported results.
- Capital spending was estimated at $26.6 million for 2014, including about $18.1 million expected in the second half; approximately $59.0 million was projected for 2015–2016. The company expected to use internal funds, dividend reinvestment proceeds, SRF funds and, if needed, credit-line borrowings.
- A New Jersey filing sought approval for a distribution-system improvement charge with up to $3.6 million in annual revenue recovery over 36 months; a decision was expected in August 2014. Approval and recoverable amounts were uncertain.
- Middlesex guaranteed a contractor’s performance on a county leachate-treatment project. The recognized liability was about $0.3 million; management considered payment unlikely, but the guarantee could require the company to assume construction and operating commitments if the contractor and its indemnitors failed to perform.
- The company expected additional 2014 pension contributions of about $2.0 million and other postretirement-benefit contributions of about $1.0 million. It planned a $26.6 million 2014 construction program. Litigation was described as routine, with no expected material adverse effect.
- Risks highlighted include regulatory outcomes, weather and water supply, operating-cost control, capital availability, customer growth, cybersecurity and information-technology failures, and commodity-supplier nonperformance. The company said disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Track the realized revenue and earnings contribution from the July New Jersey rate increase, and the final Tidewater rate decision and any refund exposure from interim rates.
- Verify the timing, funding and completion of the 2014–2016 capital program, and whether the requested New Jersey improvement charge is approved.
- Monitor refinancing or extension of July 2014 credit-line maturities, borrowing costs, and the use of available credit capacity.
- Assess whether cash generation, benefit-plan funding and the expected Dover Air Force Base start align with management’s outlook.
- Review developments in the contractor-performance guarantee and potential recoverability of preliminary survey and investigation costs.