Middlesex Water Company — Q3 2023 Form 10-Q
Business context and period. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, with a smaller non-regulated contract-services business. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the same 2022 periods. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $46.7 | $47.7 | $127.7 | $123.6 |
| Operating income | $12.8 | $16.6 | $31.0 | $39.2 |
| Net income | $10.0 | $14.3 | $25.8 | $35.3 |
| Diluted EPS | $0.56 | $0.80 | $1.44 | $1.99 |
| Operating margin | 27.5% | 34.7% | 24.3% | 31.7% |
- Revenue and earnings: Q3 revenue declined about 2.1% year over year, while nine-month revenue grew about 3.3%. Operating income fell about 22.6% in Q3 and 20.9% over nine months. Nine-month net income was also affected by the absence of the $5.2 million subsidiary-sale gain recorded in 2022.
- Cost and interest pressures: Q3 operating expenses rose $2.7 million, including higher operations and maintenance and depreciation. For the nine months, operations and maintenance increased $5.0 million, principally from purchased water and treatment costs, wages, outside services and insurance. Interest expense rose $2.8 million year over year for the nine months, reflecting higher debt and borrowing rates.
- Cash flow and investment: Nine-month operating cash flow was $40.0 million, down from $44.2 million. Utility-plant expenditures were $73.1 million, versus $65.9 million. Financing activities provided $32.2 million; cash ended the period at $3.0 million.
- Debt and liquidity: Long-term debt was $354.3 million, compared with $290.3 million at December 31, 2022; the balance sheet separately reports $7.4 million current portion and $42.3 million in notes payable. Of $140 million in bank lines, $97.7 million was available at quarter-end. Outstanding line borrowings carried a 6.51% weighted-average rate.
- Capital and equity: Total assets were $1.24 billion, including net utility plant of $985.5 million. Total capitalization was $775.9 million. Common dividends paid in the first nine months were $16.6 million.
Material changes and significant developments
- Q3 revenue softness reflected lower customer demand in the Middlesex and Tidewater systems; Tidewater was also affected by a regulator-ordered rate reduction. Nine-month revenue growth was driven mainly by the final phase of Middlesex’s 2021 rate case increase, partly offset by lower demand and Tidewater revenue declines.
- In May, Middlesex petitioned the New Jersey Board of Public Utilities (NJBPU) for an approximately $34 million annual increase in base water revenue. The filing says the request primarily reflects infrastructure investment; approval, amount and timing are uncertain.
- Pinelands received approval for a combined $1.0 million annual base-rate increase, effective April 15, 2023. Middlesex’s Distribution System Improvement Charge foundation filing was approved in October 2023, enabling future recovery on qualifying projects.
- The company completed and placed the Park Avenue Wellfield treatment upgrades in service in June 2023, and the New Jersey Department of Environmental Protection closed the related consent order after confirming compliance with PFOA standards.
- Middlesex’s 2023–2025 capital program is projected at approximately $277 million. The company forecast about $96 million of 2023 construction spending, including approximately $23 million in the fourth quarter; it expects approximately $181 million of capital spending in 2024–2025.
Outlook, risks and contingencies
- Funding and investment: The company expects to fund infrastructure spending with operating cash, debt, bank lines and equity. Regulatory approvals permit up to $300 million of borrowing and the issuance of up to 1.0 million common shares through December 31, 2025. Actual spending and financing depend on project timing, costs and market conditions.
- Settlement and customer impact: Under its 3M settlement, Middlesex is to receive $93.2 million in two installments—$23.3 million in December 2023 and $69.9 million in July 2024—and pay $27.9 million in legal fees. The anticipated net $65.2 million is recorded as a regulatory liability; the company intends for the net benefit to mitigate future customer rate increases. The filing also describes potential eligibility for additional PFAS-related compensation.
- Pending matters: Two PFOA-related class-action lawsuits seeking medical, water-replacement and other costs remained in early stages, with outcomes not predictable. The filing also describes pending litigation over a $1.7 million escrow order involving Twin Lakes; Twin Lakes’ financial results and obligations are stated to be immaterial to Middlesex.
- Operating and financial risks: Management identifies weather, timely rate relief, cost control and customer growth as key factors. Other risks include water supply and quality, regulatory outcomes, interest rates, commodity costs, supply-chain availability, housing activity, cyberattacks and access to capital. Management said projected 2023 transition, regulatory, construction and financing matters were not expected to have a material adverse effect on revenue or earnings.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were not effective as of September 30, 2023, due to a material weakness in IT general controls over user access and change management. The company described remediation efforts, but had not concluded the weakness was remediated.
- Management transition: CEO Dennis W. Doll announced plans to retire on the later of December 31, 2023 or the appointment and transition of a successor; he planned to remain Board Chairman through May 2024.
- Guidance: The filing does not provide a specific earnings or EPS forecast. It does provide the capital-spending projections above and discusses rate filings and expected funding needs.
Important facts for investors to verify
- Progress and outcome of the approximately $34 million Middlesex base-rate request, and the timing and customer-rate treatment of other regulatory proceedings.
- Receipt of the two 3M settlement installments, payment of legal fees, and how the net proceeds are applied through the regulatory liability.
- Whether operating costs, borrowing rates and capital spending continue to pressure margins, cash flow and financing requirements.
- Execution of the $277 million 2023–2025 capital program, including project costs, schedule and funding mix.
- Remediation and independent testing of the IT-control material weakness, and whether management later concludes controls are effective.
- Developments in the PFOA-related class actions and any additional PFAS remediation or settlement obligations.