Middlesex Water Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Middlesex Water is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, with additional operations in Pennsylvania and contract services. Comparisons are against Q1 2011 unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $23.546 million | $23.996 million | Down 1.9% |
| Operating income | $3.877 million | $4.768 million | Down 18.7% |
| Operating margin | 16.5% | 19.9% | Down 3.4 percentage points |
| Net income | $1.807 million | $2.630 million | Down 31.3% |
| Basic and diluted EPS | $0.11 | $0.17 | Down $0.06 |
| Cash from operations | $7.147 million | $8.058 million | Down $0.911 million |
| Utility plant expenditures | $6.433 million | $4.888 million | Up $1.545 million |
| Cash and cash equivalents | $0.854 million | $3.106 million at Dec. 31, 2011 | Down $2.252 million |
Net margin was 7.7%, compared with 11.0% a year earlier. Q1 operating cash flow exceeded utility plant expenditures by $0.714 million; the company said operating cash funded all plant expenditures during the quarter. The $0.1850 common dividend per share was up from $0.1825.
At March 31, 2012, total assets were $536.133 million and total capitalization was $311.489 million. Long-term debt was $131.729 million, with $4.739 million current; short-term notes payable were $23.250 million. Cash was $0.854 million against current liabilities of $45.949 million. The resulting current ratio was approximately 0.42.
Material changes and management commentary
- Revenue declined mainly because Middlesex System sales to metered customers fell $0.5 million amid weaker commercial and industrial demand, and municipal contract sales fell $0.3 million. Tidewater revenue increased $0.4 million, primarily from its 10.49% interim rate increase and connection fees.
- Operating and maintenance costs increased $0.344 million, including a $0.5 million increase in postretirement benefit expense. Favorable winter weather reduced main-break costs by $0.1 million; labor costs also declined $0.1 million.
- Depreciation rose $0.136 million as utility plant in service increased. Interest charges rose $0.140 million, primarily due to higher average short-term borrowings. Other income, net, fell $0.114 million, partly because of costs related to potential Delaware projects.
- Regulated-segment revenue was $20.858 million and operating income $3.503 million; non-regulated revenue was $2.758 million and operating income $0.374 million. Both segments’ operating income declined year over year.
- Management cited weather, rate relief, cost control and customer growth as key drivers of results. It said ongoing economic conditions continued to depress water consumption, particularly among Middlesex commercial and industrial customers, and the duration of weaker demand was uncertain.
Outlook, rate matters and risks
- The company estimated 2012 capital expenditures of $21.8 million, of which $6.4 million had been spent by March 31. It projected approximately $34.0 million of capital projects for 2013–2014. Funding plans included internal cash, DRP stock proceeds, SRF loan funds, a newly closed $3.9 million New Jersey SRF loan, and available bank lines.
- Middlesex requested a base-rate increase of approximately $11.3 million annually; a New Jersey decision was not expected until Q4 2012. Tidewater requested approximately $6.9 million annually, with a decision expected in the second half of 2012; its interim 10.49% increase is subject to refund. TESI reached a proposed settlement for a $0.6 million increase phased in over 4.5 years, pending regulatory action expected in Q2 2012. Approvals and timing were uncertain.
- Management expected rate increases, if approved, to support 2012 revenue, while noting that reduced customer consumption and higher operating costs could weigh on results. It also warned that some preliminary survey and investigation costs could be charged to income if recovery through rates becomes unlikely.
- Actuarial changes and lower 2011 plan-asset returns increased benefit-plan obligations and are expected to raise 2012 expense and cash contributions. The company expected additional 2012 contributions of about $3.3 million to its pension plan and $4.0 million to its other benefits plan.
- Available credit lines totaled $60.0 million; $23.3 million was outstanding at March 31 at a weighted-average rate of 1.27%. The outstanding balances matured in April 2012 and were extendable at the company’s discretion.
- The Borough of Avalon awarded USA a 10-year contract to operate its water, sewer and storm-water systems beginning July 1, 2012. Management said pending ordinary-course litigation was not expected to have a material adverse effect. The filing reported no material change to the risk factors in the 2011 Form 10-K.
Key facts for investors to verify
- Whether the NJBPU and DEPSC approve, reduce or deny pending rate requests, and the timing and refund exposure of interim rates.
- Whether commercial and industrial water demand recovers, and the effect of consumption trends and weather on revenue.
- Whether projected capital spending and benefit-plan contributions are met, and how they affect borrowing, liquidity and future rate needs.
- Whether short-term credit-line maturities were extended or repaid after quarter-end, and the deployment of the $3.9 million New Jersey SRF loan.
- Whether preliminary survey and investigation costs remain recoverable and whether any material contingent liability develops.