Middlesex Water Company — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a quarterly filing; selected fourth-quarter results are included below. Middlesex owns and operates regulated water and wastewater utilities mainly in New Jersey and Delaware, alongside contracted municipal utility operations. Regulated businesses generated approximately 91% of 2021 revenue.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $143.1 million | $141.6 million | +1.1% |
| Operating income | $33.2 million | $37.4 million | -11.2% |
| Net income | $36.5 million | $38.4 million | -4.9% |
| Basic / diluted EPS | $2.08 / $2.07 | $2.19 / $2.18 | Lower |
| Operating margin | 23.2% | 26.4% | Lower |
| Operating cash flow | $33.0 million | $53.4 million | -$20.3 million |
| Capital expenditures | $79.4 million | $105.6 million | -$26.2 million |
Revenue growth reflected Tidewater customer growth and higher water demand, partly offset by lower Middlesex demand and a Tidewater customer refund. Operating and maintenance expense rose $2.9 million, and depreciation increased $2.6 million as utility plant in service expanded. Net income benefited from a $5.5 million income tax benefit; the filing attributes substantially reduced tax expense to tax treatment of repair expenditures. Cash provided by operations fell mainly because of payment timing and higher income tax and interest payments.
At year-end, cash and cash equivalents were $3.5 million; current assets were $34.4 million and current liabilities $56.6 million. Long-term debt was $306.5 million, with $6.7 million current maturities and $13.0 million in notes payable. Available credit lines were $97 million at year-end; total availability increased to $140 million in January 2022. The company reported compliance with its mortgage covenants. Common dividends paid were $1.1075 per share, versus $1.0414 in 2020.
Fourth-quarter 2021 revenue was $34.0 million, operating income $6.3 million and net income $7.2 million, compared with $34.6 million, $8.3 million and $8.3 million, respectively, in fourth-quarter 2020. Diluted EPS was $0.41 versus $0.47.
Material changes and financing
- Middlesex’s December 2021 New Jersey rate settlement is expected to add $27.7 million to annual operating revenues: $20.7 million effective January 1, 2022 and $7.0 million effective January 1, 2023. The settlement authorizes a 9.6% return on common equity on $513.5 million of invested capital and resets the purchased-water adjustment clause to zero.
- Tidewater’s distribution-system improvement charge was reset to zero effective April 1, 2021 after the Delaware regulator found its earned return exceeded the authorized return. The company recorded a $0.8 million after-tax refund reserve and credited customers.
- New 2021 financing included $45.5 million of first mortgage bonds at 2.90% due 2051, $19.5 million at 2.79% due 2041, and a $20 million Tidewater loan at 3.94% due 2046. Middlesex also refinanced bonds and used borrowing proceeds to reduce credit-line balances.
- The company issued $3.8 million of common stock through its investment plan in 2021. A 3% purchase discount began in September 2021 and was scheduled to run until 200,000 shares were purchased or August 1, 2022.
Outlook, risks and contingencies
- Management projected approximately $229 million of capital investment for 2022–2024, including $39 million for PFAS treatment upgrades, $33 million for the Middlesex water-main replacement program, and $13 million for elevated storage tanks. Planned 2022 capital expenditures were approximately $88 million.
- Management said 2022 results depend on weather, timely rate relief, cost control and customer growth; it anticipated operating-cost increases and noted that weather could reduce water demand. Tidewater residential customer growth was expected to be comparable to 2021’s approximately 6%.
- In September 2021, New Jersey regulators issued a notice concerning PFOA above the state’s new standard at the Park Avenue Wellfield Treatment Plant. The company took the plant offline in December and secured alternate supplies. The notice required compliance by September 7, 2022; permanent treatment upgrades were expected to be completed by mid-2023. Management said the exceedance was not characterized as an acute health emergency.
- Two PFOA-related class actions were filed in 2021. Their outcomes are uncertain; the insurer acknowledged coverage of potential liability. The company also has a lawsuit against the party it believes caused the PFAS contamination. Management said penalties could reach $25,000 per day per offense if the company fails to meet the notice requirements; it considers such penalties unlikely.
- COVID-19 had not materially disrupted operations or construction through the report date, but economic effects and customer collections remained uncertain. Regulators allowed tracking of incremental costs for possible future rate recovery; no such costs had been deferred.
- The sale of regulated Delaware wastewater subsidiary TESI for $6.4 million in cash and other consideration closed January 14, 2022. The company retained its Delaware contract-operations business.
- A Pennsylvania proceeding concerning Twin Lakes included a disputed $1.7 million escrow requirement; a court granted a stay pending review. The company stated Twin Lakes was not material to its financial results, assets or obligations.
Key investor verification points
- Track the timing, realized revenue and customer impacts of the two-phase New Jersey rate increase and the reset of the purchased-water adjustment clause.
- Verify progress toward the September 2022 PFOA compliance deadline, treatment-project timing and cost recovery, and monitor the class actions and related claims.
- Assess whether operating cash generation and available financing can support the $229 million 2022–2024 capital program, debt service and dividends.
- Review the causes of the decline in operating income and operating cash flow, including expense growth, payment timing and the tax benefit’s effect on reported net income.
- Confirm the final outcome of the Twin Lakes proceeding and the financial effects, if any, of the TESI sale.