Item 1A. Risk Factors
ITEM 1A. RISK FACTORS.
Operational Risks
Weather conditions and overuse of underground aquifers may interfere
with our sources of water, demand for water services and our ability to supply water to customers.
Our ability to meet current and future water demands
of our customers depends on the availability of an adequate supply of water. Unexpected conditions may interfere with our water supply
sources. Drought and overuse of underground aquifers may limit the availability of ground and/or surface water. Freezing weather may also
contribute to water transmission interruptions caused by water main breakage. Any interruption in our water supply could cause a reduction
in our revenue and profitability. These factors may adversely affect our ability to supply water in sufficient quantities to our customers.
Governmental drought restrictions may result in decreased customer demand for water services and can adversely affect our revenue and
earnings.
Our water sources or water service provided
to customers may become contaminated by naturally-occurring or man-made compounds and events. This may cause disruption in services and
impose operational and regulatory enforcement costs upon us to restore the water to required levels of quality as well as may damage our
reputation and cause private litigation claims against us .
Our sources of water or water in our distribution
systems may become contaminated by naturally-occurring or man-made compounds or other events. In the event that any portion of our water
supply sources or water distribution systems is contaminated, we may need to interrupt service to our customers until we are able to remediate
the contamination or substitute the flow of water from an uncontaminated water source through existing interconnections with other water
purveyors or through our transmission and distribution systems, where possible. We may also incur significant costs in treating any contaminated
water, or remediating the effects on our treatment and distribution systems, through the use of our current treatment facilities, or development
of new treatment methods. Our inability to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated
water supply in a cost-effective manner, may reduce our revenues or increase our expenses and make us less profitable.
We may be unable to recover costs associated with
treating water supplies through rates or, recovery of these costs may not occur in a timely manner. In addition, we could be subject to
claims for damages arising from government enforcement actions or legal actions arising out of interruption of service or perceived human
exposure to hazardous substances in our drinking water and water supplies. Such costs could adversely affect our financial results.
Contamination of the water supply or the water
service provided to our customers could result in substantial injury or damage to our customers, employees or others and we could be exposed
to substantial claims and litigation, which are inherently subject to uncertainties and are potentially subject to unfavorable regulatory
and/or legal
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actions. Negative impacts to our profitability and/or our reputation may occur even if we are not responsible for the contamination
or the consequences arising out of human exposure to contamination or hazardous substances in the water supplies. Pending or future claims
against us could have a material adverse impact on our financial condition, results of operations and cash flows.
The necessity for ongoing physical and technological security has
resulted, and may continue to result, in increased operating costs.
Because of physical and technological threats
to the health and security of the United States of America, we employ procedures to review and modify security measures. We provide ongoing
training and communications to our employees about threats to our water supply, our assets and related systems and our employees’
personal safety. We have incurred, and will continue to incur, costs for security measures in efforts to protect against such risks.
Climate variability may cause weather volatility
in the future, which may impact water usage and related revenue or, may require additional expenditures to reduce risk associated with
any increasing storm, flood, drought or other weather occurrences.
Increased climate variability may cause increased
precipitation and flooding, increased frequency and severity of storms and other weather events, potential degradation of water quality,
decreases in available water supply, changes in water usage patterns and disruptions in service. Because of the uncertainty of weather
volatility related to climate variability, we cannot predict its potential impact on our financial condition, results of operations, cash
flows and liquidity. Although some or all potential expenditures and costs with respect to our regulated businesses could be recovered
through rates we charge to our customers, there can be no assurance that the NJBPU or the DEPSC would authorize recovery of such costs,
in whole or in part.
Regulatory Risks
Our revenue and earnings depend on the rates
we charge our customers. We cannot raise utility rates in our regulated businesses without petitioning the appropriate Public Utility
Commissions. If these agencies modify, delay or deny our petition, our revenues will not increase and our earnings will decline unless
we are able to reduce costs without degrading service quality.
The NJBPU regulates our public utility companies
in New Jersey with respect to rates and charges for service, classification of accounts, awards of new service territory, acquisitions,
financings and other matters. That means, for example, that we cannot raise the utility rates we charge to our customers without first
petitioning the NJBPU and navigating a lengthy administrative process. Similarly, the DEPSC regulates our public utility companies in
Delaware. We cannot provide assurance as to when we will request approval for any such matter, nor can we predict whether these Public
Utility Commissions will approve, deny or reduce the amount of such requests.
Certain costs are not completely within our control.
The failure to obtain any rate increase would prevent us from increasing our revenues and, unless we are able to reduce costs without
degrading service quality, would result in reduced earnings.
We are subject to environmental laws and regulations,
including water quality and wastewater effluent quality regulations, as well as other state and local regulations. Compliance with those
laws and regulations requires us to incur costs and we are subject to fines or other sanctions for non-compliance.
Government environmental regulatory agencies regulate
our operations in New Jersey and Delaware with respect to water supply, treatment and distribution systems and the quality of water. Government
environmental regulatory agencies also regulate our operations in New Jersey and Delaware with respect to wastewater collection, treatment
and disposal.
Government environmental regulatory agencies’
regulations relating to water quality require us to perform expanded types of testing to ensure our water meets state and federal water
quality requirements. We are subject to USEPA regulations under the Federal Safe Drinking Water Act and under the Federal Clean Water
Act regarding
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wastewater services. Regulations under the Safe Drinking Water Act include the Lead and Copper Rule, the maximum contaminant
levels established for various volatile organic compounds, the Federal Surface Water Treatment Rule and the Total Coliform Rule. There
are also similar NJDEP regulations for our New Jersey water systems. The NJDEP and DEDPH monitor our activities and review the results
of water quality tests we perform for adherence to applicable regulations. In addition, Government Environmental Regulatory Agencies are
continually reviewing regulations governing the limits of certain organic compounds found in the water as byproducts of treatment.
We are also subject to regulations related to
fire protection services in New Jersey and Delaware. In New Jersey there is no state-wide fire protection regulatory agency. However,
New Jersey regulations exist as to the size of piping required regarding the provision of fire protection services. In Delaware, fire
protection is regulated statewide by the Office of State Fire Marshal.
The cost of compliance with the water and wastewater
effluent quality standards depends in part on the limits set in the regulations and on the methods selected to comply with these standards.
If new or more restrictive standards are imposed, the cost of compliance could increase and therefore, have an adverse impact on our revenues
and results of operations if we cannot recover those costs through the rates we charge our customers. The cost of compliance with fire
protection requirements could also increase and make us less profitable if we cannot recover those costs through our rates charged to
our customers.
The Company must comply with various environmental
laws and regulations promulgated by the USEPA, NJDEP and other governmental agencies, including the Toxic Catastrophe Prevention Act,
the Spill Prevention, Control, and Countermeasure Rule and the Discharge Prevention Program of the New Jersey Spill Compensation and Control
Act. If we fail to comply with environmental or other laws and regulations to which our business is subject, we could be fined or subject
to other sanctions, which could adversely impact our business or results of operations.
Financial Risks
We depend upon our ability to raise money in the capital markets
to finance some of the costs of complying with laws and regulations, including environmental laws and regulations or to pay for some of
the costs of improvements to or the expansion of our utility system assets. Our regulated utility companies cannot issue debt or equity
securities without prior regulatory approval.
We require financing from external sources to
fund the ongoing capital program for the improvement in our utility system assets and for planned expansion of those systems. We expect
to spend approximately $226 million for capital projects through 2026. We must obtain prior approval from our economic regulators to sell
debt or equity securities to raise capital for these projects. If sufficient capital is not available, or the cost of capital is too high,
or if the regulatory authorities deny our petition to sell debt or equity securities, we may not be able to meet the costs of complying
with environmental laws and regulations or the costs of improving and expanding our utility system assets to the level we believe operationally
prudent. This may result in the imposition of fines from environmental regulators or restrictions on our operations which could curtail
our ability to upgrade or replace utility system assets.
We face competition from other utilities and
service providers which might hinder our growth opportunities and mitigate our future profitability.
We face risks of competition from other utilities
or other entities authorized by federal, state or local agencies to expand rate-regulated or contracted utility services. Once a state
utility regulator grants a franchise to a public utility to serve a specific territory, that utility effectively has an exclusive right
to service that territory. Although a new franchise offers some protection against competitors, the pursuit of franchises is often competitive,
particularly in Delaware, where new franchises may be awarded to utilities based upon competitive negotiation. Competing entities have
challenged, and may challenge in the future, our applications for new franchises. Also, third parties entering into agreements to operate
municipal utility systems may adversely affect the management of our long-term agreements to supply water or wastewater services on a
contract basis to those municipalities, which could adversely affect our financial results.
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We have short-term and long-term contractual obligations for water,
wastewater and storm water system operation and maintenance under which we may incur costs in excess of payments received.
USA-PA and USA operate and maintain water and
wastewater systems for three New Jersey municipalities under 10-year contracts expiring in 2028, 2030 and 2032, respectively. These contracts
do not protect us against incurring costs in excess of revenues we earn pursuant to the contracts. There can be no absolute assurance
we will not experience losses resulting from these contracts. Losses under these contracts, or our failure or inability to perform or
renew such agreements, may have a material adverse effect on our financial condition and results of operations.
Capital market conditions and key assumptions
may adversely impact the value of our postretirement benefit plan assets and liabilities.
Market factors can adversely affect the rate of
return on assets held in trusts to satisfy our future postretirement benefit obligations, as well as negatively affect interest rates,
which impacts the discount rates used in the determination of our postretirement benefit actuarial valuations. In addition, changes in
demographics, such as increases in life expectancy assumptions, can increase future postretirement benefit obligations. Any negative impact
to these factors, either individually or a combination thereof, may have a material adverse effect on our financial condition and results
of operations.
An element of our growth strategy is the acquisition
of water and wastewater assets, operations, contracts or companies. Any pending or future acquisitions we decide to undertake will involve
risks.
The acquisition and/or operation of water and
wastewater systems is an element of our growth strategy. This strategy depends on identifying suitable opportunities that meet our risk/reward
profile and reaching mutually agreeable terms with acquisition candidates or contract parties. Further, acquisitions may result in dilution
in the value of our equity securities, incurrence of debt and contingent liabilities and fluctuations in financial results. In addition,
the assets, operations, contracts or companies we acquire may not achieve the revenues and profitability projected.
Our ability to achieve organic customer growth in our market area
is dependent on the residential building market. New housing starts and home sale closings are one element that impacts our rate of growth
and therefore, may not meet our expectations.
We expect our revenues to increase from customer
growth for our regulated water operations as a result of anticipated construction, sale and close of new housing units. If housing starts
decline, or do not increase as we have projected, or home sales closing cycle times increase as a result of economic conditions or otherwise,
the timing and extent of our organic revenue growth may not meet our expectations, our deferred project costs may not produce revenue-generating
projects in the timeframes anticipated and our financial results could be negatively impacted.
There can be no assurance we will continue to pay dividends in the
future or, if dividends are paid, that they will be in amounts similar to past dividends.
We have paid dividends on our common stock each
year since 1912 and have increased the amount of dividends paid each year since 1973. Our earnings, financial condition, capital requirements,
applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to
pay dividends and the amount of those dividends. There can be no assurance we will continue to pay dividends in the future or, if dividends
are paid, that they will be in amounts similar to past dividends.
If we are unable to pay the principal and interest
on our indebtedness as it comes due or we default under certain other provisions of our loan documents, our indebtedness could be accelerated
and our results of operations and financial condition could be adversely affected.
Our ability to pay the principal and interest
on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by many factors,
some of which are beyond our control.
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We believe cash generated from operations and,
if necessary, borrowings under existing credit facilities, will be sufficient to enable us to make our debt payments as they become due.
If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may
be on terms that are less favorable than we desire.
No assurance can be given that any refinancing
or sale of equity will be possible when needed, or that we will be able to negotiate acceptable terms. In addition, our failure to comply
with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a
default under these documents, which could result in an acceleration of our indebtedness.
Our business is subject to seasonal fluctuations,
which could affect demand for our water service and our revenues.
Demand for our water during the warmer months
is generally greater than during colder months due primarily to additional consumption of water in connection with irrigation systems,
swimming pools, cooling systems and other outdoor water use. Throughout the year, and particularly during typically warmer months, demand
may vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal,
or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.
General economic conditions may materially
and adversely affect our financial condition and results of operations.
Adverse economic conditions could negatively impact
our customers’ water usage demands, particularly the level of water usage demand by our commercial and industrial customers in our
Middlesex System. If water demand by our commercial and industrial customers in our Middlesex System decreases, our financial condition
and results of operations could be negatively impacted until completion of a subsequent base rate filing.
The current concentration of our business in
central New Jersey and in Delaware makes us susceptible to adverse developments in local regulatory, economic, demographic, competitive
and weather conditions.
Our Middlesex System provides water services to
customers located primarily in eastern Middlesex County, New Jersey. Water service is provided under wholesale contracts to the Townships
of Edison, East Brunswick and Marlboro, the Borough of Highland Park, the Old Bridge Municipal Utilities Authority and the City of Rahway.
We also provide water services to customers in the State of Delaware. Our revenues and operating results are therefore subject to local
regulatory, economic, demographic, competitive and weather conditions in a relatively concentrated geographic area. A change in any of
these conditions could make it more costly for us to conduct our business.
We are subject to anti-takeover measures that
may be used to discourage, delay or prevent changes of control that might benefit non-management shareholders.
Subsection 10A of the New Jersey Business Corporation
Act, known as the New Jersey Shareholders Protection Act, applies to us. The Shareholders Protection Act deters merger proposals, tender
offers or other attempts to effect changes in control that are not approved by our Board of Directors. In addition, we have a classified
Board of Directors, which means only a portion of the Director population is elected each year. A classified Board can make it more difficult
for an acquirer to gain control of the Company by voting its candidates onto the Board of Directors and may also deter merger proposals
and tender offers. Our Board of Directors also has the ability, subject to obtaining NJBPU approval, to issue one or more series of preferred
stock having such number of shares, designation, preferences, voting rights, limitations and other rights as the Board of Directors may
fix. This could be used by the Board of Directors to discourage, delay or prevent an acquisition the Board of Directors determines is
not in the best interest of the common shareholders.
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We identified material weaknesses in our internal
controls which, if not remediated appropriately or timely, could result
in loss of investor confidence and adversely impact our stock price.
Internal controls related to the operation
of technology systems are critical to maintaining adequate internal control over financial reporting. During the fourth quarter of
2023, management identified a material weakness in internal control related to ineffective information technology general controls
(ITGCs) in the areas of user access and change management over certain information technology (IT) systems that support the
Company’s financial reporting processes. Certain of those controls were found to be deficient because of a lack of
sufficient IT control processes designed to prevent or detect unauthorized changes in applications and data in selected IT
environments. In December 2023, management implemented various auditing and monitoring solutions that provide greater transparency
into changes made within our IT systems. These control solutions are supported by a timely review process that focuses on the proper
authorization and approval of IT system changes. Due to the timing of implementing the solutions, the controls implemented did not
operate over a sufficient time period to adequately test and validate the remediation and reassess other ITGCs, which may require
further remediation actions. In addition, there were ineffective controls related to income tax
accounting for a non-routine transaction, which management has identified as a material weakness in internal controls over financial reporting.
Therefore, management concluded that our internal control over financial
reporting was not effective as of December 31, 2023. Until remediation measures are completed, fully tested and determined effective,
we will not be able to conclude that the material weaknesses have been remediated. If we are unable to determine that our remediation
measures are effective or otherwise remediate the material weaknesses, or are otherwise unable to maintain effective internal control
over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately,
and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or
investigations requiring management resources and payment of legal and other expenses, negatively affecting investor confidence in our
financial statements and adversely impacting our stock price.
General Risks
We rely on our information technology systems to help manage our
operations.
Our information technology systems require periodic
modifications, upgrades and/or replacement which subject us to costs and risks including potential disruption of our internal control
structure, substantial unanticipated capital expenditures, additional operating expenses, retention of sufficiently skilled personnel
and other risks in transitioning to new systems or integrating new systems. A failure to modify, upgrade or replace our information technology
systems could have an adverse impact on our business. In addition, challenges implementing new technology systems may cause disruptions
in our business operations and have an adverse effect on our business operations.
Our information technology systems may be subject to physical and
cyber attacks.
We rely on our computer, information and communications
technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting
and, in some cases, the monitoring and operation of our operating facilities. Our computer and communications systems and operations
could be damaged or interrupted by natural disasters, cyber-attacks, power loss and internet, telecommunications or data network failures
or acts of war or terrorism or similar events or disruptions. Any of these or other events could cause service interruption, delays
and loss of critical data or, impede aspects of operations and therefore, adversely affect our financial results.
Cyber-attacks could result in the loss, or compromise,
of customer, financial or operational data, disruption of billing, collections or normal field service activities, disruption of electronic
monitoring and control of operational systems and delays in financial reporting and other management functions. Possible impacts associated
with a cyber-incident may include remediation costs related to lost, stolen, or compromised data, repairs to data processing systems,
increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulations, including
standards for drinking water, litigation and reputational damage.
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We depend significantly on the technical and
management services of our team, and the departure of any of certain persons could cause our operating results to temporarily be short
of our expectations.
Our success depends significantly on the continued
individual and collective contributions of our team. If we lose the services of certain members of our team, or are unable to attract
and retain qualified personnel in key roles, our operating results could be negatively impacted.