Middlesex Water Company — Q2 2020 Form 10-Q
Business and period. The filing covers the three and six months ended June 30, 2020. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey, Delaware and Pennsylvania, with a smaller non-regulated contract-operations business.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $35.3 million | $33.4 million | $67.0 million | $64.1 million |
| Operating income | $9.4 million | $9.0 million | $15.9 million | $16.0 million |
| Net income | $9.7 million | $8.1 million | $17.4 million | $14.7 million |
| Common earnings per share, diluted | $0.55 | $0.49 | $0.99 | $0.88 |
| Operating margin | 26.6% | 26.8% | 23.7% | 24.9% |
Revenue increased 5.6% in Q2 and 4.6% year to date. Management attributed growth mainly to higher customer demand and additional customers at Middlesex and Tidewater, plus rate increases. Q2 operating income rose 4.9%, while six-month operating income edged down 0.4%. Net income increased 19.2% for Q2 and 18.3% year to date, aided in both comparisons by income tax benefits; the filing reports income tax benefits of $1.1 million for Q2 and $2.4 million year to date in 2020.
Regulated revenue was $32.3 million in Q2 and $61.2 million for the six months. Non-regulated revenue was $3.1 million and $6.1 million, respectively. Non-regulated net income declined year over year to $0.5 million for Q2 and $1.0 million for the six months; regulated net income increased.
Cash flow, investment and liquidity
- Operating cash flow was $20.8 million for the first six months, versus $11.6 million in 2019; management cited lower income tax payments, lower pension contributions and higher net income.
- Capital spending was $45.4 million, versus $35.7 million. Investing cash outflow was $45.4 million.
- Financing provided $20.2 million, including $17.5 million of net short-term borrowing and $9.7 million of long-term debt proceeds; common dividends paid were $8.9 million.
- At June 30, cash and cash equivalents were $13.2 million and restricted cash was $28.9 million. Notes payable were $37.5 million; long-term debt was $237.9 million, with a further $7.3 million current portion.
- Credit lines totaled $140 million, with $102.5 million available at June 30. The company reported $106.5 million available as of July 31. It plans to use multiple funding sources, including a private placement, for its capital program.
Material developments, outlook and risks
- Capital program: The company forecast approximately $119 million of 2020 capital spending and approximately $179 million in 2021–2022. It had spent about $45 million by June 30. Projects include treatment upgrades, water-main replacement, a Delaware wastewater plant and system reliability improvements.
- Planned borrowing: The NJBPU approved borrowing authority of up to $100 million. Middlesex intended to close on a private placement of up to $40 million before year-end 2020, with timing and amount subject to market conditions.
- COVID-19: Operations and construction had not been significantly disrupted through the filing, but future effects on customers, vendors, results and liquidity were uncertain. Commercial water use had fallen in some areas while residential use increased; customer collection efforts were suspended under state emergency orders. New Jersey and Delaware regulators allowed potential future recovery of incremental pandemic costs, but had not established the process or timing.
- Rates and growth: A New Jersey purchased-water adjustment took effect April 4. Tidewater’s system-improvement charge increase took effect July 1 and was expected to generate about $0.5 million annually. Twin Lakes received a $0.1 million annualized base-rate increase effective April 19. Management expected residential customer growth in 2020 to be consistent with recent years, while noting that weather, demand, rate relief, costs and the pandemic could affect results.
- Costs and unusual items: Higher demand, water-treatment costs, labor, depreciation and benefit-plan expenses increased operating costs. The tax benefit related to regulatory accounting for tax benefits from tangible-property regulations materially supported the year-over-year earnings comparison. The filing also describes a tax audit completed in 2019; related remaining tax and interest reserves were $0.5 million and $0.2 million at June 30, 2020.
- Contingencies: Middlesex is a third-party defendant in litigation concerning termination of a contractor’s county wastewater-facility agreement. Management did not expect a material effect. It also disclosed a performance guaranty related to the facility, with an approximately $1.3 million liability and a corresponding asset at June 30. Management said other routine legal and regulatory matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pandemic-related changes in customer usage, collections and costs affect future earnings, liquidity or rate recovery.
- The timing, pricing and final amount of the planned private placement, and availability of other capital-program funding.
- Whether the $119 million 2020 capital plan and projected 2021–2022 spending remain on schedule and within estimates.
- How much of earnings growth reflects recurring operations versus income tax benefits, and why non-regulated earnings declined.
- Developments in the county contractor litigation and the associated guaranty exposure.