Middlesex Water Company — Q2 2015 Form 10-Q
Business context and period. The company provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated utility operations and contract services. This unaudited report covers the three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $31.666 | $29.190 | $60.446 | $56.363 |
| Operating income | $9.235 | $8.747 | $15.919 | $14.714 |
| Net income | $5.089 | $4.728 | $8.724 | $7.897 |
| EPS, basic | $0.31 | $0.29 | $0.54 | $0.49 |
| EPS, diluted | $0.31 | $0.29 | $0.53 | $0.49 |
| Operating margin | 29.2% | 30.0% | 26.3% | 26.1% |
- Q2 revenue rose 8.5% year over year; operating income increased 5.6% and net income 7.6%. For the first half, revenue increased 7.2%, operating income 8.2% and net income 10.5%.
- Management attributed revenue growth mainly to the full-period effect of Middlesex’s July 2014 rate increase, higher Tidewater customer demand, and contract-fee increases. First-half Middlesex demand was lower in both general metered and wholesale customers.
- Operations and maintenance expense increased $1.7 million in Q2 and $2.3 million for the first half. Higher employee-benefit costs were a major factor, reflecting a lower discount rate and updated mortality tables; other increases included subcontracting, maintenance and production costs.
- Six-month operating cash flow was $20.180 million, up from $13.808 million. Management said the increase primarily reflected timing of vendor and income-tax payments; operating cash funded the period’s $12.646 million of utility-plant expenditures. Investing cash outflow was $11.271 million and financing cash outflow was $5.808 million.
- Cash and cash equivalents were $5.774 million at June 30, versus $2.673 million at year-end. Current liabilities were $49.414 million against current assets of $29.050 million. The company had $18.0 million drawn on $60.0 million of credit lines, leaving $42.0 million available; the outstanding borrowings matured in July and were extendable at the company’s discretion.
- Long-term debt was $136.065 million, with a further $5.692 million current portion and $18.0 million of notes payable. Total capitalization was $339.302 million. The common dividend was $0.1925 per share for Q2, versus $0.1900 a year earlier.
Developments, outlook and risks
- In March, Middlesex requested a $9.5 million annual base-water-rate increase. In July, an administrative law judge issued an initial decision approving a settlement recommendation for a $5.0 million increase; NJBPU approval was still pending, and the company could not predict the outcome. Approval would reset Middlesex’s DSIC to zero. Its DSIC had generated less than $0.1 million through the filing period. Tidewater’s Delaware DSIC rose to 0.37% effective July 1; expected annual revenue was approximately $0.1 million.
- Management expected 2015 revenue to benefit from the full-year effect of rate increases effective in 2014, the Dover Air Force Base contract, and DSIC charges; a Middlesex rate increase could add revenue if approved. No specific earnings or EPS guidance was provided. Management identified weather, rate relief, cost control and customer growth as important results drivers.
- The 2015 construction program was budgeted at approximately $24.2 million, with $12.6 million spent through June. The company projected approximately $71.4 million of capital projects in 2016–2017. Changes to New Jersey SRF loan requirements delayed the current-year RENEW main-rehabilitation project until 2016; Middlesex expected to update its financing petition.
- A tax study preliminarily indicated approximately $19.0 million of potentially refundable taxes under IRS repair-cost regulations. The study and tax filing were not complete; management expected any net benefit to be considered in future rate setting and said adoption was not expected to materially affect the financial statements or effective tax rate.
- Key risks include regulatory decisions on rates, water availability and quality requirements, weather and demand variability, operating-cost control, access to capital, and retirement-benefit costs. The company also guaranteed performance obligations for a third-party leachate facility; it considered payment under the guarantee unlikely and recorded a liability of approximately $0.3 million. Management did not expect pending ordinary-course lawsuits to have a material adverse effect.
Investor verification points
- Track NJBPU disposition of the proposed $5.0 million settlement and the resulting DSIC treatment.
- Assess whether operating cash flow remains strong when vendor and tax-payment timing normalizes, and how the capital program will be funded.
- Monitor pension and other postretirement costs, customer demand, and the extent to which rate increases offset expense growth.
- Confirm the timing, funding and cost implications of the delayed RENEW work and projected 2016–2017 capital spending.
- Follow completion of the tax study and IRS filing, while accounting for potential regulatory treatment of any resulting tax benefit.