Middlesex Water Company — Q3 2011 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2011, compared with the same 2010 periods. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated contract services.
Financial performance
| Metric (in $ millions except per-share data) | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | 28.671 | 29.585 | 78.769 | 77.768 |
| Operating income | 8.516 | 10.021 | 20.022 | 21.204 |
| Net income | 5.143 | 5.736 | 11.398 | 11.720 |
| Basic / diluted EPS | $0.33 / $0.32 | $0.37 / $0.36 | $0.72 / $0.72 | $0.81 / $0.80 |
| Operating margin (calculated) | 29.7% | 33.9% | 25.4% | 27.3% |
Cash flow and investment. Nine-month operating cash flow was $17.1 million, up from $15.7 million. Utility plant expenditures were $17.6 million, down from $22.2 million; operating cash funded 96.7% of these expenditures. Cash and cash equivalents were $4.1 million at September 30, 2011.
Debt and liquidity. Long-term debt was $132.6 million, excluding its $4.6 million current portion; short-term notes payable were $24.3 million. The company had $60.0 million in credit lines, of which $24.3 million was drawn at a weighted-average rate of 1.27%; those borrowings matured in October 2011 and were extendable at the company’s discretion. Current assets were $27.7 million versus current liabilities of $48.3 million.
Changes versus prior period
- Q3 revenue fell 3.1%, operating income fell 15.0%, and net income fell 10.3%. Management attributed weaker revenue primarily to cooler, wetter weather and lower Middlesex municipal-contract and metered sales. Higher healthcare and postretirement costs also pressured operating expenses.
- Nine-month revenue rose 1.3%, but operating income declined 5.6% and net income declined 2.7%. Revenue benefited from the full-period effect of Middlesex’s March 2010 rate increase and higher Perth Amboy contract fees; increased labor, benefit and technology costs offset growth.
- Q3 other income included a $0.6 million gain from transferring USA’s existing LineCare contracts to HomeServe. The 10-year agreement also provides USA service fees for billing, collections and administration.
- Nine-month EPS was affected by the higher average share count following the June 2010 public offering of 1.9 million shares.
Outlook, risks and contingencies
- Management estimated 2011 capital spending of approximately $21.9 million, with about $4.2 million expected for the remainder of the year; projected 2012–2013 capital spending was approximately $43 million. Spending depends on customer growth, housing activity, project timing and engineering estimates.
- Rate proceedings included applications for annual increases of approximately $0.2 million at Twin Lakes, $0.8 million at TESI and $6.9 million at Tidewater. TESI implemented a 7.6% interim increase subject to refund on September 28; Tidewater received approval for a 10.49% interim increase subject to refund effective November 15, 2011. Middlesex expected to file its own base-rate application in Q4 2011. Outcomes and timing were uncertain.
- Management cited lower 2011 water consumption associated with weather and economic conditions, uncertainty around recovery of some preliminary survey and investigation costs if projects do not proceed, and below-2010 retirement-plan asset returns that could increase 2012 expense or contributions. Other key risks include operating-cost control, water supply and quality, regulatory decisions, weather, and capital availability.
- The company expected approximately $1.0 million of additional pension and other-benefit plan cash contributions over the remainder of 2011. It stated that ordinary-course litigation was not expected to have a material adverse financial effect. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether requested base-rate increases are approved, at what levels and when, including potential refunds of interim rates.
- Whether consumption and revenue recover as weather and economic conditions change, and whether operating-cost increases persist.
- Actual capital spending and funding needs versus the 2011 and 2012–2013 estimates, including use of short-term credit lines.
- Whether retirement-plan asset performance increases future benefit costs or cash contributions.
- Whether preliminary survey and investigation costs remain recoverable and whether any other contingencies change materially.