Middlesex Water Company (NASDAQ: MSEX) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also provides unaudited fourth-quarter data. Middlesex operates regulated water and wastewater utilities, primarily in New Jersey and Delaware, alongside municipal operations contracts. Regulated operations generated approximately 93% of 2022 revenue.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Operating revenue | $162.4 million | $143.1 million | +13.5% |
| Operating income | $47.3 million | $33.2 million | +42.5% |
| Net income | $42.4 million | $36.5 million | +16.1% |
| Diluted EPS | $2.39 | $2.07 | +15.5% |
| Cash from operations | $61.4 million | $33.0 million | +$28.3 million |
| Capital expenditures | $91.3 million | $79.4 million | +$12.0 million |
Operating margin was approximately 29.1%, compared with 23.2% in 2021; 2022 operating income includes a $5.2 million pre-tax gain on the sale of a subsidiary. Net margin was approximately 26.1%, versus 25.5%. Net cash used in investing was $88.2 million; financing provided $27.1 million. Cash at year-end was $3.8 million.
At December 31, 2022, long-term debt was $290.3 million, current maturities were $17.5 million, and notes payable were $55.5 million—approximately $363.2 million of these debt balances combined. The company had $140 million in credit lines, of which $55.5 million was drawn and $84.5 million available. Current assets of $37.3 million were below current liabilities of $117.9 million.
Fourth-quarter revenue was $38.8 million versus $34.0 million a year earlier; net income was $7.2 million versus $7.2 million, and diluted EPS was $0.40 versus $0.41.
Drivers and material changes
- Revenue rose mainly on Middlesex rate increases and higher weather-related demand; Middlesex System revenue increased $21.6 million.
- A negotiated New Jersey rate settlement added $20.7 million of annualized revenue effective January 2022, with a further $7.0 million phase effective January 2023. A separate purchased-water adjustment added $2.7 million in annual revenue beginning October 2022, interim and subject to refund.
- Tidewater’s Delaware base rates were reduced 6% effective September 2022, with an estimated $2.2 million annual revenue impact. A 2021 sale of its distribution system improvement charge had also required approximately $1.0 million in customer refunds.
- Operating and maintenance costs increased $5.4 million, depreciation $1.9 million, other taxes $3.0 million, and interest expense $1.3 million. Income tax expense rose from a $5.5 million benefit in 2021 to $3.2 million expense in 2022, in part due to taxes on the subsidiary-sale gain and expiration of a tax benefit.
- The January 2022 sale of Tidewater Environmental Services for $6.4 million in cash and other consideration generated the $5.2 million gain; the filing reports $3.1 million cash proceeds and $2.1 million non-cash consideration.
Outlook, risks and unusual items
- Management expects operating costs to rise in 2023 and 2024 and says Middlesex and Tidewater may file base-rate increase requests as early as the second quarter of 2023. Rate recovery and timing remain subject to regulator decisions.
- Planned capital expenditures total approximately $266 million for 2023–2025: $102 million in 2023, $86 million in 2024 and $78 million in 2025. Priorities include water-main and service-line replacements, PFAS treatment, lead-line compliance and storage capacity.
- Organic residential customer growth in Tidewater was approximately 5% in 2022. Management cautions that lower home starts, longer closing cycles, inflation, supply constraints and mortgage rates may weigh on future growth. Weather and rainfall can also affect water demand and revenue.
- PFAS/PFOA: a New Jersey treatment-plant exceedance led to a 2021 notice and an Administrative Consent Order. A treatment upgrade was partly placed in service in June 2022 and the filing says treated water meets state and federal standards. The company is required to complete permanent upgrades by June 30, 2023, perform testing and submit quarterly reports; noncompliance may result in penalties of up to $500 per day.
- Two PFOA-related class actions seek customer-related costs and other relief; the matters remain unresolved. The insurer acknowledged coverage of potential liability. Middlesex also brought claims against 3M. Management does not expect pending legal matters to materially adversely affect the consolidated financial statements, but outcomes cannot be predicted.
- Other key risks include regulatory denial or delay of rate relief, water supply and water-quality events, environmental compliance costs, financing availability and interest rates, cyberattacks, and execution of the capital program. The company reported compliance with debt covenants.
- Common dividends were $1.1825 per share in 2022; future payments are not assured. The company raised $10.3 million through its investment plan and announced a temporary 3% purchase discount beginning March 2023.
Important facts for investors to verify
- How much of 2022 earnings growth reflects recurring operations versus the $5.2 million sale gain and tax changes.
- Final regulatory treatment of the $2.7 million purchased-water adjustment and outcomes of the pending Pinelands rate requests.
- Completion, cost and regulatory compliance of the permanent PFAS treatment project, and developments in the related litigation and insurance coverage.
- Funding and cost of the $266 million capital plan, including planned borrowing, equity issuance and the effect of higher interest rates on liquidity.
- Whether Tidewater customer growth and water demand hold up amid housing-market and weather uncertainty, and whether planned rate filings receive timely approval.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end 2022.