Middlesex Water Company - Q2 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2017, compared with the same periods in 2016. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated municipal and other contract operations. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $33.014 | $32.725 | $63.145 | $63.304 |
| Operating income | $9.563 | $10.328 | $17.343 | $18.630 |
| Net income | $5.381 | $5.919 | $9.822 | $10.709 |
| Diluted EPS | $0.33 | $0.36 | $0.59 | $0.65 |
| Operating margin | 29.0% | 31.6% | 27.5% | 29.4% |
- For the first half, operating cash flow was $20.171 million, versus $16.745 million a year earlier. Utility plant expenditures were $21.165 million, and financing activities provided $0.804 million. Cash declined by $0.190 million to $3.689 million.
- At June 30, current assets were $29.719 million and current liabilities $55.417 million. The balance sheet reported $136.429 million of long-term debt, $6.164 million current portion of long-term debt, and $17.000 million of short-term borrowings. Credit lines totaled $60 million, with $43 million available; the short-term borrowings matured in July and were extendable at the company’s discretion.
- Total assets were $638.730 million; utility plant, net, was $533.281 million. The common dividend paid per share was $0.2113 in Q2 and $0.4225 for the first half.
Changes versus prior comparable periods
- Q2 revenue increased 0.9%, but operating income fell 7.4% and net income fell 9.1%. First-half revenue decreased 0.3%, while operating income declined 6.9% and net income 8.3%.
- Management attributed revenue trends to lower water usage across customer classes in the Middlesex System, partly offset by residential customer growth in Tidewater. Q2 Middlesex revenue was down $0.2 million; first-half Middlesex revenue was down $1.0 million, while Tidewater revenue rose $0.9 million.
- Higher water production and labor costs, and increased depreciation from a larger utility plant, weighed on operating results. First-half interest expense also rose $0.1 million, reflecting higher average short-term debt balances and rates. Higher AFUDC partly offset these pressures.
- First-half operating cash flow improved by $3.4 million, primarily because of lower income-tax payments and decreased inventory purchases. Capital expenditures increased $1.1 million.
Outlook, risks and notable items
- No earnings or EPS guidance was provided. Management said favorable weather and additional emergency-related sales to neighboring utilities seen in 2015 and 2016 had not recurred through June 2017 and might not recur for the rest of 2017. It expected residential customer growth, largely from Delaware development, to be consistent with recent years, and anticipated increases in several operating-cost categories.
- The 2017 construction program was estimated at approximately $60 million; $21.2 million had been spent by June 30, with about $39 million expected for the rest of the year. The company projected approximately $163 million of capital projects in 2018 and 2019. Funding sources include operating cash, investment-plan proceeds, SRF construction-loan funding and short-term borrowing.
- Middlesex filed in May to reset its New Jersey purchased water adjustment clause, including recovery of $1.2 million of additional annual untreated-water costs. The company expected approval by October 2017 and a November 1 effective date; approval was pending at filing. Tidewater’s Delaware distribution system improvement charge reset July 1 and was expected to generate $0.4 million in annual revenue.
- New Jersey approved borrowing authority of up to $37 million for a transmission pipeline and up to $10 million for the 2017 RENEW main-replacement program. Middlesex also closed a $2.3 million SRF construction loan in May. Timing and actual capital spending depend on project schedules and engineering estimates.
- Risks identified include regulatory decisions and timing of rate recovery, water availability and quality, weather, operating-cost increases, capital availability, supplier performance, and customer credit. The company reported no material change to the risk factors in its 2016 Form 10-K and stated pending litigation was not expected to have a material adverse effect. The IRS was examining the company’s 2014 federal return; the outcome was unknown.
- The company said adoption of new inventory and share-based-payment accounting standards had no material impact. It was assessing revenue-recognition guidance effective in 2018; it preliminarily expected no impact on regulated water-sale contracts and no material impact, if any, on non-regulated operation and maintenance contracts.
Most important facts for investors to verify
- Whether and when regulators approved the Middlesex PWAC reset, and the actual customer-rate and cost-recovery impact.
- Progress, timing and final cost of the large capital program, and how much is funded by internally generated cash versus new borrowing.
- Whether water usage, production costs and labor costs improve or continue to pressure margins, particularly given the absence of prior-year weather and emergency-sales benefits.
- Availability and extension of short-term credit, future debt issuance and interest costs as investment spending proceeds.
- Outcome of the IRS examination of the 2014 return and any resulting tax adjustment.