Middlesex Water Company — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly data are included below. Middlesex owns and operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, alongside contracted municipal operations. Regulated activities generated about 88% of revenue.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $117.1 million | $114.8 million | +2.0% |
| Operating income | $34.4 million | $31.0 million | +11.0% |
| Operating margin | 29.4% | 27.0% | +2.4 percentage points |
| Net income | $18.4 million | $16.6 million | +10.9% |
| Basic / diluted EPS | $1.14 / $1.13 | $1.04 / $1.03 | Higher |
| Operating cash flow | $32.6 million | $33.8 million | -$1.2 million |
| Capital expenditures | $22.6 million | $20.1 million | +$2.5 million |
- Net margin was approximately 15.7%, versus 14.5% in 2013. Operations and maintenance expense fell $1.6 million to $59.1 million, partly reflecting $3.0 million lower employee-benefit expense; depreciation rose $0.5 million.
- Cash from operations funded 2014 utility-plant expenditures. Year-end cash was $2.7 million, down from $4.8 million. Current assets of $22.9 million compared with current liabilities of $43.9 million.
- At year-end, long-term debt was $136.0 million, current maturities were $5.9 million, and short-term notes payable were $19.0 million. Total assets were $575.8 million. The company reported compliance with its mortgage covenants.
- Common dividends paid were $0.763 per share, up from $0.753. Dividend continuity is not assured.
Material changes and developments
- Revenue increased $2.3 million. Tidewater revenue rose $2.5 million, helped by customer demand, connection fees and rate increases; TESI revenue increased $0.5 million, including Plantations system service. Middlesex revenue declined $0.5 million, chiefly due to the expired Sayreville wholesale contract and weaker industrial demand, including Hess’s refinery closure.
- Operating income improved despite the modest revenue increase, reflecting lower operating and maintenance costs. Net income also benefited from lower interest expense, while income-tax expense increased $1.3 million.
- New base-rate awards effective in 2014 added $4.2 million in annual revenues for Middlesex and $0.8 million for Tidewater. Tidewater refunded $0.4 million to customers after its final approved increase was below the interim increase.
- Tidewater began regulated water service at Dover Air Force Base on October 1 under a 50-year agreement. Middlesex received approval for a distribution system improvement charge mechanism, with initial annual revenue of about $0.3 million expected in 2015; Tidewater’s approved DSIC is expected to produce less than $0.1 million annually.
Outlook, risks and unusual items
- Management expected 2015 revenue to benefit from the full-year effect of 2014 rate increases, the Dover Air Force Base contract, the Plantations rate increase and DSIC charges. No specific earnings or revenue forecast was provided.
- Planned capital expenditures total $95.6 million for 2015–2017, including $28.6 million in 2015. Funding plans include operating cash, dividend-reinvestment proceeds, state revolving-fund loans and credit facilities; $41.0 million remained available under credit lines at year-end.
- Management expected higher 2015 employee-benefit expense, citing a lower discount rate and adoption of a mortality table reflecting longer life expectancy. The benefit-plan liability rose substantially in 2014, and related regulatory assets increased to $66.2 million from $34.4 million.
- Preliminary tax analysis indicated up to $6.8 million of potentially refundable prior taxes under new tangible-property regulations; the amount and regulatory treatment were uncertain, and the company did not expect a significant financial-statement or effective-tax-rate impact.
- Risks include regulatory delays or denial of rate relief, lower commercial and industrial water demand, weather and seasonal usage, water supply or quality issues, environmental compliance costs, financing availability, cybersecurity, customer growth and acquisition execution. The company also guarantees an unaffiliated contractor’s performance on a leachate facility project; it considered payment unlikely and reported a $0.3 million liability.
- Management and the independent auditor reported effective internal controls. The auditor issued an unqualified opinion on the financial statements and internal control; ordinary-course litigation was not expected to have a material adverse effect.
Investor verification priorities
- Verify the realized revenue and earnings contribution from the 2014 rate awards, 2015 DSIC charges and Dover Air Force Base operations, as well as whether commercial and industrial demand stabilizes.
- Review cash-flow conversion, the planned $95.6 million capital program, debt maturities and refinancing needs, credit-line availability, and liquidity given current liabilities exceeding current assets.
- Track pension and other postretirement obligations, funding contributions, discount-rate assumptions and whether regulators permit recovery of related costs through rates.
- Confirm the outcome and timing of the potential tax refund and assess the exposure under the Monmouth County project guarantee.
- Assess water-quality and environmental compliance developments, regulatory decisions and the ability to recover new costs in customer rates.