Middlesex Water Company — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; the filing provides quarterly results, including Q4, but is not a standalone quarterly report. Middlesex operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, alongside contract operations. Its regulated segment generated about 89% of 2016 revenue and 98% of net income.
Key financial results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $132.9 million | $126.0 million | +5.5% |
| Operating income | $40.6 million | $35.8 million | +13.4% |
| Net income | $22.7 million | $20.0 million | +13.6% |
| Basic / diluted EPS | $1.39 / $1.38 | $1.23 / $1.22 | +13.0% / +13.1% |
| Operating margin | 30.6% | 28.4% | +2.1 percentage points |
| Net margin | 17.1% | 15.9% | +1.2 percentage points |
| Operating cash flow | $47.1 million | $51.2 million | Down $4.1 million |
Q4 results: Revenue was $31.8 million versus $30.9 million in Q4 2015; operating income was $7.8 million versus $8.5 million; net income was $3.2 million versus $4.6 million; diluted EPS was $0.19 versus $0.28. The filing attributes full-year revenue growth chiefly to rates and higher water demand, including favorable weather.
Cash flow, investment and liquidity: 2016 utility-plant expenditures were $47.4 million, compared with operating cash flow of $47.1 million. Cash and cash equivalents were $3.9 million at year-end. Current assets were $26.7 million and current liabilities $47.1 million. The company had $12.0 million drawn under $60.0 million of credit lines, leaving $48.0 million available; year-end short-term borrowing carried a 1.71% weighted-average rate.
Debt and dividends: Balance-sheet long-term debt was $134.5 million, excluding its $6.2 million current portion; notes payable were $12.0 million. Gross long-term debt before premiums, issuance costs and the current portion was $142.5 million. The weighted-average rate on long-term debt was 3.88%. Common dividends paid were $0.808 per share, up from $0.776 in 2015.
Material changes versus prior year
- Revenue rose $6.9 million, led by a $5.9 million increase in the Middlesex System, including the full-year contribution of the 2015 rate increase and favorable weather and demand.
- Operating income increased $4.8 million despite operating expenses rising $2.1 million. Lower employee benefit costs and variable production costs partly offset higher labor, depreciation and taxes.
- Operating cash flow declined from $51.2 million, while investing cash outflow increased to $47.4 million as capital spending rose substantially.
- Other income/expense deteriorated by $1.2 million, mainly because of a $1.7 million allowance against a loan to Ridgewood Green RME and a $0.2 million impairment of the company’s investment.
- Year-end notes payable increased from $3.0 million to $12.0 million. Long-term debt on the balance sheet increased from $132.9 million to $134.5 million.
Outlook, risks and unusual items
- Management projected approximately $222.9 million of capital expenditures for 2017–2019, including a second large-diameter transmission connection, the Middlesex RENEW main-replacement program and an upgrade to the CJO water treatment plant. Funding was expected from operating cash, the Investment Plan, state revolving-fund loans and short-term borrowing.
- Management expected 2017 residential customer growth to be consistent with recent years, but said weather patterns that supported 2015–2016 revenue growth might not recur. It anticipated higher operating costs and continued cost-control efforts.
- Results depend on weather and seasonal water usage, timely rate relief, cost management and customer growth. Rate increases require regulatory approval; cost recovery may be delayed, reduced or denied.
- Other key exposures include water availability and quality, changing environmental standards, capital-market access, interest rates, cyber and IT disruption, local economic and housing conditions, and possible losses under municipal operating contracts.
- The company guarantees performance of an unaffiliated contractor at a county leachate facility through 2028; indemnities are in place, but performance could expose Middlesex to operating obligations.
- The IRS was examining the company’s 2014 federal return and the related repair-cost tax treatment. Middlesex recorded a $2.3 million provision against refundable taxes; the examination outcome was unresolved in the filing.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether subsequent rate decisions and cost-recovery mechanisms keep pace with infrastructure spending and operating-cost increases.
- Actual progress, timing and financing of the approximately $223 million 2017–2019 capital program, including SRF loan closings and draws.
- Whether 2016’s favorable weather-driven demand persists and how Q4’s lower year-over-year operating income and earnings develop.
- Any further impairment, recovery or operational developments involving Ridgewood Green RME and the IRS review of repair-cost deductions.
- Liquidity and leverage as capital expenditures rise, including short-term borrowing, debt maturities, covenant compliance and dividend capacity.