Middlesex Water Company — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. The company provides regulated water and wastewater services and contract operations in New Jersey, Delaware, and Pennsylvania. Its regulated segment generated about 91% of 2019 revenue.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $134.6 million | $138.1 million | Down 2.5% |
| Operating income | $35.5 million | $37.1 million | Down 4.4% |
| Net income | $33.9 million | $32.5 million | Up 4.4% |
| Diluted EPS | $2.01 | $1.96 | Up 2.6% |
| Operating margin | 26.4% | 26.9% | Down 0.5 percentage points |
| Net margin | 25.2% | 23.5% | Up 1.7 percentage points |
Revenue declined mainly because non-regulated contract revenue fell $4.6 million under the revised Perth Amboy operating arrangement and Middlesex experienced lower industrial and contract-customer demand. The associated reduction in subcontractor costs helped lift non-regulated operating margin. Company-wide operating and maintenance expense fell $3.6 million, while depreciation rose $1.7 million and interest expense rose $0.5 million.
Net income increased despite lower operating income, substantially reflecting lower income tax expense: the company recorded a $3.1 million income tax benefit in 2019, versus $0.9 million of tax expense in 2018. Management attributed the benefit in part to tax treatment of tangible-property regulations and regulatory accounting. This was a significant contributor to earnings and should not be assumed to recur at the same level.
Cash flow, investment, debt, and liquidity
- Operating cash flow was $36.1 million, down from $45.9 million. Investing cash outflow, principally utility-plant expenditures, was $89.1 million, up from $72.1 million.
- Cash flow from operations less utility-plant expenditures was negative $53.1 million. Financing provided $93.9 million, including long-term borrowing and common-stock issuance.
- At year-end, cash and cash equivalents were $2.2 million and restricted cash was $44.3 million. Restricted proceeds are held for specified capital projects and are not equivalent to unrestricted cash.
- Notes payable were $20.0 million, down from $48.5 million; long-term debt on the balance sheet was $230.8 million, up from $152.9 million. Including current long-term debt, total reported debt was approximately $258.0 million. The company reported $120 million of available credit under its lines at year-end.
- In August, the company issued $53.7 million of first mortgage bonds at 4.0% and 5.0% coupons, with $7.1 million in issuance premium. In November, it issued 0.8 million common shares in a public offering, generating $43.7 million net proceeds; its investment plan raised a further $12.7 million.
- Common dividends declared and paid were $0.976 per share, up from $0.911 in 2018. The company has paid common dividends annually since 1912; future payments remain subject to earnings, financial condition, and other factors.
Material changes and regulatory developments
- Middlesex revenue was broadly flat: a $1.2 million benefit from its 2018 base-rate increase was offset by a $1.2 million reduction in industrial and contract-customer revenue.
- Tidewater revenue increased $1.0 million, partly offset by a 3.35% rate reduction for certain customer classes effective March 2019 following lower corporate tax rates. Tidewater acquired eight Delaware community water systems serving about 1,000 customers for $1.8 million in November.
- Pinelands received a negotiated $0.5 million annual base-rate increase effective November 4, 2019. Middlesex requested a $0.5 million purchased-water adjustment; approval was uncertain at filing. Twin Lakes sought a roughly $0.2 million annual rate increase, then pending before regulators.
- Year-end total assets were $909.9 million, up from $767.8 million, reflecting infrastructure investment and financing. Utility plant net was $705.7 million, versus $618.5 million.
Outlook, risks, and contingencies
Management projected approximately $124 million of capital spending in 2020 and $295 million over 2020–2022, focused on water and wastewater infrastructure, treatment upgrades, water-main replacement, wellfield work, and a replacement wastewater plant in Milton, Delaware. Management expected residential customer growth in 2020 to be consistent with recent years, while noting that weather-related demand may remain weak and operating costs were expected to rise. The filing does not provide a specific earnings or revenue forecast.
Key sensitivities include regulatory approval and timing of rate recovery, weather and seasonal water demand, water availability and quality, construction and financing costs, customer growth, and compliance with evolving environmental standards. Management also identifies cybersecurity and IT disruptions, competition for contracts and franchises, and pension assumptions as risks. The company expects to fund its investment program through operating cash, debt, credit lines, and equity; financing and regulatory approvals are not assured.
A notable contingency concerns Middlesex’s performance guaranty for an unaffiliated contractor operating a county leachate-treatment facility. The County terminated its agreement with the contractor in November 2019, and the contractor sued the County. Middlesex was assessing the guaranty’s status; the recorded related asset and liability were about $1.4 million each. Management stated that pending routine claims and proceedings were not expected to have a material adverse effect. The auditor issued an unqualified opinion, reported effective internal control, and identified no critical audit matters.
Important facts for investors to verify
- How much of 2019 earnings growth reflects the unusual income-tax benefit, and what is the expected normalized tax rate?
- Whether pending rate requests were approved, and when rate recovery will offset rising operating and capital costs.
- Execution, cost, and financing of the $295 million 2020–2022 capital program, including the use of restricted bond proceeds.
- Whether the Perth Amboy contract change and lower industrial and wholesale demand continue to affect revenue and margins.
- The eventual outcome and potential exposure under the leachate-facility guaranty following the County’s termination and related litigation.
- Debt and equity funding needs, including potential further share issuance, and the sustainability of dividend growth alongside capital requirements.