Executive Summary / Key Takeaways

• Middlesex Water Company ($MSEX) is a long-standing, regulated water and wastewater utility with a stable business model, primarily serving New Jersey and Delaware. Its core investment thesis is built on consistent infrastructure investment, strategic acquisitions, and a constructive regulatory environment that supports rate base growth and cost recovery.
• The company is actively addressing stringent new federal PFAS regulations through significant capital investments in advanced treatment technologies, such as granular activated carbon (GAC) and ozone treatment, which enhance water quality and operational resilience. These investments are crucial for maintaining compliance and are expected to drive future rate increases.
• Recent financial performance for the nine months ended September 30, 2025, shows a 2.03% increase in total operating revenues to $147.72 million, driven by rate increases and customer growth in its regulated segment, despite some weather-related consumption declines. Net income for the period was $34.22 million, a slight decrease from the prior year, influenced by higher operating costs and changes in other income.
• Middlesex Water is in a heavy capital expenditure cycle, planning to invest approximately $93 million in 2025, with significant long-term debt and equity financing secured to support these crucial infrastructure upgrades and acquisitions. This investment phase is expected to bolster long-term operational resilience and justify future rate adjustments.
• The company's competitive advantages stem from its regulatory licenses, established regional infrastructure, and diversified service offerings, which create high barriers to entry. However, its smaller scale compared to national peers like American Water Works presents a vulnerability in terms of broader market reach and resource allocation.

A Century of Service: Middlesex Water's Foundation in Essential Utilities

Middlesex Water Company, established in 1897, has cultivated a deep-rooted presence in the essential utility sector, providing critical water and wastewater services across New Jersey and Delaware. The company's business model is predominantly regulated, ensuring a stable revenue stream from its core operations, which include collecting, treating, and distributing water for residential, commercial, industrial, and fire protection purposes. This foundational stability is a key differentiator in the broader market, offering investors a defensive play against economic volatility. The company's strategic approach is anchored in continuous infrastructure investment, selective acquisitions, and a proactive engagement with regulatory bodies to ensure timely cost recovery and sustainable growth.

The water utility industry is currently undergoing a significant transformation, driven by increasing demand, aging infrastructure, and evolving environmental regulations. Digitalization and automation are emerging as key solutions to improve efficiency and ensure sustainable resource use across the sector. Utilities are implementing advanced digital solutions, such as IoT sensors, data analytics platforms, and digital twins, to predict consumption, detect leaks, and optimize distribution networks. Furthermore, the growing demand for utilities due to the expansion of AI and data centers is projected to strain water resources, highlighting the critical need for advanced water management solutions. Middlesex Water's strategic initiatives are directly aligned with these industry trends, focusing on modernizing its systems to meet future challenges and capitalize on opportunities.

Technological Leadership in Water Quality and Infrastructure

Middlesex Water's commitment to technological advancement is most evident in its proactive response to increasingly stringent water quality regulations and its ongoing infrastructure modernization program. A critical area of focus is the treatment of Per- and Polyfluoroalkyl Substances (PFAS), often referred to as "forever chemicals." In April 2024, the United States Environmental Protection Agency (USEPA) finalized new drinking water regulations for PFAS, establishing maximum contaminant levels (MCLs) that are even lower than previous state standards.

In anticipation of these new federal standards, Middlesex Water began implementing its PFAS treatment strategy in 2023. The company has successfully deployed granular activated carbon (GAC) treatment at its Park Avenue wellfield facility in South Plainfield, New Jersey, to address PFOA, one of the prevalent PFAS compounds. This facility, upgraded with a $52 million investment, is now in service and treating groundwater to non-detectable levels of PFOA under current analytical technology, demonstrating a tangible and quantifiable benefit in water quality and regulatory compliance. Furthermore, the company is finalizing preliminary engineering studies and has begun preliminary design for PFAS treatment at its largest water treatment facility in New Jersey to ensure effective treatment approaches are implemented.

Beyond PFAS, Middlesex Water has invested $70 million in upgrades to its Carl J. Olsen Treatment Plant in Edison, New Jersey, which was completed and placed into service in 2021. This upgrade involved replacing sodium hypochlorite with ozone as the primary disinfectant, a more effective method globally. Ozone treatment not only inactivates pathogens but also improves water taste and odor, addresses emerging contaminants, and mitigates harmful disinfection byproducts that can form with chlorine. These investments in advanced treatment technologies are crucial for ensuring public health, maintaining compliance, and enhancing the overall quality and resilience of the water supply.

The company's "Water For Tomorrow®" initiative is a multi-year capital construction program encompassing numerous projects designed to upgrade and replace utility infrastructure and enhance asset integrity and reliability. This includes replacing approximately 20,000 linear feet of cast iron main in Woodbridge Township, designing and constructing new elevated water tanks in Delaware, and advancing its "Knocking Out Lead" initiative to eliminate utility and customer-owned lead and galvanized steel service lines by 2031. These strategic investments, totaling approximately $93 million in 2025, are not merely expenditures but represent a technological roadmap to build system resiliency, meet compliance requirements, and ensure long-term service quality for current and future generations of customers. The "so what" for investors is clear: these technological differentiators and infrastructure investments underpin the company's ability to secure rate increases, maintain its competitive moat, and drive sustainable financial performance in a highly regulated environment.

Competitive Landscape and Strategic Positioning

Middlesex Water operates within a competitive landscape characterized by a mix of larger, multi-state utilities and smaller, regional players. Its primary competitive advantages stem from its long-standing regulatory licenses, which often grant near-monopoly status in its service areas, and its established infrastructure network. This regulatory framework ensures a stable revenue stream and provides a degree of predictability in earnings, further bolstered by the company's ability to secure rate increases.

Compared to larger national competitors like American Water Works (AWK) and Essential Utilities (WTRG), Middlesex Water maintains a more focused regional presence, primarily in New Jersey and Delaware. While AWK and WTRG pursue aggressive expansion through mergers and acquisitions across a broader geographic footprint, Middlesex Water's strategy emphasizes reliable, localized service delivery and maintenance contracts in its non-regulated segment. This allows Middlesex Water to leverage its localized expertise and strong community relationships, potentially leading to greater operational efficiency in niche areas and fostering customer loyalty. However, its smaller scale can be a vulnerability, potentially leading to higher operational costs and limiting its ability to match the broader market reach and resource allocation of its larger rivals.

Middlesex Water's diversified revenue streams, with slightly more than 50% from residential customers and significant contributions from commercial, contract sales, and fire protection, also contribute to its stability. The company actively seeks to expand through selective acquisitions of investor and municipally-owned water and wastewater utilities, as demonstrated by the recent acquisition of Ocean View's water utility assets for approximately $4.60 million in April 2025, and the pending acquisition of Pinewood Acres' assets for $0.20 million. These "tuck-in" acquisitions are a key pillar of its growth strategy, complementing its organic growth from infrastructure investments.

The company's proactive engagement with regulatory mechanisms, such as the Distribution System Improvement Charge (DSIC) and Resiliency and Environmental System Improvement Charge (RESIC) programs, is a significant competitive strength. These programs allow for the recovery of prudently incurred costs associated with infrastructure investments and environmental compliance, directly supporting the company's financial health and ensuring a return on its capital expenditures. For instance, a New Jersey Board of Public Utilities (NJBPU) approved DSIC rate, effective June 1, 2025, is expected to generate $1.10 million in annual revenues.

Financial Performance and Liquidity

Middlesex Water Company's financial performance for the nine months ended September 30, 2025, reflects the ongoing investments in its utility plant and the impact of regulatory rate adjustments. Total operating revenues increased by $2.90 million, or 2.03%, to $147.72 million compared to the same period in 2024. This growth was primarily driven by base rate increases in both the Middlesex System (effective March 1, 2024) and the Tidewater System (effective July 3, 2025), along with increased DSIC and Lead Service Line (LSL) Recovery rates. These positive factors were partially offset by lower customer consumption due to unfavorable weather conditions. The regulated segment remains the dominant contributor, accounting for approximately 94.36% of total net income for the nine months ended September 30, 2025.

Net income for the nine months ended September 30, 2025, was $34.22 million, a decrease from $35.55 million in the prior year. This decline was influenced by several factors, including increased operations and maintenance expenses (up $0.30 million to $67.91 million) due to higher production costs from weather-driven lower water quality, increased main break repair costs, and higher labor costs. Depreciation expense also rose by $2.20 million to $20.17 million, reflecting a higher average utility plant in service. Interest charges decreased slightly by $0.20 million to $10.54 million due to lower average debt outstanding and lower average interest rates. Income taxes decreased by $2.40 million, primarily due to lower pre-tax income and higher income tax benefits associated with increased repair expenditures.

From a liquidity perspective, cash flows from operating activities increased by $6.80 million to $44.10 million for the nine months ended September 30, 2025. This improvement was largely a result of the approved base rate increases and increased DSIC. However, cash flows used in investing activities significantly increased by $26.80 million to $76.20 million, primarily due to increased utility plant expenditures and the acquisition of Ocean View's water utility assets. The company's financing activities provided $32.90 million in cash, an increase of $16.80 million, driven by higher borrowings under lines of credit and proceeds from common stock issuance through its At-the-Market (ATM) equity offering program.

Middlesex Water funds its substantial capital program through a combination of internally generated funds, short-term and long-term debt, and equity issuances. The company strategically utilizes State Revolving Fund (SRF) loan programs, which offer interest rates typically below broader financial markets. In October 2025, Middlesex closed on a $30 million private placement of First Mortgage Bonds at 5.99% interest, due 2055, to repay short-term borrowings and for general corporate purposes. The company has regulatory approval to borrow up to $300 million through December 31, 2025, and an additional $260 million from January 2026 through December 2028, to support its multi-year capital construction program. Furthermore, an ATM Equity Offering Sales Agreement allows for up to $110 million in gross sales of common stock, with $89.40 million remaining as of September 30, 2025, providing flexibility to fund capital expenditures and maintain a balanced capital structure.

Outlook and Key Risks

Middlesex Water's outlook is fundamentally tied to its ability to secure timely rate relief, manage costs effectively, and achieve customer growth, while also being influenced by weather patterns. The company anticipates operating costs to increase in 2025 and 2026 across various categories, necessitating continued efforts to streamline operations. Its multi-year capital construction program, with an estimated $93 million investment in 2025, is a significant driver of future rate increase requests. While organic residential customer growth in the Tidewater system was approximately 3.50% in 2024, evolving economic conditions may challenge this trajectory. Analysts project modest EPS growth of 3-5% annually, reflecting the capital-intensive nature of the utility business and the need for continuous investment.

The company's strategic pillars for its "MWC 2030 Vision" include employee satisfaction, performance efficiency, safety and compliance, unparalleled service quality, efficiency through innovation, enhanced digital experience, infrastructure investment, tuck-in acquisitions, and a constructive regulatory environment. These initiatives underscore a forward-looking approach to operational excellence and sustainable growth.

However, several risks warrant investor attention. General economic conditions, including tariffs, and increased competition in non-franchised markets could impact performance. The ability to control operating expenses, which can be influenced by factors beyond the company's control, remains a challenge. New or modified water quality standards, such as the evolving PFAS regulations, require substantial capital outlays and ongoing compliance efforts. Weather variations, including climate variability, can affect customer demand and operational costs. Financial and operating risks associated with acquisitions, cyber-attacks, and the availability and cost of capital resources are also pertinent. While the company manages interest rate risk through fixed-rate long-term debt and mitigates commodity price risk through contractual arrangements and rate recovery, these factors still present potential headwinds.

Conclusion

Middlesex Water Company stands as a testament to resilience and strategic foresight in the essential water utility sector. Its long history, coupled with a robust regulated business model, provides a stable foundation for investors. The company's proactive and substantial investments in advanced water treatment technologies, particularly for PFAS removal and ozone disinfection, are not merely compliance measures but strategic differentiators that enhance water quality, operational reliability, and public trust. These technological advancements, alongside its ongoing infrastructure modernization program, are critical drivers for future rate base growth and the justification for necessary rate increases.

While the utility sector faces challenges from rising operating costs and evolving environmental mandates, Middlesex Water's established regulatory relationships and strategic approach to capital recovery position it favorably. The company's disciplined acquisition strategy further bolsters its regional footprint and growth prospects. Despite its smaller scale compared to some national peers, Middlesex Water leverages its localized expertise and diversified service offerings to maintain a strong competitive standing. For discerning investors, Middlesex Water Company represents a compelling opportunity for stable, long-term growth, underpinned by essential services, technological leadership in water quality, and a commitment to prudent infrastructure investment in a critical industry.