Middlesex Water Company — Q1 2024 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2024, compared with Q1 2023. Middlesex provides regulated water and wastewater services, primarily in New Jersey and Delaware, and operates systems under contract through its non-regulated businesses.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $40.5 million | $38.2 million | +6.2% |
| Operating income | $9.9 million | $7.5 million | +31.7% |
| Operating margin | 24.3% | 19.6% | +4.7 percentage points |
| Net income | $10.7 million | $5.9 million | +82.0% |
| Basic / diluted EPS | $0.60 / $0.59 | $0.33 / $0.33 | Higher |
| Operating cash flow | $6.7 million | $16.0 million | Down $9.3 million |
| Utility plant expenditures | $14.4 million | $24.5 million | Down $10.1 million |
Revenue growth reflected Middlesex’s approved base-rate increase effective March 1, 2024 and higher commercial and industrial billings, plus Tidewater customer growth and demand. The regulated segment generated $37.5 million of revenue and $10.0 million of net income; non-regulated operations generated $3.1 million of revenue and $0.6 million of net income.
Operating expenses were nearly flat at $30.7 million. Operations and maintenance rose modestly, while depreciation declined by $0.6 million, partly reflecting recovery of prior-year Park Avenue PFAS-treatment costs. Operating margin improved, but reported earnings also benefited substantially from unusual settlement-related recoveries: other income, net increased to $5.4 million from $1.7 million, including recovery of carrying costs and other costs associated with PFAS upgrades. Interest expense rose $0.7 million to $3.3 million, primarily due to higher average debt and borrowing rates.
Financial position and liquidity
- Total assets were $1.25 billion at March 31, 2024, up $14.1 million from year-end 2023. Net utility plant was $1.01 billion.
- Cash was $2.9 million. Current assets were $111.2 million and current liabilities were $117.2 million; current assets include a $69.9 million litigation settlement receivable.
- Long-term debt was $357.0 million, with $7.8 million classified as current; short-term notes payable were $58.0 million. Together, these borrowings totaled approximately $422.8 million, up about $14.2 million from December 31, 2023.
- The company had $82.0 million available on its $140.0 million bank credit lines. Outstanding line borrowings carried a 6.46% weighted-average rate at quarter-end and were being rolled over daily.
- Operating cash flow fell mainly because of payment timing and higher interest payments. Cash from operations did not cover $14.4 million of capital expenditures; financing activities provided $8.2 million, including increased short-term borrowing.
Material changes, outlook, and risks
- Rates and cost recovery: New Jersey approved a settlement of Middlesex’s 2023 rate case, expected to add $15.4 million in annual revenue from March 1, 2024. Approved rates provide for a 9.6% authorized return on common equity on a $563.1 million rate base. The company reclassified $48.3 million from regulatory liabilities to contributions in aid of construction under the settlement arrangement with 3M.
- Capital program: The company expects to spend approximately $78 million on construction in 2024 and projects approximately $226 million of capital investment for 2024–2026. Funding may include internally generated cash, debt, bank lines, common stock issuance, and 3M settlement proceeds. The company expects about $64 million of 2024 capital spending after Q1.
- Further rate actions: Management said higher operating costs and infrastructure investment may prompt base-rate filings for Tidewater and Pinelands later in 2024. Middlesex filed in April for a DSIC expected to produce $0.5 million in annual revenue if approved. Tidewater’s DSIC, effective January 2024, is expected to generate about $1.3 million annually.
- PFAS: EPA finalized lower PFAS drinking-water limits in April 2024. Initial monitoring is due by April 2027, and systems exceeding limits must implement solutions by April 2029. Middlesex began preliminary engineering work in 2023. Compliance costs and rate recovery remain important uncertainties.
- Other exposures: Two PFOA-related class actions remain unresolved. Middlesex is appealing a federal court dismissal concerning a $1.7 million escrow order related to Twin Lakes; the company says Twin Lakes’s results and obligations are not material. Management does not expect other routine legal or regulatory matters to have a material adverse effect.
- Internal controls: Disclosure controls and internal control over financial reporting were reported ineffective because of a material weakness in IT general controls, including user access and change management. Management is implementing remediation and expects additional controls in Q2 2024; effectiveness has not yet been established.
- Other stated risks include regulatory decisions and cost recovery, water quality and supply, weather, customer growth, capital availability and costs, supply-chain constraints, cyberattacks, and commodity prices.
Important facts for investors to verify
- How much of Q1’s earnings increase reflects recurring rate and operating performance versus 3M-related recoveries and other income.
- Timing, amount, and rate treatment of PFAS and lead-service-line compliance spending, including the estimated $46 million–$77 million lead-line replacement plan over nine years.
- Execution and funding of the $78 million 2024 construction program, including borrowing levels, interest costs, and any equity issuance.
- Progress on the IT-controls material weakness remediation and whether controls are tested and deemed effective.
- Outcomes of pending PFOA litigation, the Twin Lakes appeal, and requested or potential rate adjustments.