Middlesex Water Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; the filing also provides unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside contract operations and other non-regulated services. The regulated segment generated about 88% of 2015 revenue and 94% of net income. Demand is seasonal, generally strongest in warmer months, and results depend materially on utility commission rate decisions, weather, customer growth and cost control.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $126.0 million | $117.1 million |
| Operating income | $35.8 million | $34.4 million |
| Net income | $20.0 million | $18.4 million |
| Basic / diluted EPS | $1.23 / $1.22 | $1.14 / $1.13 |
| Operating margin | 28.4% | 29.4% |
| Net margin | 15.9% | 15.7% |
| Cash from operating activities | $51.2 million | $32.6 million |
| Utility plant expenditures | $25.8 million | $22.6 million |
| Common dividends per share | $0.776 | $0.763 |
Revenue increased 7.6% year over year, while operating income rose 4.2% and net income 8.6%. Operations and maintenance expense increased $6.0 million, chiefly from employee benefit costs; total operating expenses rose about 9.0%, contributing to lower operating margin. Revenue gains reflected Middlesex rate increases and stronger weather-related demand, higher Tidewater demand and the Dover Air Force Base system, and scheduled Perth Amboy contract fee increases.
Operating cash flow increased by $18.6 million, substantially reflecting a net federal tax refund related to the company’s adoption of IRS tangible-property repair-cost regulations, as well as higher earnings and tax-payment timing. Management said operating cash funded all 2015 utility plant expenditures. Cash was $3.5 million at year-end; current assets of $24.4 million were below current liabilities of $28.3 million. The company had $60.0 million in credit lines, with $3.0 million drawn and $57.0 million available at year-end.
Long-term debt was $136.2 million on the balance sheet, excluding its $5.7 million current portion; notes payable were $3.0 million. The weighted-average rate on long-term debt was 3.87%. The company reported compliance with mortgage covenants. Estimated capital expenditures for 2016–2018 total $159.7 million, including $47.3 million planned for 2016.
Fourth-quarter 2015 revenue was $30.9 million versus $28.1 million in 2014; operating income was $8.5 million versus $8.1 million, and net income was $4.6 million versus $3.8 million.
Material changes and unusual items
- A New Jersey rate settlement effective August 29, 2015 authorized $5.0 million in annual revenue increases, below the $9.5 million request. The settlement reset Middlesex’s distribution system improvement charge to zero.
- Operating cash flow benefited from the IRS tangible-property repair-cost tax treatment. The company sought a $10.3 million federal refund, recorded a $2.3 million provision against refundable taxes because the deduction could be challenged, and said its 2014 federal return was selected for IRS examination. Management said the tax-regulation adoption was not expected to significantly affect the financial statements or effective tax rate.
- Tidewater’s acquisition of the Dover Air Force Base water assets began contributing regulated service in October 2014; Tidewater revenues also benefited from higher customer demand.
- Employee benefit expense increased $3.4 million in 2015, reflecting higher healthcare costs and retirement-plan costs, including the effects of a lower discount rate in the prior-year comparison and updated mortality assumptions.
Outlook, risks and contingencies
Management expected 2016 revenue to benefit from the full-year effect of Middlesex’s 2015 rate increase, Tidewater’s higher improvement-charge rate effective January 1, 2016, and pending Pinelands and Twin Lakes rate cases. It also expected a market-driven higher discount rate to lower employee benefit expense. The filing gives no quantified earnings or revenue guidance. Pinelands sought annual increases of approximately $0.3 million for water and $0.2 million for wastewater; Twin Lakes sought approximately $0.2 million. Decisions were expected in the third quarter of 2016, but approval and amounts were uncertain.
Principal risks include delayed, reduced or denied rate relief; continued weakness in commercial and industrial water demand; weather-driven usage variability; water availability or contamination; tighter water-quality and environmental requirements and related unrecovered costs; capital-market access and financing costs; benefit-plan assumptions and investment performance; competition for contracts and service territories; and cybersecurity or operational disruptions. The company also guarantees an unaffiliated operator’s performance at a Monmouth County leachate facility through 2028 unless replaced by an acceptable guarantor; it considered a payment under the guarantee unlikely and had recorded a liability of about $0.2 million. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Progress and final outcomes of the Pinelands and Twin Lakes rate cases, and whether 2016 revenue benefits match management’s expectations.
- IRS examination outcome, the recoverability and timing of the requested refund and related tax benefits, and whether the $2.3 million provision proves sufficient.
- Whether operating cash flow remains strong excluding tax-related cash-flow effects, and the funding mix and cost for the approximately $159.7 million 2016–2018 capital program.
- Trends in commercial and industrial demand, weather-related consumption, and operating and employee-benefit costs.
- Water-quality compliance, environmental capital requirements, and any changes in the status or exposure of the Monmouth County guarantee.