Middlesex Water Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, along with non-regulated system operations and maintenance services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $37.8 million | $38.7 million | $101.9 million | $104.8 million |
| Operating income | $12.0 million | $12.9 million | $28.0 million | $30.0 million |
| Net income | $11.1 million | $12.3 million | $25.8 million | $25.5 million |
| Diluted EPS | $0.66 | $0.74 | $1.55 | $1.54 |
| Operating margin | 31.7% | 33.4% | 27.5% | 28.6% |
Q3 revenue fell about 2.4% and operating income about 7.2% year over year; nine-month revenue declined about 2.8%, while net income rose about 1.4%. Nine-month basic EPS was $1.56 versus $1.55. Net income exceeded pre-tax income in 2019 because the company recorded income tax benefits: $0.3 million in Q3 and $1.0 million for the first nine months, compared with tax expense of $0.3 million and $1.7 million, respectively, in 2018.
Cash flow, capital spending and financial position
- Operating cash flow for the first nine months was $23.3 million, down from $32.9 million. Management attributed the decline mainly to payment timing with vendors and higher income tax payments.
- Utility plant expenditures were $61.2 million, up from $49.5 million. The company reported $105 million of planned 2019 construction spending and projected approximately $220 million of capital projects in 2020–2021.
- At September 30, long-term debt was $228.3 million, compared with $152.9 million at December 31, 2018; notes payable were $58.5 million versus $48.5 million. Nine-month interest expense was $5.0 million, compared with $4.9 million.
- Cash and cash equivalents were $3.2 million. Restricted cash was $53.9 million, primarily unspent proceeds from the 2019 bond financing held for qualifying projects. Current liabilities were $103.5 million versus current assets of $34.7 million.
- Financing activities provided $89.3 million, including $82.4 million of long-term debt proceeds, $10.0 million of net short-term borrowing and $12.4 million from common stock issuance; common dividends paid were $11.9 million.
Material changes and management commentary
- Q3 regulated revenue increased modestly, but lower water consumption—particularly wholesale demand—reduced Middlesex System revenue. Tidewater revenue benefited from customer growth, partly offset by lower tariffs. Non-regulated revenue declined largely because of the revised Perth Amboy contract; related subcontractor expenses also fell.
- For the first nine months, weather-related lower consumption reduced Middlesex revenue by $1.9 million, partly offset by $1.2 million from a 2018 base-rate increase. Non-regulated revenue fell $3.3 million, largely alongside the Perth Amboy contract change.
- Depreciation rose as more utility plant entered service. Regulated labor costs also increased. Management identified weather, timely rate relief, cost control and customer growth as key drivers of results; residential customer growth through September was described as consistent with recent years.
- The 2019 Water for Tomorrow program includes pipeline, water-main, treatment, meter and emergency-power projects. The company said it expected to fund capital spending through operating cash, debt, stock issuance and credit lines.
Outlook, regulatory matters and risks
- Pinelands received approval on October 25, 2019 for a $0.5 million annual base-rate increase, effective November 4. Twin Lakes had requested a roughly $0.2 million annual increase; a regulator decision was not expected before Q1 2020.
- Tidewater’s acquisition of water assets serving approximately 1,000 customers was approved in October and was expected to close in Q4 2019.
- In August, Middlesex issued $53.7 million of First Mortgage Bonds at 4.0% and 5.0% coupon rates. Proceeds, including an issuance premium, were held in restricted cash for capital projects. The company expected to draw the remaining proceeds through Q3 2021.
- Management cited risks including weather and water availability, regulatory decisions and rate recovery, operating-cost control, environmental and water-quality requirements, access to capital, and acquisition and operating risks. The filing reported no material change in risk factors from the 2018 Form 10-K and no legal proceedings.
Unusual item and contingencies
The company disclosed that shares were inadvertently sold through its Investment Plan from August 1, 2018 to September 3, 2019 after the related registration statement had expired. Participants bought 232,643 shares during that period. In October 2019, the board approved a voluntary rescission offer; the company said it did not expect resulting exercises to materially affect results, financial condition or liquidity. The offer’s outcome was not yet known. The IRS concluded audits of the 2014–2017 federal returns; the company reported $2.4 million of tax reserve and $0.1 million of related interest liability at September 30, and paid $1.9 million in October for the 2016–2017 audits.
Important facts for investors to verify
- Whether the rescission offer was accepted, and its final cash and share impact.
- Actual capital spending and project schedules versus the $105 million 2019 plan and approximately $220 million 2020–2021 projection.
- Progress drawing and converting construction-loan and bond funding, and the resulting debt, interest and restricted-cash balances.
- Regulatory outcomes for Twin Lakes’ rate request and the timing and realized effect of approved rate changes.
- Whether weather-related demand weakness, operating costs and rate recovery continue to pressure regulated operating margins and cash flow.