Middlesex Water Company — Q2 2016 Form 10-Q
Business context and period. This unaudited filing covers the three and six months ended June 30, 2016, compared with the same periods in 2015. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated municipal and utility contract services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $32.7 million | $31.7 million | $63.3 million | $60.4 million |
| Operating income | $10.3 million | $9.2 million | $18.6 million | $15.9 million |
| Net income | $5.9 million | $5.1 million | $10.7 million | $8.7 million |
| EPS, diluted | $0.36 | $0.31 | $0.65 | $0.53 |
| Operating margin | 31.6% | 29.2% | 29.4% | 26.3% |
| Net margin | 18.1% | 16.1% | 16.9% | 14.4% |
Cash flow and investment. Six-month operating cash flow was $16.7 million, down from $20.2 million, mainly reflecting higher income tax payments and inventory spending. Utility plant expenditures were $20.1 million, up from $12.6 million; operating cash funded 83.3% of these expenditures. Cash and equivalents were $1.2 million at June 30, versus $3.5 million at year-end 2015.
Debt and liquidity. Long-term debt, net of current maturities and issuance costs, was $131.0 million, compared with $132.9 million at year-end. Notes payable were $10.5 million, up from $3.0 million; total current liabilities rose to $39.1 million from $28.3 million. The company had $60 million of credit lines, with $10.5 million borrowed and $49.5 million available at quarter-end. Those borrowings matured in July 2016 and were extendable at the company’s discretion. Current assets were $28.3 million.
Material changes and drivers
- Q2 revenue increased 3.3%; six-month revenue increased 4.7%. Growth reflected the full-period effect of Middlesex’s August 2015 rate increase and higher demand in parts of the service area. Tidewater’s revenue was affected by lower weather-driven demand.
- Six-month operating income rose 17.0% and net income rose 22.8%. Lower employee benefit and operating costs and increased revenue contributed; depreciation and other taxes increased as the utility plant base and revenues grew.
- Six-month capital expenditures increased about 59% year over year, reflecting higher utility investment. Utility plant net rose to $497.1 million from $481.9 million at year-end.
- Common dividends paid per share were $0.1988 for Q2, versus $0.1925 a year earlier; six-month dividends were $0.3975 versus $0.3850.
Outlook, risks and contingencies
- Management expected 2016 revenue to benefit from the full-year effect of the 2015 Middlesex rate increase, 2016 Pinelands and Twin Lakes rate increases, and Tidewater’s higher DSIC rate effective July 1. The Tidewater DSIC was expected to generate $0.3 million of annual revenue. No specific earnings guidance was provided.
- The 2016 capital program was estimated at approximately $49 million, with about $29 million remaining after June 30. The company projected approximately $112 million of capital investment in 2017–2018; timing and amounts depend on project schedules and engineering estimates. Funding plans include internally generated funds, investment-plan stock proceeds, SRF financing and, if needed, credit lines.
- Middlesex closed on an $11.8 million, zero-interest NJEIT construction loan for its 2016 RENEW program to replace unlined water mains; Tidewater had drawn $0.9 million of a $1.2 million, 2% SRF loan. Middlesex expected further NJEIT draws in the second half of 2016.
- Management cited weather, rate decisions, water availability and quality, operating-cost control, customer growth, capital availability, regulation and environmental requirements as factors that could affect results. Commodity supplier non-performance could adversely affect operations, finances and cash flow.
- An IRS examination of the company’s 2014 federal return was pending after the company received refunds related to repair-cost tax deductions; the filing says the outcome and any changes to the return were unknown.
- The company reported routine-course lawsuits and did not expect their resolution to materially adversely affect its financial statements. A $0.2 million liability was recorded for its performance guarantee relating to a third-party facility; management considered payment under the guarantee unlikely. The company also reported a pending New Jersey purchased-water cost recovery request of less than $0.1 million, with approval uncertain.
Important facts for investors to verify
- Whether rate increases, DSIC revenues and regulatory cost recovery are approved and realized as expected.
- Actual capital spending and financing needs against the $49 million 2016 and approximately $112 million 2017–2018 plans.
- Cash generation and short-term borrowing after the July 2016 credit-line maturities, including any extensions or repayments.
- The effects of weather and water demand, benefit-cost assumptions, and the IRS examination on future earnings and cash flows.