Middlesex Water Company — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing also reports fourth-quarter results. Middlesex operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, alongside contract operations. Its regulated segment generated about 88% of 2013 revenue.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $114.8 million | $110.4 million | +4.0% |
| Operating income | $31.0 million | $27.6 million | +12.0% |
| Net income | $16.6 million | $14.4 million | +15.5% |
| Diluted EPS | $1.03 | $0.90 | +$0.13 |
| Operating margin | 27.0% | 25.0% | +2.0 percentage points |
| Net cash from operations | $33.8 million | $29.6 million | +$4.2 million |
| Utility plant expenditures | $20.1 million | $21.6 million | -$1.5 million |
Net income increased despite only modest revenue growth, supported in part by lower employee-benefit expense and reduced interest charges following debt refinancing. O&M expense rose $0.3 million; depreciation increased $0.6 million. Cash from operations covered reported utility-plant expenditures in 2013.
At year-end, cash was $4.8 million, current assets $25.8 million and current liabilities $52.7 million. The company had $28.5 million outstanding on $60 million of credit lines, at a 1.47% year-end weighted-average rate. Long-term debt was $129.8 million on the balance sheet; reported debt principal before the current portion was $133.1 million. Total assets were $530.3 million, down from $561.7 million, largely alongside a decline in regulatory assets and employee-benefit liabilities.
Annual common dividends were $0.753 per share, versus $0.743 in 2012. The company reported no mortgage covenant violations. Its independent auditor issued an unqualified opinion on the financial statements and internal controls.
Fourth-quarter results
For Q4 2013, revenue was $27.4 million, operating income $6.7 million, net income $3.2 million and diluted EPS $0.19. In Q4 2012, the respective figures were $27.1 million, $5.7 million, $2.7 million and $0.17.
Material changes and developments
- Revenue rose $4.4 million year over year. Increases included $1.2 million from USA, largely reflecting the Avalon contract, and $0.8 million from Tidewater, mainly rate and connection-fee effects.
- Middlesex lost Sayreville as a wholesale customer when its contract ended in August 2013. Hess, its largest retail customer, stopped refining at its Port Reading facility in February; 2013 revenue from Hess was $1.1 million, down $1.5 million from 2012.
- Operating income increased $3.3 million. Employee-benefit expense declined $2.0 million, while other income fell $0.8 million. Interest charges decreased $0.9 million, mainly following refinancing.
- An amendment to the Other Benefits Plan increased retiree premium contributions and reduced the related benefit liability and regulatory asset by $10.2 million at January 1, 2013. Management also cited improved plan investment performance and a higher discount rate as expected to lower 2014 benefit expense and contributions.
- Cash from operations funded utility-plant expenditures in 2013; company capital spending was $20.1 million. Planned capital expenditures for 2014–2016 total $87.9 million.
Outlook, regulation and risks
- Middlesex requested a $10.6 million annual base-water-rate increase in New Jersey; a decision was expected in Q3 2014. Tidewater requested a $3.9 million annual increase in Delaware; a decision was expected in the second half of 2014. Neither outcome was assured. Tidewater’s 6.5% interim increase began February 6, 2014, subject to refund.
- Management expected 2014 revenue to benefit from rate changes, the full-year effect of Middlesex’s distribution-system charge and the Plantations wastewater acquisition. The filing did not provide a quantified earnings or revenue forecast.
- Tidewater’s proposed 50-year Dover Air Force Base water-service agreement, subject to regulatory approval, could initially add about $0.6 million in annual revenue.
- Management identified weather, timely rate relief, cost control and customer growth as key drivers. Lower commercial and industrial demand, rainfall, the loss of Sayreville and Hess, and slow Delaware housing development could weigh on results. Unrecoverable preliminary survey and investigation costs may be charged to income.
- Other risks include stricter water-quality or environmental requirements, supply interruption or contamination, rate-case delays, financing availability and cost, cybersecurity and operational disruptions, and competition for contracts and service franchises.
- Middlesex guarantees an unaffiliated contractor’s performance on the Monmouth County leachate-treatment project through 2028 unless replaced by an acceptable guarantor. The company considered payment unlikely; it recognized a $0.4 million liability. If called upon and indemnification failed, Middlesex could have to fulfill construction and operating commitments.
- Superstorm Sandy costs were about $0.4 million; insurance had paid $0.2 million, and recovery of the remaining amount through rates was uncertain. Routine litigation was not expected by management to materially affect the financial statements.
Investor facts to verify
- Regulatory decisions and final authorized revenue from the Middlesex and Tidewater rate cases, including any refund exposure for Tidewater’s interim rates.
- Whether the company sustains earnings and cash generation after the Sayreville contract ended and Hess demand fell, and how weather affects consumption.
- Funding and execution of the $87.9 million 2014–2016 capital program, including planned debt financing and credit-line usage.
- Recoverability of regulatory assets, Sandy costs and preliminary project costs, and the assumptions underlying employee-benefit liabilities and expected 2014 contributions.
- Progress and approval of the Dover Air Force Base agreement, and the company’s exposure under the Monmouth County project guaranty.