Middlesex Water Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The unaudited consolidated company operates regulated water and wastewater utilities and non-regulated contract services, principally in New Jersey and Delaware.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $29.1 million | $27.4 million | $56.1 million | $50.9 million |
| Operating income | $8.2 million | $7.2 million | $14.0 million | $11.1 million |
| Net income | $4.5 million | $3.7 million | $7.7 million | $5.5 million |
| Diluted EPS | $0.28 | $0.23 | $0.47 | $0.35 |
| Operating margin | 28.1% | 26.3% | 25.0% | 21.8% |
For the first half, operating cash flow was $16.2 million, versus $15.8 million a year earlier; utility-plant expenditures were $10.2 million, versus $12.6 million. Cash and cash equivalents were $3.0 million at June 30. The company paid $0.1875 per common share in Q2 dividends.
At June 30, total assets were $552.4 million and capitalization was $321.3 million. Long-term debt was $133.5 million, current maturities were $5.3 million, and short-term notes payable were $28.0 million. The company had $60.0 million of credit lines, with $28.0 million drawn at a weighted-average rate of 1.27%; those borrowings matured in July and were extendable at the company’s discretion.
Changes and drivers
- First-half revenue increased $5.2 million, with growth primarily from rate increases, municipal sales, and the Avalon operating contract. Q2 revenue rose $1.7 million.
- First-half operating expenses increased $2.2 million, including higher maintenance, depreciation, and other taxes. Higher labor, water-treatment costs and water-main breaks were among the cost increases; the retiree-benefit plan amendment partly offset them.
- Operating income and net income improved in both periods. Lower interest charges reflected the late-2012 refinancing of $57.5 million of first-mortgage bonds.
- First-half capital expenditures declined year over year. Utility plant net increased to $440.8 million from $435.2 million at December 31, 2012.
Outlook, risks and contingencies
- Management expected 2013 revenue to benefit from approved rate increases and the Tidewater DSIC and Middlesex purchased-water adjustment and DSIC. Middlesex’s DSIC was authorized to begin in September 2013, subject to qualifying investment, with maximum annual revenue recovery of $1.4 million.
- The company estimated 2013 capital spending of approximately $21.9 million and projected approximately $51.1 million for 2014–2015. Funding sources include operating cash, dividend-reinvestment-plan stock proceeds, SRF funds and, if needed, short-term borrowing.
- Sayreville notified Middlesex it would not renew its wholesale water contract, which remained in effect through August 12, 2013; 2012 revenue from that customer was $1.9 million. Hess, the largest retail customer, stopped refining at its Port Reading facility in February 2013; 2012 revenue from Hess was $2.6 million. Management said the resulting revenue reductions could accelerate a Middlesex base-rate filing in 2013.
- Management cited weaker commercial and industrial water demand, precipitation and weather variability, and the pace of housing development as factors affecting results. Some preliminary survey and investigation costs may be charged to income if recovery is deemed unlikely.
- The NJBPU approved deferral of approximately $0.4 million of Superstorm Sandy costs; recovery through insurance or future rates remained uncertain. The company also disclosed a pending Delaware regulatory decision on TESI’s proposed Plantations wastewater-system acquisition and related rate request.
- Management expected 2013 employee-benefit expense to be approximately $2.8 million lower than 2012, partly due to plan changes, and expected additional pension and other-benefit cash contributions of approximately $2.7 million and $1.5 million, respectively, during the remainder of 2013.
- The company said ordinary-course litigation was not expected to have a material adverse effect. It identified regulatory decisions, water supply, weather, costs, capital availability and customer demand among forward-looking risks.
Investor verification points
- Track the actual revenue and usage impact of Sayreville’s contract expiration and Hess’s refinery closure, and whether Middlesex files for base-rate relief.
- Verify DSIC implementation, qualifying investment and recoveries against the stated $1.4 million annual cap.
- Follow insurance and regulatory recovery of Superstorm Sandy costs and the outcome of the Plantations acquisition and rate proceedings.
- Compare actual capital spending, borrowing and benefit-plan contributions with management’s 2013 and 2014–2015 estimates.