Middlesex Water Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, alongside non-regulated contract operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Operating revenue | $36.2 | $32.5 |
| Operating income | $12.5 | $5.6 |
| Net income | $12.1 | $6.9 |
| Basic / diluted EPS | $0.69 / $0.68 | $0.39 / $0.39 |
| Cash from operations | $14.0 | $9.4 |
| Utility plant expenditures | $16.6 | $22.0 |
| Cash and cash equivalents | $3.3 at March 31 | $3.5 at December 31 |
| Total capitalization | $686.5 at March 31 | $676.3 at December 31 |
Revenue rose 11.2%. Reported operating margin was approximately 34.6%, compared with 17.3% a year earlier; Q1 2022 includes a $5.2 million subsidiary-sale gain. Excluding that gain, operating income was approximately $7.3 million and operating margin approximately 20.1%. These are calculated from reported figures. Operating expenses increased to $28.9 million from $26.9 million, including higher depreciation, maintenance and other taxes. Interest charges were $1.9 million, versus $1.7 million.
Net cash used in investing was $13.5 million, including $16.6 million of utility plant expenditures and $3.1 million of cash proceeds from the subsidiary sale. Financing used $0.7 million; the company paid $5.1 million in common dividends. Long-term debt was $306.5 million, current maturities $6.7 million and notes payable $15.0 million. The company had $125 million available under $140 million of credit lines; $15 million was outstanding. Working capital was negative $26.8 million (current assets $32.9 million and current liabilities $59.7 million).
Material changes and notable items
- Middlesex’s New Jersey base-rate settlement began taking effect January 1, 2022, with a projected $27.7 million annual revenue increase: $20.7 million effective in 2022 and $7.0 million scheduled for January 1, 2023. The settlement uses a 9.6% authorized return on common equity on $513.5 million of invested capital.
- In January, the company sold Tidewater Environmental Services, Inc. for $6.4 million in cash and other consideration, recording a $5.2 million pretax gain. The sale reduced revenue by approximately $0.6 million, partly offsetting growth elsewhere.
- Revenue growth reflected the Middlesex rate increase and additional Tidewater customers; operating costs also rose. Cash from operations increased $4.5 million, which management attributed primarily to timing of vendor payments.
Outlook, risks and contingencies
- Capital program: The company expects to spend approximately $90 million on construction in 2022, with approximately $73 million remaining after Q1. It projects approximately $229 million of capital investment over 2022–2024, including PFAS treatment upgrades, water-main replacement and storage tanks. Funding may include internally generated funds, debt, revolving credit, state revolving-fund financing and common-stock issuance.
- Rates and operating outlook: Management identifies weather, timely rate relief, cost control and customer growth as key drivers. It says infrastructure investment and operating costs are expected to rise and that additional rate requests may be needed during 2022. A March 2022 petition seeks $3.7 million of purchased-water cost recovery through the Purchased Water Adjustment Clause; approval is uncertain.
- PFOA: New Jersey regulators issued a Notice of Non-Compliance after a PFOA standard exceedance at the Park Avenue Wellfield. The company took the wellfield offline and obtained alternate supply; enhanced treatment is not expected to be complete until mid-2023, and interim upgrades are being accelerated. The company sought deferred accounting for interim costs, with recovery not yet established. Noncompliance with the Notice by September 7, 2022 could expose the company to penalties of up to $25,000 per day per offense. Two related class actions are pending; the insurer has acknowledged coverage of potential liability. On April 21, 2022, a judge granted class certification in one case and granted in part and denied in part the company’s motion to dismiss.
- Other uncertainty: The company says COVID-19 had not materially disrupted operations or construction to date, but its economic effects, customer collections and potential recovery of incremental costs remain uncertain. Supply availability and cost, weather, regulation, water quality requirements, interest rates, customer growth and construction timing are among the disclosed risks.
Important facts for investors to verify
- How much of the earnings increase is recurring: reported Q1 results include the $5.2 million pretax sale gain.
- Whether regulators approve the $3.7 million purchased-water recovery request and the company’s requested PFOA interim-cost accounting treatment.
- Progress, cost and schedule of the Park Avenue treatment upgrades, including compliance with the September 2022 Notice deadline.
- Developments in the PFOA class actions, including insurance coverage and potential exposure.
- Execution and funding of the substantial capital program, and the effects of construction needs, borrowing and possible equity issuance on liquidity and shareholder returns.