Middlesex Water Company — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report; it also provides unaudited fourth-quarter results. Financial amounts below are in U.S. dollars unless noted.
Business context
Middlesex owns and operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, and provides contract operations services. The regulated segment generated about 88% of 2017 revenue and 94% of net income. Its largest systems are the Middlesex System in New Jersey and Tidewater in Delaware.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $130.8 million | $132.9 million |
| Operating income | $38.6 million | $40.6 million |
| Operating margin | 29.5% | 30.6% |
| Net income | $22.8 million | $22.7 million |
| Net margin | 17.4% | 17.1% |
| Diluted EPS | $1.38 | $1.38 |
| Operating cash flow | $42.8 million | $47.1 million |
| Utility-plant expenditures | $50.3 million | $47.4 million |
| Cash and cash equivalents at year-end | $4.9 million | $3.9 million |
| Total assets | $661.1 million | $620.2 million |
| Long-term debt, net of current portion | $139.0 million | $134.5 million |
At year-end, notes payable were $28.0 million, and $64.0 million remained available under $92.0 million of credit lines. Current assets were $29.2 million versus current liabilities of $64.5 million. Gross long-term debt before current maturities was $147.9 million. The company paid common dividends of $0.858 per share for 2017, up from $0.808 in 2016.
Fourth-quarter 2017 revenue was $31.5 million, operating income $8.5 million, net income $5.3 million and diluted EPS $0.32. In fourth-quarter 2016, those figures were $31.8 million, $7.8 million, $3.2 million and $0.19, respectively.
Changes versus 2016
- Revenue declined $2.1 million, mainly because lower water consumption and lower bulk sales reduced Middlesex System revenue by $4.0 million. Tidewater revenue rose $1.3 million, partly offsetting the decline.
- Operating income fell $2.0 million as revenue and regulated-segment operating income declined; lower operations and maintenance costs partly offset higher depreciation.
- Net income edged up $0.1 million. Lower income-tax expense and improved other income—principally because 2016 included a $1.9 million charge related to the Ridgewood Green renewable-energy investment and loan—offset lower operating income and higher interest charges.
- Operating cash flow decreased $4.2 million, attributed primarily to lower water sales and higher vendor payments. Investing cash use rose to $51.3 million, primarily reflecting higher utility-plant spending.
- Year-end short-term borrowings increased to $28.0 million from $12.0 million. Long-term debt, net of current maturities, increased to $139.0 million from $134.5 million.
Outlook, risks and unusual items
- Rates: Middlesex’s October 2017 New Jersey filing sought an annual base-rate increase of approximately $15.3 million; the outcome was uncertain. Separately, an approved purchased-water adjustment became effective November 1, 2017 and was expected to recover $1.2 million annually. Tidewater’s January 2018 system-improvement charge increase was expected to generate about $0.4 million annually.
- Capital plan: Management projected approximately $94 million of 2018 capital expenditures and $267 million over 2018–2020. Major projects include a New Jersey transmission pipeline, treatment-plant upgrades, replacement of unlined mains and meter relocation. Planned funding includes internal cash, equity-plan proceeds, state revolving-fund loans and short-term borrowing.
- Management outlook: Management said results depend materially on weather, timely rate relief, cost control and customer growth. It expected 2018 residential customer growth to be consistent with recent years, anticipated operating-cost increases, and said weather patterns that supported 2015–2016 revenues might not recur.
- Tax Act: The 2017 tax-law change reduced the federal corporate rate from 35% to 21%. The company recorded a $0.6 million reduction in 2017 income-tax expense, a $24.2 million reduction in accumulated deferred taxes and regulatory liabilities of $31.6 million, while reducing tax-related regulatory assets by $5.9 million. Regulators were considering how to return excess tax collections and reflect the lower tax rate in customer rates; estimates could change.
- Contract renewal: The Perth Amboy operating agreement expires December 31, 2018. The city issued a request for proposals, and Middlesex intended to submit a proposal; renewal was not assured.
- Principal risks: Regulatory delay or denial of rate increases; seasonal demand and weather; water-supply adequacy or contamination; environmental and water-quality compliance costs; access to capital and interest-rate exposure; infrastructure execution; cybersecurity and operating-system disruption; and pension and postretirement assumptions. The company also guarantees an unaffiliated contractor’s performance on a facility contract through 2028, with indemnification from the contractor and its parent.
- Other items: The company recorded a $1.7 million allowance against its Ridgewood Green loan and a $0.2 million investment impairment in 2016. Pending ordinary-course lawsuits were not expected by management to materially affect the financial statements. The auditor gave unqualified opinions on the financial statements and internal controls; management also reported effective controls.
The filing provides no clear numerical earnings or revenue guidance for 2018.
Important facts for investors to verify
- Progress and final terms of the $15.3 million New Jersey base-rate request, including how the tax-law changes affect customer tariffs and regulatory balances.
- Actual capital spending, project timing and availability of planned revolving-fund financing and credit-line capacity.
- Water-demand and weather trends, particularly whether lower 2017 consumption persists and how it affects revenue and cash generation.
- Outcome of the Perth Amboy contract process and any effect on contract-services revenue.
- Debt maturities, short-term borrowing costs, dividend coverage and the funding implications of the company’s multi-year capital program.