Middlesex Water Company — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. Middlesex owns and operates regulated water and wastewater utilities in New Jersey, Delaware and Pennsylvania, and provides contracted system operations. Its largest system, Middlesex in New Jersey, generated about 64% of 2011 consolidated operating revenue. Results are seasonal, with demand typically highest in warmer months.
Financial results and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $102.1 million | $102.7 million | Down 0.6% |
| Operating income | $24.2 million | $26.6 million | Down 9.0% |
| Net income | $13.4 million | $14.3 million | Down 6.2% |
| Basic / diluted EPS | $0.85 / $0.84 | $0.96 / $0.96 | Lower |
| Operating cash flow | $22.8 million | $25.6 million | Down $2.7 million |
| Utility plant expenditures | $23.6 million | $29.6 million | Down $6.0 million |
- Operating margin was approximately 23.7%, compared with 25.9% in 2010. Operating expenses rose to $77.9 million from $76.1 million.
- Cash from operations funded approximately 97% of utility plant expenditures, versus 86% in 2010. Year-end cash was $3.1 million.
- Total assets were $537.5 million. Long-term debt was $132.2 million, including $4.6 million current portion; short-term notes payable were $24.3 million. Total committed bank lines were $60.0 million, leaving $35.7 million undrawn. Year-end short-term borrowing rate was 1.33%; weighted average long-term debt rate was 5.13%.
- Current assets were $22.9 million and current liabilities $46.7 million. The company also reported $67.3 million of regulatory assets and $51.0 million of employee-benefit plan liabilities.
- Common dividends paid were $0.733 per share for 2011, up from $0.723 in 2010. The company reported a long record of annual dividend payments but gave no assurance of future payments.
Material changes versus 2010
- Revenue declined primarily because cooler, wetter summer weather reduced customer consumption; contract sales also fell after a temporary Perth Amboy water-supply arrangement ended. Lower Tidewater connection fees and the expiration of a White Marsh wastewater contract also weighed on revenue.
- Operating and maintenance expense increased $1.1 million, including higher healthcare and postretirement-benefit costs. Depreciation rose $0.6 million as utility plant in service increased. Lower interest expense and higher other income partly offset these items.
- Other income included a $0.7 million gain from transferring USA’s LineCare contracts to HomeServe. USA now receives fees for billing and administrative services.
- Net income and EPS decreased; management attributed the EPS decline both to lower net income and to the higher average share count following the 2010 public stock offering.
- Operating cash flow declined, while utility plant expenditures were lower than in 2010. Total assets rose to $537.5 million from $489.2 million, and reported employee-benefit plan liabilities increased substantially.
Outlook, commentary and risks
- Management expected 2012 revenue to benefit from interim or approved rate increases at Middlesex, Tidewater, TESI, Southern Shores and Twin Lakes. Applications or settlements remained subject to regulatory decisions where approval was pending.
- Middlesex requested an annual base-rate increase of approximately $11.3 million; a decision was expected in the fourth quarter of 2012. Tidewater requested approximately $6.9 million, with a 10.49% interim increase subject to refund. TESI requested approximately $0.8 million, with a 7.6% interim increase subject to refund. Pinelands Water and Pinelands Wastewater expected to file for increases.
- Management estimated capital expenditures of $56.2 million for 2012–2014: $21.8 million in 2012, $18.0 million in 2013 and $16.4 million in 2014. Funding sources were expected to include operating cash, DRP proceeds, state revolving-fund financing and short-term borrowings.
- The company expected to contribute approximately $8.9 million to retirement benefit plans in 2012, compared with $6.9 million contributed in 2011. Lower discount rates, revised mortality assumptions and weaker-than-expected 2011 asset returns increased benefit obligations and were expected to raise expense and cash contributions.
- Key risks include regulatory delay, denial or reduction of rate requests; reduced commercial and industrial demand; weather and water-supply variability; environmental and water-quality compliance costs; capital-market access; slower Delaware housing development and potential recovery losses on preliminary survey and investigation costs. The Perth Amboy operating contract may also expose the company to costs exceeding contract payments.
- Contractual obligations totaled $328.1 million, including $136.7 million of long-term debt, $24.3 million of notes payable, $89.6 million of future long-term-debt interest, purchased-water commitments and wastewater operations obligations. This schedule excludes anticipated postretirement benefit payments.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls. Pending ordinary-course lawsuits were not expected by management to have a material adverse effect.
Investor verification priorities
- Track final outcomes and effective dates for the pending base-rate cases, including whether interim rates subject to refund are retained, modified or refunded.
- Assess whether customer usage, particularly commercial and industrial demand, and weather normalize; compare actual 2012 revenue and margins with the 2011 decline.
- Verify benefit-plan funding, expense and liability trends against the projected 2012 contributions and the assumptions underlying regulatory recovery.
- Monitor execution and funding of the $56.2 million capital program, available credit capacity, short-term borrowing maturities and debt covenant compliance.
- Evaluate recoverability of regulatory assets and preliminary survey and investigation costs, and confirm the impact of the HomeServe LineCare agreement and its one-time sale gain.