Middlesex Water Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Middlesex is a regulated water and wastewater utility operating primarily in New Jersey and Delaware, with a smaller non-regulated contract-services business.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $39.7 million | $36.7 million | $75.9 million | $69.2 million |
| Operating income | $10.1 million | $9.8 million | $22.6 million | $15.4 million |
| Net income | $8.9 million | $10.9 million | $21.0 million | $17.8 million |
| Basic EPS | $0.50 | $0.62 | $1.19 | $1.02 |
| Diluted EPS | $0.50 | $0.62 | $1.18 | $1.01 |
- Q2 revenue rose 8.1%, while operating income increased 2.8%; operating margin was approximately 25.4%, compared with 26.7% a year earlier. Net income fell 18.8%, primarily reflecting a much smaller income-tax benefit than in Q2 2021.
- Six-month revenue rose 9.6% and net income rose 17.6%. Operating income included a $5.2 million pre-tax gain on the January sale of a regulated Delaware wastewater subsidiary; excluding that gain, six-month operating income was $17.4 million, up from $15.4 million.
- Revenue growth primarily reflected the Middlesex System’s approved rate increase. Higher wages, employee benefit costs, chemical costs, depreciation and taxes partly offset the revenue increase. Non-regulated revenue declined.
- Six-month operating cash flow was $26.9 million, versus $14.6 million. Investing cash outflow was $36.2 million, including $39.3 million of utility-plant expenditures; financing cash inflow was $10.1 million. Cash ended the period at $4.3 million.
- At June 30, total capitalization was $693.1 million, including $305.4 million of long-term debt. The company also had $27.5 million of short-term borrowings, $7.8 million of current long-term debt, and $112.5 million of available capacity on $140 million in credit lines. The filing states the company was in compliance with mortgage covenants.
- Utility plant, net, was $878.9 million. Current liabilities were $78.8 million, up from $56.6 million at year-end 2021.
Material developments, outlook and risks
- A New Jersey rate settlement is expected to add $27.7 million in annual operating revenue: $20.7 million took effect January 1, 2022, with the remaining $7.0 million scheduled for January 1, 2023. Middlesex also requested approval to recover $3.7 million of treated-water costs through its Purchased Water Adjustment Clause; the outcome is uncertain.
- The Delaware Public Advocate petitioned to reduce Tidewater’s rates, alleging earnings above its authorized return. Tidewater disputes the request and indicated it would likely seek a base-rate increase in Q1 2023.
- The company forecast approximately $90 million of 2022 capital spending, including about $51 million for the remainder of the year, and projected approximately $232 million of investment for 2022–2024. Funding sources may include operating cash, debt, credit lines, state revolving-fund loans and equity issuance. The 3% Investment Plan stock-purchase discount was scheduled to expire August 1, 2022.
- Phase 1 of advanced treatment at the Park Avenue Wellfield was completed in June. The company reported that treated water being introduced into the system met state and federal standards, including the PFOA standard, and that it awaited NJDEP confirmation of sampling results. The full treatment project was not expected to be complete until mid-2023.
- Two PFOA-related class actions seek damages and other relief; one received class certification in April. Middlesex impleaded 3M in one case and separately sued 3M. The company’s insurer acknowledged coverage of potential liability, but outcomes remain uncertain. Middlesex also petitioned for regulatory-asset treatment of interim compliance costs; NJBPU action was pending. The filing says penalties are considered unlikely but describes potential penalties of up to $25,000 per day per offense if compliance requirements are not maintained.
- Management cited weather and water demand, timely rate relief, cost control and customer growth as key earnings drivers. After extended dry, hot weather, the company asked Middlesex System customers in July to voluntarily limit non-essential water use. Inflation, supply-chain delays, construction timing, COVID-19 effects, water quality requirements and regulatory decisions are among the stated risks. No specific earnings or EPS guidance was provided.
Important facts for investors to verify
- Whether NJDEP confirmed compliance with the PFOA standard and whether treatment upgrades remain on schedule and within the projected capital budget.
- Developments in the PFOA litigation, insurance coverage and the NJBPU decision on interim compliance-cost recovery.
- Outcomes of Middlesex’s $3.7 million PWAC request and the Delaware rate-reduction petition, as well as Tidewater’s potential 2023 rate filing.
- Whether planned capital spending, debt and equity financing, and operating cash flow support liquidity and dividend needs.
- How customer demand, dry-weather conditions, inflation, labor and chemical costs affect margins after the 2022 rate increase.