Middlesex Water Company (NASDAQ: MSEX) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Middlesex owns and operates regulated water and wastewater utilities primarily in New Jersey and Delaware, and provides contract operations services. Regulated operations generated about 93% of 2023 revenue. Its largest systems serve approximately 61,000 retail customers in New Jersey and 59,000 in Delaware.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenue | $166.3 million | $162.4 million | +2.4% |
| Operating income | $39.2 million | $47.3 million | -17.1% |
| Net income | $31.5 million | $42.4 million | -25.7% |
| Diluted EPS | $1.76 | $2.39 | -26.4% |
| Cash from operations | $52.8 million | $61.4 million | Down $8.6 million |
| Capital expenditures | $90.2 million | $91.3 million | Down $1.2 million |
Operating margin was approximately 23.6% in 2023 versus 29.1% in 2022; 2022 included a $5.2 million gain on sale of a subsidiary. Excluding that gain, 2022 operating margin was approximately 25.9%. Net margin was approximately 19.0% versus 26.1%.
Fourth quarter: Revenue was $38.6 million versus $38.8 million in Q4 2022; operating income was $8.2 million versus $8.1 million; net income was $5.8 million versus $7.2 million. Diluted EPS was $0.32 versus $0.40.
Liquidity, debt and capital
- Cash and cash equivalents were $2.4 million at year-end. Operating cash flow less utility-plant expenditures was approximately negative $37.4 million.
- Long-term debt, including its current portion, was approximately $365.9 million; notes payable were $42.8 million. The weighted-average long-term debt rate was 3.65%. Total borrowings were higher than in 2022.
- The company had $140 million of bank lines, with $42.8 million drawn and $97.2 million available at year-end. It reported compliance with mortgage covenants.
- Contractual obligations totaled $771 million, including $365 million of long-term debt principal and $260 million of interest on long-term debt.
- Dividends paid on common stock were $1.2625 per share in 2023. The company raised $12.1 million through its investment plan.
Material changes and unusual items
- Revenue growth reflected rate increases at Middlesex and Pinelands, partly offset by lower demand and a Delaware rate reduction. Operations and maintenance expense rose $4.0 million, depreciation rose $2.2 million, and interest expense rose $3.8 million.
- The 2022 comparison benefited from a $5.2 million subsidiary-sale gain. In 2023, higher average debt and interest rates increased interest costs.
- A settlement with 3M provides $93.2 million in two installments: $23.3 million received in December 2023 and $69.9 million due in July 2024. Middlesex owes approximately $29.5 million in legal fees and expenses. Net proceeds available to the company, $63.6 million, were recorded as a regulatory liability at year-end.
- The Park Avenue treatment upgrades for PFOA were completed and operating in compliance in June 2023; the NJDEP closed its related consent order in October. Two related class-action lawsuits remain unresolved.
- Management identified material weaknesses in IT general controls over user access and change management, and in income-tax accounting for a non-routine transaction. Management and the auditor concluded internal control over financial reporting was not effective at December 31, 2023. The auditor gave an unqualified opinion on the financial statements.
Outlook, guidance and risks
- A New Jersey rate-case settlement concluded in February 2024 is expected to add $15.4 million to annual revenue effective March 1, 2024, based on a $563.1 million rate base and 9.6% authorized return on common equity. This is a post-year-end development, not 2023 revenue.
- Management projects $226 million of capital spending in 2024–2026, including $75 million in 2024. It expects operating costs to increase in 2024 and 2025 and said additional rate filings by Tidewater and Pinelands may be needed later in 2024. No earnings or EPS guidance was provided in the supplied filing text.
- Estimated lead-service-line replacement spending for Middlesex is $46 million–$77 million over nine years. The filing says eligible replacement costs can be recovered through surcharges or future base rates.
- Management cited weather, timely rate relief, cost control, and customer growth as key drivers. Cooler or wetter weather, lower water demand, housing-market weakness, inflation, interest costs, regulatory decisions, water quality requirements, supply availability, and access to capital could affect results.
- Tidewater’s permanent 6% base-rate reduction lowered 2023 annual revenue by approximately $2.1 million. Its new 3.71% distribution-system charge, effective January 2024, is expected to generate about $1.3 million annually.
- Middlesex’s CEO transition was announced: Nadine Leslie was named CEO effective March 1, 2024; Dennis Doll was expected to remain Board chair through the May 2024 annual meeting.
Important facts for investors to verify
- Whether the $69.9 million remaining 3M payment was received as scheduled and how settlement proceeds and legal costs are ultimately accounted for.
- Progress on remediation and independent testing of the disclosed internal-control material weaknesses.
- Realized revenue and earnings effects of the March 2024 rate increase, DSIC mechanisms, and any future Tidewater or Pinelands rate filings.
- Capital-spending execution, funding needs, debt levels, and interest expense against the $226 million 2024–2026 plan.
- Developments in the PFOA class actions and the Twin Lakes regulatory appeal; the filing does not predict the ultimate outcomes of the PFOA cases.
- Actual lead-service-line replacement costs, recovery timing, and any changes to the current $46 million–$77 million estimate.