Middlesex Water Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited consolidated results. Amounts below are in millions unless noted.
Business context
Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated utility operations and contract services. The filing reports regulated and non-regulated segments. Its results are affected by weather, customer usage, regulatory rate decisions, operating costs and customer growth.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $27.401 | $26.102 | $50.947 | $50.098 |
| Operating income | $7.210 | $6.738 | $11.087 | $11.506 |
| Net income | $3.725 | $3.625 | $5.532 | $6.255 |
| EPS, basic and diluted | $0.23 | $0.23 | $0.35 | $0.40 |
| Operating margin | 26.3% | 25.8% | 21.8% | 23.0% |
| Operating cash flow | Not presented quarterly | $15.813 | $12.084 |
Q2 revenue rose about 5.0% and net income about 2.8% year over year. For the first half, revenue rose about 1.7%, while operating income fell about 3.6% and net income about 11.6%. First-half operating cash flow exceeded utility plant expenditures of $12.574 million by approximately $3.239 million. Common dividends paid were $0.185 per share in Q2 and $0.370 per share in the first half.
Liquidity, debt and capital investment
- At June 30, cash and cash equivalents were $2.727 million; current assets were $23.435 million and current liabilities $48.535 million. The resulting current ratio was approximately 0.48.
- Notes payable were $25.250 million, with $60.0 million of aggregate credit lines and $25.3 million drawn at a weighted-average interest rate of 1.36%. The outstanding borrowings matured in July 2012 and were extendable at the Company’s discretion.
- Long-term debt was $135.079 million, plus a $4.996 million current portion. Total reported debt including notes payable was approximately $165.3 million.
- Capital expenditures were $12.574 million in the first half. The 2012 construction program was budgeted at approximately $21.8 million; the Company projected approximately $34.0 million of capital projects for 2013 and 2014.
Material changes and management outlook
- Q2 regulated revenue increased, supported chiefly by Tidewater rate relief; Middlesex system revenue was nearly flat. For the first half, Middlesex system revenue declined $0.7 million, partly offset by a $1.1 million increase at Tidewater.
- Higher employee-benefit expense was a significant cost pressure: it increased $1.1 million in the first half, reflecting actuarial assumption changes and lower prior-year plan asset returns. Management expected approximately $3.3 million of additional pension contributions and $4.0 million of other-benefit contributions during the remainder of 2012.
- Management expected 2012 revenue to benefit from approved rate increases at Middlesex, Tidewater, TESI, Southern Shores and Twin Lakes. Middlesex’s New Jersey rate increase of $8.1 million in annual revenue became effective July 20, 2012; Tidewater’s $3.9 million annual increase became effective June 19, and TESI’s $0.6 million annual increase became effective June 5, with part phased in through 2015. These are annualized approvals, not reported-period revenue.
- Pinelands planned to file for base rate increases in Q3 2012, with a decision expected in 2013. The ten-year Avalon municipal operations contract began July 1, 2012; management expected it to contribute less than $0.01 to annual EPS.
- Management cited continuing weakness in commercial and industrial water demand, particularly in Middlesex, and could not determine when or whether usage would recover. It also noted the possibility that preliminary survey and investigation costs could be charged to income if rate recovery is considered unlikely.
Risks, contingencies and unusual items
- Key risks include regulatory outcomes and cost recovery, water demand and weather, water supply and quality, operating-cost control, capital availability, economic conditions and growth opportunities. Management said ongoing economic conditions were affecting customer consumption and residential construction.
- The Company budgeted $21.8 million for 2012 construction, with actual timing and amount dependent on project schedules and engineering estimates. May 2012 SRF financing included $3.9 million of bonds whose proceeds were restricted to the Middlesex RENEW water-main program.
- The Company said pending ordinary-course litigation was not expected to have a material adverse effect. No separate material legal proceeding was reported.
- Implementation of an ERP work and asset management module materially changed internal controls over financial reporting; management said related controls were being replaced or supplemented as appropriate. The change was not prompted by a perceived control deficiency, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Realized revenue and earnings effects of the newly approved rate increases, particularly Middlesex’s rates effective after quarter-end.
- Whether commercial and industrial water demand stabilizes or continues to weaken, and how this affects future rate cases.
- Actual pension and other-benefit expense and cash contributions compared with management’s remaining-2012 estimates.
- How the July 2012 short-term borrowings were extended or repaid, and the funding mix for planned capital expenditures.
- Whether preliminary survey and investigation costs remain recoverable through rates, and whether the ERP control changes are completed effectively.