Middlesex Water Company — Q2 2023 Form 10-Q
Business context and period: This unaudited filing covers the three and six months ended June 30, 2023, compared with the same 2022 periods. Middlesex provides regulated water and wastewater services in New Jersey and Delaware, plus non-regulated contract operations.
Financial performance and position
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $42.8 | $39.7 | $81.0 | $75.9 |
| Operating income | $10.7 | $10.1 | $18.2 | $22.6 |
| Net income | $9.9 | $8.9 | $15.8 | $21.0 |
| Diluted EPS | $0.55 | $0.50 | $0.88 | $1.18 |
| Operating margin | 24.9% | 25.4% | 22.4% | 29.8% |
- Quarterly trend: Q2 revenue rose 7.9% and net income rose 11.6% year over year. Higher revenue reflected the final phase of the 2021 Middlesex rate case increase, stronger contract customer demand, and the Pinelands rate increase. Operating costs and interest charges also increased.
- Six-month comparison: Revenue grew 6.7%, but net income declined 24.8%. The 2022 period included a $5.2 million gain on the sale of a regulated Delaware wastewater subsidiary; the 2023 period had no comparable gain. Interest expense increased $1.6 million, while operating and maintenance expense increased $2.8 million.
- Cash flow and investment: Six-month operating cash flow was $29.3 million, versus $26.9 million. Capital expenditures were $50.6 million, compared with $39.3 million. Investing cash use was $50.6 million; financing provided $21.9 million. Cash ended the period at $4.4 million.
- Debt and liquidity: Long-term debt was $350.4 million, with a further $17.5 million current portion and $23.5 million of notes payable. Cash and current assets were $4.4 million and $40.6 million, respectively, against current liabilities of $87.6 million. The company reported $116.5 million of available capacity under its $140 million credit lines; outstanding line borrowings carried a 6.24% weighted-average rate at June 30.
- Balance sheet growth: Total assets were $1.128 billion, up from $1.074 billion at year-end 2022. Utility plant, net, increased to $967.1 million from $920.6 million.
Outlook, developments and risks
- Middlesex expects approximately $101 million of capital spending in 2023, including about $50 million in the second half. It projects approximately $166 million of capital projects in 2024–2025 and a $268 million capital investment program for 2023–2025.
- In May 2023, Middlesex requested NJBPU approval for an approximately $34 million annual base water revenue increase. The outcome is uncertain; state law requires a decision within nine months of filing. Pinelands received approval for a combined $1.0 million annual base-rate increase effective April 15, 2023.
- The company estimates lead service line replacement costs of approximately $57 million to $95 million over nine years and has petitioned for related cost recovery. It also sought approval for a Distribution System Improvement Charge framework. These petitions remain subject to regulatory decisions.
- Middlesex completed and placed its permanent Park Avenue Wellfield treatment upgrades into operation in June 2023 and believes the treated water meets NJDEP PFOA standards. It is awaiting NJDEP confirmation under the Administrative Consent Order. Two PFOA-related class actions remain in early stages; the company says its insurer has acknowledged coverage of potential liability. A separate lawsuit against 3M had a trial date set for October 2, 2023.
- Management identifies weather, timely rate relief, cost management and customer growth as key drivers of results. It cites rising infrastructure and operating costs, interest rates, housing-market and supply-chain uncertainty, water quality and availability, regulatory outcomes, and access to capital among relevant risks. Management said the identified 2023 transition, regulatory, construction and financing matters were not expected to have a material adverse effect on revenue or earnings.
- CEO Dennis W. Doll announced plans to retire no earlier than December 31, 2023, subject to naming and transitioning a successor. The board is conducting a search.
- The filing reports no material change in risk factors from the 2022 Form 10-K. Management stated that disclosure controls were effective at quarter-end and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when regulators approve, modify, or reject Middlesex’s $34 million base-rate request, lead-line cost recovery, and DSIC-related filings.
- Actual spending, timing, and funding for the 2023–2025 capital program, and the effect of new debt and equity issuance on financing costs and shareholders.
- NJDEP confirmation of compliance and closure of the PFOA consent order, and developments in the PFOA lawsuits and 3M litigation.
- Whether higher operating costs, borrowing rates, and customer demand affect earnings and cash generation beyond the reported quarter.
- Progress on the CEO succession and the outcome of the pending Purchased Water Adjustment Clause matter, including the potential refund obligation.