Middlesex Water Company — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed March 8, 2019. Although the request references 2018 Q4, this is an annual filing. The company provides regulated water and wastewater services and contracted operations in New Jersey, Delaware and Pennsylvania; regulated operations accounted for about 88% of 2018 revenue.
Key financial results
Amounts are in millions of dollars except per-share data. Financial statements were audited, and the auditor gave an unqualified opinion.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $138.1 | $130.8 | +5.6% |
| Operating income | $37.1 | $37.8 | -1.7% |
| Operating margin | 26.9% | 28.9% | -2.0 percentage points |
| Net income | $32.5 | $22.8 | +42.3% |
| Diluted EPS | $1.96 | $1.38 | +$0.58 |
| Operating cash flow | $45.9 | $42.8 | +$3.0 |
| Utility plant expenditures | $72.1 | $50.3 | +$21.8 |
| Common dividends per share | $0.911 | $0.858 | +6.2% |
Fourth quarter: Revenue was $33.3 million versus $31.5 million in Q4 2017; operating income was $7.2 million versus $8.3 million; net income was $7.0 million versus $5.3 million; diluted EPS was $0.43 versus $0.32.
Cash flow and liquidity: Operating cash flow covered about 64% of 2018 capital expenditures; the resulting simple operating-cash-flow-minus-capex measure was negative $26.2 million. Year-end cash and cash equivalents were $3.7 million, current assets $30.8 million and current liabilities $94.4 million. The company had $48.5 million drawn on credit lines and $43.5 million of remaining availability under $92 million of year-end lines; it increased total lines to $100 million in February 2019.
Debt: At year-end, balance-sheet long-term debt was $152.9 million, excluding $7.3 million of current maturities; gross long-term debt obligations were $162.9 million. Short-term notes payable were $48.5 million. The company reported compliance with its debt covenants.
Material changes and notable items
- Revenue increased $7.3 million, including $4.3 million from the Middlesex System’s rate increase effective April 1, 2018, higher contract-customer demand and customer growth in Delaware.
- Operating and maintenance expense rose $6.1 million, including higher production, labor, insurance and other operating costs; depreciation increased $1.1 million. These pressures reduced operating income despite revenue growth.
- Net income rose substantially while operating income declined. Income tax expense fell to $0.9 million from $11.1 million, primarily reflecting the Tax Act and approved regulatory accounting treatment of tangible-property tax deductions. This was a significant driver of reported earnings growth.
- Interest expense increased $1.3 million, reflecting higher average debt, higher short-term rates and $0.6 million of accrued interest related to an IRS examination.
- Middlesex’s New Jersey base-rate settlement provided $5.5 million of annual revenue increase, versus an original request of $15.3 million. The approved rate base was $245.5 million with a 9.6% authorized return on common equity.
- The company renewed the Perth Amboy operating contract through 2028; the filing describes a $67 million base professional-services contract.
Outlook, risks and contingencies
- Management provided no quantified earnings or revenue forecast for 2019. It expected the full-year effect of the April 2018 rate increase to benefit 2019 revenue, residential customer growth to remain consistent with recent years, and weather-related lower demand to potentially recur. Management also anticipated significantly higher actuarially determined non-service retirement-benefit costs and continued operating-cost pressure.
- Planned capital expenditures total approximately $295 million for 2019–2021, including $118 million in 2019. Major projects include treatment-plant upgrades, a large-diameter transmission pipeline, the RENEW water-main program and a new Delaware wastewater plant.
- New Jersey SRF program changes may reduce low-cost financing for the CJO treatment-plant upgrade; eligibility remained uncertain. The company received approval in February 2019 to issue up to $140 million of First Mortgage Bonds through 2022 and expected its first phase in 2019.
- The IRS was examining the company’s 2014 federal return and its tangible-property repair deductions. The tax reserve was increased to $4.1 million; the final liability could differ.
- Key risks include rate-case outcomes and cost recovery, water availability and quality, weather and seasonal demand, environmental compliance costs, rising capital needs and financing costs, cyber and operational disruption, customer growth, and geographic concentration. Middlesex also guarantees an unaffiliated contractor’s performance through 2029; the company reported a related liability of about $1.5 million and indemnification arrangements.
- Management said ordinary-course litigation was not expected to materially affect the financial statements. The auditor and management reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of the 2018 net-income and EPS increase is attributable to tax and regulatory-accounting effects rather than recurring operations.
- Whether operating-cost growth, especially labor, purchased water, insurance and retirement benefits, continues to outpace revenue growth.
- Final CJO project eligibility and financing terms under the revised New Jersey SRF program, and the cost and timing of planned bond and equity issuance.
- Progress, spending and rate recovery for the $295 million capital program, alongside operating cash flow and short-term borrowing needs.
- The outcome and potential exposure from the IRS examination, and the adequacy of the recorded reserve.
- Actual 2019 demand, weather, customer growth and rate-related revenue compared with management’s stated outlook.