Middlesex Water Company — FY 2012 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone quarterly filing. Middlesex provides regulated water and wastewater services in New Jersey, Delaware and Pennsylvania, alongside contract operations. Regulated businesses generated approximately 89% of 2012 revenue. The New Jersey Middlesex System contributed about 61% of consolidated revenue and Delaware’s Tidewater System about 26%.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $110.4 million | $102.1 million | Up $8.3 million (8.1%) |
| Operating income | $27.6 million | $24.2 million | Up $3.4 million (14.2%) |
| Net income | $14.4 million | $13.4 million | Up $0.9 million (7.1%) |
| Basic / diluted EPS | $0.90 / $0.90 | $0.85 / $0.84 | Basic EPS up $0.05 |
| Operating cash flow | $29.6 million | $22.8 million | Up $6.7 million |
| Utility plant expenditures | $21.6 million | $23.6 million | Down $2.0 million |
Operating margin was approximately 25.0%, versus 23.7% in 2011; net margin was approximately 13.0%, versus 13.2%. The 2012 fourth quarter reported revenue of $27.1 million, operating income of $5.7 million, net income of $2.7 million and EPS of $0.17; corresponding 2011 fourth-quarter figures were $23.3 million, $4.2 million, $2.0 million and $0.12.
At year-end, total assets were $561.7 million, common equity $181.6 million, long-term debt $131.5 million, current maturities of long-term debt $11.1 million and short-term notes payable $28.0 million. Cash and equivalents were $3.0 million; the company had $60.0 million of credit lines, with $28.0 million drawn. Current assets of $24.6 million compared with current liabilities of $55.9 million. The annual common dividend was $0.743 per share.
Material changes versus 2011
- Revenue growth reflected approved rate increases, including Middlesex’s $8.1 million annual base-rate increase effective July 20, and Tidewater’s $3.9 million increase effective June 19. New Avalon and Sunoco wastewater operating contracts and scheduled Perth Amboy contract fees also contributed.
- Operating and maintenance expense rose $3.8 million, led by a $2.6 million increase in employee benefit costs, including actuarial assumption changes and lower investment returns in benefit-plan assets. Depreciation increased $0.7 million as utility plant in service grew.
- Other income declined $1.3 million, partly because 2011 included a $0.7 million gain from the sale of LineCare contracts and 2012 had lower allowance for funds used during construction.
- Operating cash flow increased and funded 100% of utility plant expenditures, compared with approximately 97% in 2011.
- Middlesex refinanced $57.5 million of bonds in 2012 with new bond series totaling $55.4 million net of a $2.2 million premium; management expected annual debt service to fall by approximately $0.9 million. The weighted-average interest rate on long-term debt was 4.34% at year-end, compared with 5.13% in 2011.
Outlook, risks and unusual items
- Management expected 2013 revenue to benefit from the full-year effect of 2012 rate increases, the Tidewater DSIC, and anticipated Middlesex DSIC/PWAC and Pinelands rate actions. The Middlesex DSIC was approved after year-end, with implementation allowed from September 2013 and annual recovery capped at $1.4 million. Rate requests remain subject to regulatory approval; no specific consolidated earnings guidance was provided.
- Middlesex expected to need another base-rate filing in 2013, as did Tidewater. The company cited customer demand, weather, timely rate relief, cost control and customer growth as key factors affecting earnings.
- Two customer developments threaten Middlesex revenue: Sayreville’s water-purchase contract was to expire August 12, 2013, following notice of nonrenewal; 2012 sales to Sayreville were $1.9 million. Hess planned to cease refining at its Port Reading facility as early as February 2013; 2012 revenue from Hess was $2.6 million. Management said either loss could accelerate a rate filing.
- Management identified persistently weak commercial and industrial water demand, slower Delaware housing development, weather-driven consumption, uncertain recoverability of preliminary survey and investigation costs, environmental compliance costs, water-supply and contamination risks, financing availability, and regulatory decisions as important risks.
- Planned capital expenditures were $73.0 million for 2013–2015. The company contributed $7.6 million to retirement benefit plans in 2012 and expected a similar amount in 2013; management expected lower 2013 benefit expense and contributions based on improved plan-asset performance, partly offset by a lower discount rate.
- Superstorm Sandy caused widespread power outages, but emergency generators enabled continued service. The company reported no material adverse financial impact and submitted damage claims to insurers; it expected uninsured claims to be recoverable through ratemaking. Pending ordinary-course lawsuits were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Sayreville’s contract ended as scheduled, whether replacement or emergency-supply arrangements were reached, and the resulting revenue effect.
- Whether Hess ceased refining and how much of its $2.6 million 2012 revenue was lost or replaced.
- Regulatory outcomes and timing for Middlesex and Tidewater rate filings, the Middlesex DSIC/PWAC, and pending Pinelands rate requests.
- Whether operating-cost growth, particularly employee benefit costs, is offset by rate recovery and cost controls.
- Capital spending, debt maturities and short-term borrowing needs against the $73.0 million 2013–2015 program and available credit lines.
- Recoverability of the $72.8 million in regulatory assets and $5.1 million in preliminary survey and investigation charges.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective disclosure controls.