Middlesex Water Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Middlesex provides regulated water and wastewater services in New Jersey and Delaware, plus non-regulated utility operations and maintenance services. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $47.7 | $39.9 | $123.6 | $109.1 |
| Operating income | $16.6 | $11.4 | $39.2 | $26.9 |
| Net income | $14.3 | $11.5 | $35.3 | $29.3 |
| Basic / diluted EPS | $0.81 / $0.80 | $0.65 / $0.65 | $2.00 / $1.99 | $1.67 / $1.66 |
| Operating margin | 34.7% | 28.7% | 31.7% | 24.6% |
Q3 revenue increased 19.7% and net income 24.5% year over year. For the first nine months, revenue rose 13.3% and net income 20.3%. Nine-month operating income includes a $5.2 million pretax gain on the sale of a subsidiary; excluding that gain, operating income was approximately $34.0 million.
- Revenue drivers: The Middlesex System’s January 2022 base-rate increase and higher weather-driven demand were principal contributors. Tidewater revenue also benefited from customer growth, partly offset by a 6% rate reduction effective September 1, 2022. Sale of a Delaware wastewater subsidiary reduced revenue.
- Costs and interest: Nine-month operating and maintenance expense increased $3.7 million, reflecting wage and benefit costs, weather-related main breaks, production costs and fuel. Depreciation and other taxes also rose. Interest expense increased $0.7 million for the nine-month period, attributed to higher average debt and interest rates.
- Cash flow: Nine-month operating cash flow was $44.2 million, versus $18.6 million in 2021. The company attributed the improvement mainly to higher revenues and vendor-payment timing. Capital expenditures were $65.9 million; investing cash flow was negative $62.8 million. Financing cash flow was positive $18.0 million, including $27.5 million of net short-term borrowing and $10.1 million of common-stock issuance. Cash ended at $2.9 million.
- Debt and liquidity: At September 30, long-term debt was $301.2 million, current long-term debt $7.6 million, and notes payable $40.5 million. Total assets were $1,064.7 million and current liabilities $93.0 million. The company had $99.5 million available under $140 million of credit lines; outstanding short-term borrowings carried a 3.81% weighted-average rate. It reported compliance with mortgage covenants.
Material developments, outlook and risks
- Rates: Middlesex’s approved rate settlement is expected to add $27.7 million in annual revenue, phased in during 2022 and 2023. An additional $2.7 million purchased-water adjustment took effect October 1, 2022 on an interim, refundable basis. Tidewater’s 6% rate reduction is expected to lower annual revenue by about $2.2 million. Pinelands requested annual increases totaling approximately $1.0 million; decisions were not expected before Q1 2023. Tidewater expected to file for a rate increase in Q1 2023. Management said another Middlesex filing may be needed in 2023 as costs and investment rise.
- PFAS/PFOA: The Park Avenue Wellfield’s accelerated treatment work was completed and the facility restarted in June 2022; the company stated delivered water met applicable standards, including the NJ PFOA standard. An NJDEP consent order requires public notifications, quarterly progress reporting, testing, and permanent upgrades in operation by June 30, 2023. Noncompliance with the schedule or reporting requirements could result in penalties of up to $500 per day. Two PFOA-related class actions are ongoing; their outcome is uncertain, and the insurer acknowledged coverage of potential liability. Recovery of interim-response costs through rates remained pending.
- Capital program: The company estimated about $85 million of 2022 capital spending, with $65.9 million spent through September, and projected approximately $230 million for 2022–2024. Major programs include PFAS treatment upgrades, water-main replacement and storage tanks. Timing and costs depend on project execution, supply availability, customer growth and other factors.
- Other changes and uncertainties: The company sold Tidewater Environmental Services in January for $6.4 million in cash and other consideration, recognizing a $5.2 million pretax gain. It renewed Avalon’s operations contract for ten years starting September 1, 2022. Management cited weather, regulatory decisions, operating-cost control, water supply, construction costs, customer growth, COVID-related uncertainty, and access to capital as factors affecting results. No specific earnings guidance was provided.
Important facts for investors to verify
- Progress against the NJDEP consent-order milestones, PFOA testing results, and status of the related litigation and insurance coverage.
- Final regulatory outcomes for the purchased-water adjustment and pending Pinelands rate petitions, plus the timing and terms of expected rate filings.
- Whether the planned capital program remains on schedule and within budget, and how it will be funded.
- Short-term borrowing levels, credit-line renewals and interest costs as rates and funding needs change.
- The earnings contribution from ongoing operations versus the one-time subsidiary-sale gain, and the effect of Tidewater’s rate reduction.