Middlesex Water Company — Q1 2020 Form 10-Q
Business context and period: The regulated water and wastewater utility, operating primarily in New Jersey, Delaware and Pennsylvania, reported results for the three months ended March 31, 2020. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $31.8 | $30.7 |
| Operating income / margin | $6.5 / 20.5% | $7.0 / 22.9% |
| Net income | $7.7 | $6.6 |
| EPS, basic / diluted | $0.44 / $0.44 | $0.40 / $0.39 |
| Operating cash flow | $16.1 | $7.7 |
| Utility plant expenditures | $25.1 | $12.3 |
- Revenue rose 3.5%; net income increased 17.0%, while operating income fell 7.1%. Net margin was 24.1%, versus 21.3% a year earlier.
- Operating expenses increased to $25.2 million from $23.7 million. Operations and maintenance rose $1.1 million, depreciation $0.4 million, and other taxes $0.1 million.
- Net income benefited from higher allowance for funds used during construction (AFUDC) and a larger income-tax benefit. The company reported an income-tax benefit of $1.3 million, compared with $0.3 million in Q1 2019; management attributed the change primarily to regulatory accounting treatment of tax benefits related to tangible-property regulations.
- Operating cash flow increased mainly because of the timing of vendor payments. Investing cash outflow rose with higher utility-plant spending; operating cash flow less plant expenditures was negative $9.0 million, compared with negative $4.7 million.
- At March 31, cash and cash equivalents were $15.4 million and restricted cash was $37.9 million. Credit lines totaled $140 million, with $33.5 million outstanding and $106.5 million available. Long-term debt was $234.8 million, plus $7.2 million current maturities and $33.5 million in notes payable.
- Common dividends paid were $4.5 million; the quarterly common dividend shown in equity was $0.2563 per share.
Changes, outlook and risks
- Regulated revenue increased about $1.0 million, led by higher wholesale demand at Middlesex and customer growth at Tidewater. Non-regulated operating income declined to $0.7 million from $1.0 million.
- Operating costs increased due to retirement-benefit expenses, higher water-treatment costs associated with weather-related raw-water quality, and labor costs. Interest charges rose $0.5 million, reflecting higher average debt outstanding, partly offset by lower average rates.
- The company forecast approximately $118 million of 2020 capital spending; about $25 million had been spent by March 31. It projected approximately $173 million of capital expenditures in 2021–2022. No earnings or EPS guidance was provided.
- COVID-19’s prospective effects were uncertain. Operations and construction had not been significantly disrupted through the filing, but commercial closures could reduce water demand and state emergency orders had suspended customer collection efforts. Management drew on credit lines as a liquidity precaution and was discussing potential recovery of pandemic-related costs with regulators; recovery was not assured.
- Management identified weather, rate relief, cost control, customer growth and COVID-19 as important outlook factors. The 2020 construction program could be affected if pandemic impacts persisted.
- The company sought NJBPU approval to borrow up to $100 million through private placements; a decision was expected in May 2020. It also expected to draw the remaining proceeds from its 2019 bond financing through Q3 2021.
- A county terminated a wastewater contractor agreement for which Middlesex had provided a performance guaranty; related litigation names Middlesex as a third-party defendant. Management did not expect a material effect. Other routine legal and regulatory matters were not expected to materially affect results.
Important facts for investors to verify
- Whether COVID-19 affected customer demand, collections, construction timing, liquidity or cost recovery after March 31.
- Regulatory outcomes for the requested $100 million private placement and for recovery of COVID-related costs.
- Whether planned capital spending and financing needs changed, including the timing and terms of SRF and bond funding.
- Whether operating-cost increases, the tax benefit and elevated AFUDC are recurring; reported net-income growth outpaced operating-income performance.
- Developments in the wastewater-contract litigation and any resulting obligations under the company’s guaranty.