Middlesex Water Company — Q3 2015 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2015, compared with 2014. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside non-regulated contract operations. Unless noted, financial amounts below are in millions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $34.654 | $32.669 | $95.100 | $89.032 |
| Operating income | $11.460 | $11.620 | $27.378 | $26.333 |
| Net income | $6.743 | $6.758 | $15.467 | $14.654 |
| EPS, basic / diluted | $0.41 / $0.41 | $0.42 / $0.42 | $0.95 / $0.95 | $0.91 / $0.90 |
| Operating margin | 33.1% | 35.6% | 28.8% | 29.6% |
Q3 revenue increased about 6.1%, while operating income and net income edged down. For the nine months, revenue rose about 6.8%, operating income 4.0%, and net income 5.5%. Nine-month common dividends were $0.5775 per share, versus $0.5700.
- Costs and drivers: Q3 operations and maintenance expense rose $1.8 million, mainly from higher employee health and retirement-benefit costs ($1.0 million) and variable production costs ($0.4 million). Nine-month O&M rose $4.1 million, including $2.4 million in employee benefits. Depreciation and other taxes also increased.
- Cash flow: Nine-month operating cash flow was $29.2 million, up from $22.4 million. Utility-plant expenditures were $19.3 million, up from $15.8 million; the company said operating cash flow funded all plant spending during the period. Cash increased to $4.7 million from $2.7 million at year-end 2014.
- Liquidity and debt: Current assets were $30.9 million and current liabilities $46.9 million at September 30 (current ratio about 0.66). Long-term debt was $135.2 million, current debt $5.7 million, and short-term notes payable $18.0 million. The company had $60.0 million of credit lines, with $42.0 million available; outstanding borrowings carried a 1.20% weighted-average rate and matured in October 2015, extendable at the company’s discretion.
- Capital and equity: Utility plant, net, was $477.8 million, up from $465.4 million at year-end. Total assets were $603.1 million and common equity $204.9 million. Capital expenditures totaled $19.3 million through September.
Material changes, outlook and risks
- Rates: An August 2015 New Jersey settlement raised Middlesex annual base-water revenues by $5.0 million, effective August 29; the original request was $9.5 million. The rate design used a $219.0 million rate base and 9.75% return on equity. Middlesex’s distribution-system surcharge was reset to zero. Tidewater’s Delaware surcharge rose to 0.37%, with about $0.1 million expected annual revenue.
- Further rate requests: In October, Pinelands Water and Pinelands Wastewater sought annual base-rate increases of approximately $0.3 million and $0.2 million, respectively. A decision was not expected until Q3 2016; approval and amount were uncertain.
- Outlook and investment: Management expected Q4 revenue to benefit from the Middlesex base-rate increase and Tidewater surcharge. It estimated 2015 capital spending at $22.4 million and projected approximately $74.5 million for 2016–2017, subject to scheduling and updated engineering estimates. The current-year RENEW main-rehabilitation project was delayed to 2016 due to changes in New Jersey SRF loan requirements and review of main conditions.
- Tax item: Applying IRS tangible-property repair regulations to prior expenditures produced a $17.6 million reduction in federal taxes due. The company recorded a $2.3 million provision against refundable taxes because the deduction could be challenged. It reported a $10.3 million federal tax receivable, a $16.8 million increase in deferred income taxes, and said the tax change was not expected to significantly affect earnings or the effective tax rate. Management expects net tax benefits may be considered in a future rate proceeding.
- Other notable items and risks: Retirement-benefit costs increased in part due to a lower discount rate and updated mortality assumptions. Middlesex guarantees an affiliate’s performance on a municipal facility through at least 2018, with contractual exposure through 2028; management considered payment unlikely and recorded a $0.2 million liability. Risks cited include regulatory decisions, water supply and quality, weather, customer demand, operating costs, capital availability, and benefit-plan market assumptions. The company reported no material change to its previously disclosed risk factors and no material adverse effect expected from pending litigation.
Important facts for investors to verify
- Whether the $5.0 million Middlesex rate increase offsets the cited cost pressures and translates into improved operating income and margins.
- IRS examination outcome and the timing, collectability, and future regulatory treatment of the tax benefits and receivable.
- Disposition and timing of the Pinelands rate petitions, plus the impact of resetting Middlesex’s surcharge to zero.
- Funding, timing, and execution of the delayed RENEW work and the projected 2016–2017 capital program; availability and extension of short-term credit borrowings.
- Trends in employee benefit costs, consumption, weather-sensitive demand, and the performance-guarantee exposure.