SEC Filing - Middlesex Water Company

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MIDDLESEX WATER CO

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ___________to ___________

Commission File Number 0-422

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey	22-1114430
(State of incorporation)	(IRS employer identification no.)

485C Route One South, Iselin, New Jersey 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	MSEX	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐
	Smaller reporting company ☐		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No ☒

The number of shares outstanding of each of the registrant's classes of common stock, as of October 29, 2020: Common Stock, No Par Value: 17,469,410 shares outstanding.

INDEX

	PAGE
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited):	1
Condensed Consolidated Statements of Income	1
Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Cash Flows	3
Condensed Consolidated Statements of Capital Stock and Long-Term Debt	4
Condensed Consolidated Statements of Common Stockholders’ Equity	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.Quantitative and Qualitative Disclosures of Market Risk	24
Item 4.Controls and Procedures	24
PART II.OTHER INFORMATION
Item 1.Legal Proceedings	25
Item 1A.Risk Factors	25
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.Defaults upon Senior Securities	25
Item 4.Mine Safety Disclosures	25
Item 5.Other Information	25
Item 6.Exhibits	25
SIGNATURES	26

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

Operating Revenues	$	39,920		$	37,769		$	106,965		$	101,859

Operating Expenses:
Operations and Maintenance		17,949			17,669			52,761			50,569
Depreciation		4,721			4,246			13,798			12,415
Other Taxes		4,073			3,871			11,318			10,913

Total Operating Expenses		26,743			25,786			77,877			73,897

Operating Income		13,177			11,983			29,088			27,962

Other Income (Expense):
Allowance for Funds Used During Construction		953			871			2,871			2,030
Other Income (Expense), net		444			(4	)		1,164			(142	)

Total Other Income, net		1,397			867			4,035			1,888

Interest Charges		1,906			1,996			5,521			4,984

Income before Income Taxes		12,668			10,854			27,602			24,866

Income Taxes		(69	)		(265	)		(2,516	)		(952	)

Net Income		12,737			11,119			30,118			25,818

Preferred Stock Dividend Requirements		30			30			90			102

Earnings Applicable to Common Stock	$	12,707		$	11,089		$	30,028		$	25,716

Earnings per share of Common Stock:
Basic	$	0.73		$	0.67		$	1.72		$	1.56
Diluted	$	0.72		$	0.66		$	1.71		$	1.55

Average Number of Common Shares Outstanding:
Basic		17,466			16,610			17,455			16,520
Diluted		17,581			16,757			17,570			16,673

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

		September 30,		December 31,
ASSETS		2020		2019
UTILITY PLANT:	Water Production	$	165,010	$	160,870
	Transmission and Distribution		625,746		556,517
	General		83,606		83,043
	Construction Work in Progress		73,340		75,520
	TOTAL		947,702		875,950
	Less Accumulated Depreciation		181,661		170,220
	UTILITY PLANT - NET		766,041		705,730

CURRENT ASSETS:	Cash and Cash Equivalents		5,346		2,230
	Accounts Receivable, net		15,567		11,908
	Unbilled Revenues		8,823		7,183
	Materials and Supplies (at average cost)		4,762		5,445
	Prepayments		3,369		2,367
	TOTAL CURRENT ASSETS		37,867		29,133

AND OTHER ASSETS:	Operating Lease Right of Use Asset		5,390		5,944
	Preliminary Survey and Investigation Charges		3,307		2,054
	Regulatory Assets		112,176		110,479
	Restricted Cash		22,841		44,269
	Non-utility Assets - Net		10,845		10,370
	Other		1,367		1,899
	TOTAL DEFERRED CHARGES AND OTHER ASSETS		155,926		175,015
	TOTAL ASSETS	$	959,834	$	909,878

CAPITALIZATION AND LIABILITIES
CAPITALIZATION:	Common Stock, No Par Value	$	216,866		215,125
	Retained Earnings		125,240		108,667
	TOTAL COMMON EQUITY		342,106		323,792
	Preferred Stock		2,084		2,084
	Long-term Debt		234,489		230,777
	TOTAL CAPITALIZATION		578,679		556,653

CURRENT	Current Portion of Long-term Debt		7,239		7,178
LIABILITIES:	Notes Payable		36,500		20,000
	Accounts Payable		24,860		23,306
	Accrued Taxes		10,642		7,635
	Accrued Interest		1,937		2,031
	Unearned Revenues and Advanced Service Fees		1,311		1,211
	Other		2,865		3,620
	TOTAL CURRENT LIABILITIES		85,354		64,981

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

DEFERRED CREDITS	Customer Advances for Construction		25,100		23,905
AND OTHER LIABILITIES:	Lease Obligations		5,214		5,732
	Accumulated Deferred Income Taxes		58,970		54,408
	Employee Benefit Plans		33,310		34,671
	Regulatory Liabilities		62,979		69,152
	Other		2,432		2,546
	TOTAL DEFERRED CREDITS AND OTHER LIABILITIES		188,005		190,414

CONTRIBUTIONS IN AID OF CONSTRUCTION			107,796		97,830
	TOTAL CAPITALIZATION AND LIABILITIES	$	959,834	$	909,878

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	30,118		$	25,818
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization		15,595			12,858
Provision for Deferred Income Taxes and Investment Tax Credits		(10,991	)		(8,379	)
Equity Portion of Allowance for Funds Used During Construction (AFUDC)		(1,789	)		(1,330	)
Cash Surrender Value of Life Insurance		(166	)		(187	)
Stock Compensation Expense		820			409
Changes in Assets and Liabilities:
Accounts Receivable		(3,659	)		(1,645	)
Unbilled Revenues		(1,640	)		(2,124	)
Materials & Supplies		683			252
Prepayments		(1,002	)		(933	)
Accounts Payable		1,554			853
Accrued Taxes		3,007			(2,098	)
Accrued Interest		(94	)		(490	)
Employee Benefit Plans		1,234			(640	)
Unearned Revenue & Advanced Service Fees		100			12
Other Assets and Liabilities		3,520			972

NET CASH PROVIDED BY OPERATING ACTIVITIES		37,290			23,348
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures, Including AFUDC of $1,082 in 2020, $700 in 2019		(70,785	)		(61,220	)

NET CASH USED IN INVESTING ACTIVITIES		(70,785	)		(61,220	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt		(6,391	)		(6,315	)
Proceeds from Issuance of Long-term Debt		10,319			82,446
Net Short-term Bank Borrowings		16,500			10,000
Deferred Debt Issuance Expense		(41	)		(754	)
Common Stock Issuance Expense		(37	)		(22	)
Proceeds from Issuance of Common Stock		921			12,449
Payment of Common Dividends		(13,418	)		(11,893	)
Payment of Preferred Dividends		(90	)		(102	)
Construction Advances and Contributions-Net		7,420			3,480

NET CASH PROVIDED BY FINANCING ACTIVITIES		15,183			89,289
NET CHANGES IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH		(18,312	)		(51,417	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		46,499			5,661
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	28,187		$	57,078


SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions	$	3,747		$	5,375
Long term Debt Deobligation	$	-		$	130

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest	$	5,834		$	5,929
Interest Capitalized	$	1,082		$	700
Income Taxes	$	1,783		$	6,752

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(Unaudited)

(In thousands)

	September 30,			December 31,
	2020			2019
Common Stock, No Par Value
Shares Authorized - 40,000
Shares Outstanding - 2020 - 17,469; 2019 - 17,434	$	216,866		$	215,125

Retained Earnings		125,240			108,667
TOTAL COMMON EQUITY	$	342,106		$	323,792

Cumulative Preferred Stock, No Par Value:
Shares Authorized - 120
Shares Outstanding - 2020 - 20: 2019 - 20
Convertible:
Shares Outstanding, $7.00 Series - 10	$	1,005		$	1,005
Nonredeemable:
Shares Outstanding, $7.00 Series - 1		79			79
Shares Outstanding, $4.75 Series - 10		1,000			1,000
TOTAL PREFERRED STOCK	$	2,084		$	2,084

Long-term Debt:
8.05%, Amortizing Secured Note, due December 20, 2021	$	415		$	643
6.25%, Amortizing Secured Note, due May 19, 2028		3,220			3,535
6.44%, Amortizing Secured Note, due August 25, 2030		2,777			2,987
6.46%, Amortizing Secured Note, due September 19, 2031		3,057			3,267
4.22%, State Revolving Trust Note, due December 31, 2022		147			175
3.60%, State Revolving Trust Note, due May 1, 2025		1,288			1,405
3.30% State Revolving Trust Note, due March 1, 2026		266			309
3.49%, State Revolving Trust Note, due January 25, 2027		307			349
4.03%, State Revolving Trust Note, due December 1, 2026		419			446
4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021		4			60
0.00%, State Revolving Fund Bond, due August 1, 2021		11			50
3.64%, State Revolving Trust Note, due July 1, 2028		203			214
3.64%, State Revolving Trust Note, due January 1, 2028		66			69
3.45%, State Revolving Trust Note, due August 1, 2031		793			851
6.59%, Amortizing Secured Note, due April 20, 2029		2,994			3,255
7.05%, Amortizing Secured Note, due January 20, 2030		2,333			2,521
5.69%, Amortizing Secured Note, due January 20, 2030		4,786			5,171
4.45%, Amortizing Secured Note, due April 20, 2040		8,617			8,946
4.47%, Amortizing Secured Note, due April 20, 2040		3,197			3,320
3.75%, State Revolving Trust Note, due July 1, 2031		1,765			1,829
2.00%, State Revolving Trust Note, due February 1, 2036		960			1,013
2.00%, State Revolving Trust Note, due November 1, 2038		1,579			1,309
3.75%, State Revolving Trust Note, due November 30, 2030		919			955
0.00% Construction Loans		50,536			40,467
First Mortgage Bonds:
0.00%, Series BB, due August 1, 2021		119			241
4.00% to 5.00%, Series CC, due August 1, 2021		164			331
0.00%, Series EE, due August 1, 2023		1,036			1,456
3.00% to 5.50%, Series FF, due August 1, 2024		1,870			2,440
0.00%, Series GG, due August 1, 2026		542			632
4.00% to 5.00%, Series HH, due August 1, 2026		620			710
0.00%, Series II, due August 1, 2024		338			429
3.40% to 5.00%, Series JJ, due August 1, 2027		500			588
0.00%, Series KK, due August 1, 2028		719			807
5.00% to 5.50%, Series LL, due August 1, 2028		846			928
0.00%, Series MM, due August 1, 2030		937			1,037
3.00% to 4.375%, Series NN, due August 1, 2030		1,105			1,190
0.00%, Series OO, due August 1, 2031		1,655			1,806
2.00% to 5.00%, Series PP, due August 1, 2031		600			660
5.00%, Series QQ, due October 1, 2023		9,915			9,915
3.80%, Series RR, due October 1, 2038		22,500			22,500
4.25%, Series SS, due October 1, 2047		23,000			23,000
0.00%, Series TT, due August 1, 2032		1,806			1,957
3.00% to 3.25%, Series UU, due August 1, 2032		705			755
0.00%, Series VV, due August 1, 2033		1,861			2,004
3.00% to 5.00%, Series WW, due August 1, 2033		715			755
0.00%, Series XX, due August 1, 2047		10,247			10,627
3.00% to 5.00%, Series YY, due August 1, 2047		3,710			3,785
0.00%, Series 2018A, due August 1, 2047		6,247			6,678
3.00% to 5.00%, Series 2018B, due August 1, 2047		2,210			2,320
4.00%, Series 2019A, due August 1, 2059		32,500			32,500
5.00%, Series 2019B, due August 1, 2059		21,200			21,200
SUBTOTAL LONG-TERM DEBT		238,326			234,397
Add: Premium on Issuance of Long-term Debt		7,766			8,064
Less: Unamortized Debt Expense		(4,364	)		(4,506	)
Less: Current Portion of Long-term Debt		(7,239	)		(7,178	)
TOTAL LONG-TERM DEBT	$	234,489		$	230,777

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands)

	Common			Common
	Stock			Stock			Retained
	Shares			Amount			Earnings			Total

For the Three Months Ended September 30, 2019
Balance at July 1, 2019		16,554		$	165,138		$	98,146		$	263,284
Net Income		—			—			11,119			11,119
Dividend Reinvestment & Common Stock Purchase Plan		92			5,368			—			5,368
Restricted Stock Award, Net - Employees		1			172			—			172
Shares Forefeited		(18	)		(466	)		—			(466	)
Conversion of $8.00 Convertible Preferred Stock		41			350			—			350
Cash Dividends on Common Stock ($0.2400 per share)		—			—			(3,987	)		(3,987	)
Cash Dividends on Preferred Stock		—			—			(30	)		(30	)
Common Stock Expenses		—			—			(15	)		(15	)
Balance at September 30, 2019		16,670		$	170,562		$	105,233		$	275,795

For the Nine Months Ended September, 2019
Balance at January 1, 2019		16,403		$	157,354		$	91,433		$	248,787
Net Income		—			—			25,818			25,818
Dividend Reinvestment & Common Stock Purchase Plan		222			12,449			—			12,449
Restricted Stock Award, Net - Employees		18			679			—			679
Stock Award - Board Of Directors		4			196			—			196
Shares Forefeited		(18	)		(466	)		—			(466	)
Conversion of $8.00 Convertible Preferred Stock		41			350			—			350
Cash Dividends on Common Stock ($0.7200 per share)		—			—			(11,893	)		(11,893	)
Cash Dividends on Preferred Stock		—			—			(102	)		(102	)
Common Stock Expenses		—			—			(23	)		(23	)
Balance at September 30, 2019		16,670		$	170,562		$	105,233		$	275,795

For the Three Months Ended September 30, 2020
Balance at July 1, 2020		17,464		$	216,365		$	117,008		$	333,373
Net Income		—			—			12,737			12,737
Dividend Reinvestment & Common Stock Purchase Plan		5			313			—			313
Restricted Stock Award - Net - Employees		—			188			—			188
Cash Dividends on Common Stock ($0.2563 per share)		—			—			(4,475	)		(4,475	)
Cash Dividends on Preferred Stock		—			—			(30	)		(30	)
Balance at September 30, 2020		17,469		$	216,866		$	125,240		$	342,106

For the Nine Months Ended September 30, 2020
Balance at January 1, 2020		17,434		$	215,125		$	108,667		$	323,792
Net Income		—			—			30,118			30,118
Dividend Reinvestment & Common Stock Purchase Plan		14			921			—			921
Restricted Stock Award - Net - Employees		17			575			—			575
Restricted Stock Award - Board Of Directors		4			245						245
Cash Dividends on Common Stock ($0.7688 per share)		—			—			(13,418	)		(13,418	)
Cash Dividends on Preferred Stock		—			—			(90	)		(90	)
Common Stock Expenses		—			—			(37	)		(37	)
Balance at September 30, 2020		17,469		$	216,866		$	125,240		$	342,106

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation and Recent Developments

Middlesex Water Company (Middlesex or the Company) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA), and Twin Lakes Utilities, Inc. (Twin Lakes). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh) are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly-owned subsidiaries are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.

The consolidated notes within the 2019 Annual Report on Form 10-K (the 2019 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of September 30, 2020, the results of operations for the three month and nine month periods ended September 30, 2020 and 2019 and cash flows for the nine month periods ended September 30, 2020 and 2019. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2019, has been derived from the Company’s audited financial statements for the year ended December 31, 2019 included in the 2019 Form 10-K.

Recent Developments

Novel Coronavirus (COVID-19) - On March 13, 2020, the United States declared the COVID-19 pandemic a national emergency. The impact on changing economic conditions due to COVID-19 is uncertain and could affect the Company’s results of operations, financial condition and liquidity in the future. While the Company’s operations and capital construction program have not been significantly disrupted to date from COVID-19, we are unable to assess with certainty the impact that COVID-19 will have on our business, our customers and our vendors prospectively, due to numerous uncertainties, including the severity of the pandemic, the duration of the outbreak and actions which could potentially be taken by governmental and/or regulatory authorities.

The New Jersey Board of Public Utilities (NJBPU) and the Delaware Public Service Commission (DEPSC) have allowed for potential future recovery of COVID-19 related incremental costs through customer rates by the regulated utilities under their respective jurisdictions. Neither jurisdiction has yet to establish a timetable or definitive method for formally providing for cost recovery. We will continue to monitor the COVID-19 situation and evaluate its impact on the Company’s business, results of operations, financial condition and liquidity.

Contract Operations – In May 2020, USA, through a competitive bidding process, was awarded a ten-year, $8.3 million contract to operate and maintain the Borough of Highland Park, New Jersey’s water and wastewater systems. The contract commenced July 1, 2020.

Recently Adopted Accounting Guidance

Credit Losses on Financial Instruments - The Financial Accounting Standards Board issued guidance on the measurement of credit losses on financial instruments, including trade receivables, which requires expected credit losses to be measured based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. The new guidance became effective January 1, 2020. For the Company, this applies primarily to accounts receivable and unbilled revenue balances. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Expected credit losses on accounts receivable and unbilled revenues are based on historical write-offs combined with an evaluation of current conditions and reasonable and supportable forecasts. Customer accounts are written off when collection efforts have been exhausted.

There are no other new adopted or proposed accounting guidance that the Company is aware of that could have a material impact on the Company’s financial statements.

Note 2 – Rate and Regulatory Matters

Middlesex – In March 2020, the NJBPU approved Middlesex’s petition to reset its Purchased Water Adjustment Clause (PWAC) tariff rate to recover additional costs of $0.6 million for the purchase of treated water from a non-affiliated water utility regulated by the NJBPU. The new PWAC rate became effective on April 4, 2020. A PWAC is a rate mechanism that allows for recovery of increased purchased water costs between base rate case filings. It is reset to zero once those increased costs are included in base rates.

Tidewater - Effective July 1, 2020, Tidewater increased its DEPSC-approved Distribution System Improvement Charge (DSIC) rate, which is expected to generate revenue of approximately $0.5 million annually. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements made between base rate proceedings.

Southern Shores - Effective January 1, 2020, the DEPSC approved the renewal of a multi-year agreement for water service to a 2,200 unit condominium community in Sussex County, Delaware. Under the agreement, current rates will remain in effect until December 31, 2024, but should there be unanticipated capital expenditures or regulatory related changes in operating expenses exceeding certain thresholds during this time period, rates are permitted to be adjusted to reflect such cost changes. Thereafter, rate increases, if any, cannot exceed the lesser of the regional Consumer Price Index or 3%. The new agreement expires on December 31, 2029.

Twin Lakes - In March 2020, the Pennsylvania Public Utilities Commission (PAPUC) approved a $0.1 million increase in annualized base rates for Twin Lakes. In July 2019, Twin Lakes had filed a petition with the PAPUC seeking permission to increase annualized base rates by approximately $0.2 million, necessitated by capital infrastructure investments and increased operations and maintenance costs. The new rates became effective April 19, 2020.

COVID-19 - The NJBPU and the DEPSC have allowed for potential future recovery in customer rates of additional costs related to COVID-19 (for further discussion of the impact of COVID-19 on the Company, see Note 1- Basis of Presentation and Recent Developments, Recent Developments).

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Note 3 – Capitalization

Common Stock - During the nine months ended September 30, 2020 and 2019, there were 14,223 common shares (approximately $0.9 million) and 221,558 common shares ($12.4 million), respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan). In January 2019, the Company had activated a limited share purchase discount feature of the Investment Plan. A 5% discount was available until August 2019, when the 0.2 million share purchase limit was reached and the discount feature terminated.

Long-term Debt - Subject to regulatory approval, the Company periodically issues long-term debt to fund its investments in utility plant. To the extent possible, the Company finances qualifying capital projects under State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest-free. Under the New Jersey SRF program, borrowers first enter into a construction loan agreement with the New Jersey Infrastructure Bank (NJIB) at a below market interest rate. The interest rate on the Company’s current construction loan borrowings is zero percent (0%). When construction on the qualifying project is substantially complete, NJIB will coordinate the conversion of the construction loan into a long-term securitized loan with a portion of the principal balance having a stated interest rate of zero percent (0%) and a portion of the principal balance at a market interest rate at the time of closing using the credit rating of the State of New Jersey. The term of the long-term loans currently offered through the NJIB is up to thirty years.

The NJIB generally schedules its long-term debt financings in May and November. Middlesex currently has two projects that are in the construction loan phase of the New Jersey SRF program as follows:

In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the construction of a large-diameter transmission pipeline from the Carl J. Olsen water treatment plant in Edison, New Jersey and interconnect with our distribution system. Middlesex closed on a $43.5 million NJIB interest-free construction loan in August 2018. Through September 30, 2020, Middlesex has drawn a total of $41.9 million and expects to continue to draw down on this construction loan through the fourth quarter of 2020.

In March 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the 2018 RENEW Program, which is an ongoing initiative to eliminate unlined water distribution mains in the Middlesex system. Middlesex closed on an $8.7 million NJIB construction loan in September 2018 and completed withdrawal of the proceeds in October 2019.

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The Company expects that the large-diameter transmission pipeline and the 2018 RENEW construction loans will be included in the NJIB May 2021 long-term debt financing program.

In September 2018, the NJIB announced changes to the SRF program for project funding priority ranking, the proportions of interest free loans and market interest rate loans and overall loan limits on interest free loan balances to investor-owned water utilities. These changes affect SRF projects for which the construction loan closes after September 2018. Under the amended regulations, the principal balance having a stated interest rate of zero percent (0%) is 25% of the loan balance with the remaining 75% having a market based interest rate. This is limited to the first $10.0 million of the loan. Loan amounts above $10.0 million do not participate in the 0% rate program, but do participate at the market based interest rate. As a result of all these changes, the Company’s future capital funding plan does not include participating in the NJIB SRF program unless the terms are further amended to become more favorable to the Company.

In August 2019, Middlesex priced and closed on a New Jersey Economic Development Authority (NJEDA) debt financing transaction of $53.7 million by issuing First Mortgage Bonds (FMB) designated as Series 2019A ($32.5 million at coupon interest rate of 4.0%) and Series 2019B ($21.2 million at coupon interest rate of 5.0%). The proceeds, including an issuance premium of $7.1 million, are being used to finance several projects under the Water For Tomorrow capital program initiated by the Company to upgrade and replace aging water utility infrastructure. The total proceeds of $60.8 million, initially recorded as Restricted Cash on the balance sheet, are held in escrow by a bond trustee and are drawn down by requisition for the qualifying projects. Through September 30, 2020, Middlesex has drawn a total of $38.1 million and currently expects to draw the remaining $22.7 million of proceeds, currently included in Restricted Cash, through the second quarter of 2021.

In May 2020, Middlesex received approval from the NJBPU to borrow up to $100 million, in one or more private placement transactions to help fund Middlesex’s multi-year capital construction program. Middlesex expects to close on a $40.0 million loan on or about November 18, 2020. Middlesex will issue a FMB with a payment maturity date of November 2050 at an interest rate of 2.90%.

In March 2018, the DEPSC approved Tidewater’s request to borrow up to $0.9 million under the Delaware SRF program to fund the replacement of an entire water distribution system of a small Delaware community. Tidewater closed on the SRF loan in May 2018. In April 2019, Tidewater received approval from the DEPSC to increase the borrowing to $1.7 million based on revised project cost estimates. Tidewater closed on the additional SRF loan in October 2019 and completed withdrawal of the proceeds in April 2020.

Fair Value of Financial Instruments - The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of FMBs and SRF Bonds (collectively, the Bonds) issued by Middlesex is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable and the Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Bonds were as follows:

	(In Thousands)
	September 30, 2020		December 31, 2019
	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
Bonds	$147,681	$158,579	$151,361	$160,772

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For other long-term debt for which there was no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value (for details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note”, “State Revolving Trust Note” and “Construction Loans” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $90.9 million and $83.0 million at September 30, 2020 and December 31, 2019, respectively. Customer advances for construction have carrying amounts of $25.1 million and $23.9 million as of September 30, 2020 and December 31, 2019, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

Note 4 – Earnings Per Share

Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented. Diluted EPS assumes the conversion of the Convertible Preferred Stock $7.00 Series in 2020 and the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series in 2019.

	(In Thousands Except per Share Amounts)
	Three Months Ended September 30,
	2020					2019
Basic:	Income			Shares		Income			Shares
Net Income	$	12,737			17,466	$	11,119			16,610
Preferred Dividend		(30	)				(30	)
Earnings Applicable to Common Stock	$	12,707			17,466	$	11,089			16,610

Basic EPS	$	0.73				$	0.67

Diluted:
Earnings Applicable to Common Stock	$	12,707			17,466	$	11,089			16,610
$7.00 Series Preferred Dividend		17			115		17			115
$8.00 Series Preferred Dividend		—			—		—			32
Adjusted Earnings Applicable to Common Stock	$	12,724			17,581	$	11,106			16,757

Diluted EPS	$	0.72				$	0.66

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		(In Thousands Except per Share Amounts)
		Nine Months Ended September 30,