Middlesex Water Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, with a smaller non-regulated contract-services business.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $39.9 million | $39.9 million | $109.1 million | $107.0 million |
| Operating income | $11.4 million | $13.2 million | $26.9 million | $29.1 million |
| Net income | $11.5 million | $12.7 million | $29.3 million | $30.1 million |
| Diluted EPS | $0.65 | $0.72 | $1.66 | $1.71 |
| Operating margin | 28.7% | 33.0% | 24.6% | 27.2% |
Q3 revenue was essentially flat; nine-month revenue increased 2.0%. Operating income fell 13.3% for the quarter and 7.6% year to date, as higher operating and depreciation costs outweighed revenue growth. Net income declined 9.9% in Q3 and 2.7% year to date. The reported income-tax benefit was $1.1 million for Q3 and $3.7 million for the nine-month period; pretax income was lower than in the comparable periods.
Cash flow and investment: Nine-month operating cash flow was $18.6 million, down from $37.3 million, primarily reflecting payment timing and higher income-tax and interest payments. Capital expenditures were $61.2 million, versus $70.8 million. Cash and cash equivalents were $5.3 million at September 30, 2021.
Debt and liquidity: The company reported $266.5 million of long-term debt, $6.8 million of current maturities, and $50.0 million of notes payable, versus $273.2 million, $7.3 million, and $2.0 million, respectively, at year-end 2020. It had $60.0 million available under $110.0 million of credit lines; the $50.0 million outstanding was due to mature in October and November 2021 and was expected to be renewed or rolled over if needed. Current assets were $40.6 million against current liabilities of $92.5 million.
Common dividends paid were $14.3 million in the first nine months. The quarterly common dividend was $0.2725 per share, up from $0.2563 a year earlier.
Material changes and management commentary
- Q3 operating revenue was nearly unchanged: lower weather-related demand in Middlesex’s New Jersey system was offset in part by customer growth in Tidewater’s Delaware system. Nine-month revenue growth reflected higher Tidewater customers and consumption and the Highland Park contract; a Tidewater system-improvement-charge refund partly offset these increases.
- Year-to-date operations and maintenance expense rose $2.5 million, and depreciation rose $1.7 million, including higher labor and water-main-break costs and a larger utility-plant base. Management also cited insurance, consulting, fuel, and technology costs.
- Management reduced its 2021 construction-program forecast to $77 million because of schedule coordination; approximately $61 million had been spent through September. It projected $175 million–$200 million of capital expenditures in 2022–2023, subject to budget approval and project timing.
- Management identified weather, timely rate relief, cost management, and customer growth as key drivers of results. Tidewater residential customer growth was expected to continue at the 5% pace achieved in 2020. The company said COVID-19 had not materially disrupted operations or construction to date, but economic effects and customer payment risks remained uncertain.
Guidance, regulatory matters, and risks
- New Jersey rate request: Middlesex filed in May 2021 for approximately $31 million in annual base-water-revenue increases. The outcome and timing were uncertain. A separate purchased-water adjustment adding $1.1 million of annual recovery became effective April 4, 2021.
- Water-quality compliance: In October, the company notified New Jersey customers that September PFOA levels at its Park Avenue Treatment Plant exceeded the new state standard. The filing states the standard is 14 parts per trillion, but does not provide a clear value for the measured exceedance. The company said the water met the federal health advisory level of 70 ppt and the former state guidance level of 40 ppt; neither the state nor the company characterized the exceedance as an acute health emergency. The notice requires compliance by September 7, 2022, while a treatment facility was expected to be completed in mid-2023. Interim compliance costs could be significant and may not be recoverable through rates; potential penalties were described as up to $25,000 per day per offense.
- Subsidiary sale: The Delaware regulator approved the proposed sale of TESI, a regulated wastewater subsidiary, for $6.4 million. The transaction was expected to close before year-end 2021; it was not yet completed as of the filing.
- Financing and capital program: Middlesex expected to refinance up to $45.5 million of bonds in November 2021 at 2.90%, and expected a further $19.5 million private-placement borrowing at 2.79%. Tidewater borrowed $20.0 million in September at 3.94%. Construction spending, financing availability, interest rates, and regulatory recovery remain relevant risks.
- Other uncertainties: The company cited regulatory decisions, changing water-quality standards, water supply, weather, operating costs, customer credit and COVID-19 effects. COVID-19-related costs were being tracked for potential future recovery, but regulators had not set recovery procedures or a timetable. The filing reported no legal proceedings and said other known contingencies were not expected to have a material adverse effect.
Investor verification priorities
- Check the actual PFOA test result, interim compliance plan, remediation costs, and potential rate recovery or enforcement developments.
- Track the $31 million New Jersey rate case and the timing and amount of any regulatory decision.
- Confirm completion and proceeds of the TESI sale, and any resulting gain, loss, or change to reported results.
- Verify refinancing and rollover of near-term borrowings, and funding for the capital program, including projected 2022–2023 spending.
- Monitor operating-cost trends, cash generation, customer collections, and the effect of capital investment on future earnings and dividends.