Middlesex Water Company — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are noted where useful. Middlesex owns and operates regulated water and wastewater utilities primarily in New Jersey and Delaware, and also operates systems under contract. Regulated operations generated about 91% of 2020 revenue.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $141.6 million | $134.6 million | +5.2% |
| Operating income | $37.4 million | $35.5 million | +5.3% |
| Net income | $38.4 million | $33.9 million | +13.4% |
| Diluted EPS | $2.18 | $2.01 | +8.5% |
| Operating cash flow | $53.4 million | $36.1 million | +$17.3 million |
| Utility plant expenditures | $105.6 million | $89.1 million | +$16.5 million |
- Operating margin was approximately 26.4%, broadly unchanged from 2019. Net income benefited from a $4.1 million income-tax benefit, versus a $3.1 million benefit in 2019; repair-related tax benefits and their regulatory accounting treatment were significant factors. The reported net-income increase therefore exceeded operating-income growth.
- Revenue gains reflected higher Middlesex water consumption, Tidewater customer additions and developer connection fees, the Pinelands rate increase, and a new Highland Park operating contract. Residential demand increased during the pandemic; some commercial and industrial activity was curtailed.
- Operating and maintenance expense rose $2.8 million, including higher production and treatment costs, retirement-plan expense and bad-debt expense. Depreciation increased $1.8 million as utility plant in service expanded.
- Cash flow from operations less utility-plant expenditures was negative $52.3 million. Cash and cash equivalents were $4.5 million at year-end; current assets were $34.1 million versus current liabilities of $56.8 million. The company reported $2.0 million drawn on credit lines at year-end, with $138 million available under the then-existing $140 million facilities. In January 2021, total facilities were reduced to $110 million.
- Long-term debt was reported at $273.2 million, excluding the $7.3 million current portion; notes payable were $2.0 million. The company issued $40 million of 2.90% private-placement debt maturing in 2050. It reported compliance with mortgage covenants.
- Dividends declared and paid were $1.041 per common share, up from $0.976 in 2019.
Fourth-quarter context
Fourth-quarter revenue was $34.6 million versus $32.7 million in 2019, operating income was $8.3 million versus $7.6 million, and net income was $8.3 million versus $8.1 million. Diluted EPS was $0.47 in both quarters.
Outlook, material matters and risks
- Management projected approximately $314 million in capital spending for 2021–2023, including $134 million in 2021. Major projects include water-treatment upgrades, PFAS treatment at a Middlesex wellfield, water-main replacement and a replacement wastewater plant in Milton, Delaware. Planned funding sources include operating cash, debt, credit lines and equity; timing and costs may change.
- Management identified weather, timely rate relief, cost control, customer growth and COVID-19 impacts as significant determinants of results. Tidewater residential customer growth was expected to be comparable to 2020’s approximately 5%. Management anticipated operating-cost increases and noted that suspended customer-collection efforts and shifts in residential versus commercial demand could affect results.
- Middlesex sought NJBPU approval to recover $1.1 million of additional purchased-water costs through its adjustment clause; the outcome was uncertain. A previously approved $0.6 million adjustment took effect in April 2020. Tidewater’s January 2021 system-improvement charge was expected to produce about $0.6 million annually.
- COVID-19 had not significantly disrupted operations or capital construction by the filing date, but its future effects on demand, collections, bad debts, vendors, liquidity and costs remained uncertain. New Jersey and Delaware regulators allowed for potential future recovery of incremental pandemic costs but had not established procedures or timing.
- Twin Lakes, a small Pennsylvania subsidiary, was under a receiver appointed in January 2021 while a regulatory proceeding concerning possible acquisition of the system was pending. The company said the subsidiary was not material; the proceeding’s outcome was uncertain.
- Principal risks include regulatory delays or denials of rate increases and cost recovery; water-supply constraints, contamination and weather variability; tighter water-quality standards and compliance costs, including PFAS-related investment; capital-market access and financing costs; seasonal demand; customer credit and pandemic effects; and cyber or operational disruptions. Management said pending ordinary-course claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the requested $1.1 million purchased-water cost recovery is approved, and the timing and adequacy of future base-rate relief.
- Actual capital spending, project delivery and financing needs against the $314 million 2021–2023 plan, including treatment upgrades and PFAS compliance.
- Whether COVID-related customer collections, bad debts and changes in usage materially affect revenue, cash flow or liquidity.
- Debt and equity funding requirements, credit-line availability and dividend sustainability as the investment program proceeds.
- The outcome and financial implications, if any, of the Twin Lakes proceeding and receivership.