SEC Filing - Middlesex Water Company

View:

Download DOC

Download PDF

Download XLS

Download XBRL

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 June 30, 2021

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 Jersey08830

(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 July 30, 2021: Common Stock, No Par Value: 17,490,561 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	17
Item 3.Quantitative and Qualitative Disclosures of Market Risk	24
Item 4.Controls and Procedures	25
PART II.OTHER INFORMATION
Item 1.Legal Proceedings	26
Item 1A.Risk Factors	26
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.Defaults upon Senior Securities	26
Item 4.Mine Safety Disclosures	26
Item 5.Other Information	26
Item 6.Exhibits	26
SIGNATURES	27

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020

Operating Revenues	$	36,701		$	35,277		$	69,242		$	67,046

Operating Expenses:
Operations and Maintenance		17,959			17,620			36,315			34,812
Depreciation		5,187			4,629			10,019			9,077
Other Taxes		3,741			3,643			7,460			7,245

Total Operating Expenses		26,887			25,892			53,794			51,134

Operating Income		9,814			9,385			15,448			15,912

Other Income (Expense):
Allowance for Funds Used During Construction		768			795			2,031			1,917
Other Income (Expense), net		790			334			1,564			720

Total Other Income, net		1,558			1,129			3,595			2,637

Interest Charges		2,070			1,946			3,808			3,615

Income before Income Taxes		9,302			8,568			15,235			14,934

Income Taxes		(1,621	)		(1,145	)		(2,593	)		(2,447	)

Net Income		10,923			9,713			17,828			17,381

Preferred Stock Dividend Requirements		30			30			60			60

Earnings Applicable to Common Stock	$	10,893		$	9,683		$	17,768		$	17,321

Earnings per share of Common Stock:
Basic	$	0.62		$	0.55		$	1.02		$	0.99
Diluted	$	0.62		$	0.55		$	1.01		$	0.99

Average Number of Common Shares Outstanding:
Basic		17,488			17,462			17,482			17,449
Diluted		17,603			17,577			17,597			17,564

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

		June 30,		December 31,
ASSETS		2021		2020
UTILITY PLANT:	Water Production	$	219,291	$	168,080
	Transmission and Distribution		670,951		648,763
	General		93,215		85,056
	Construction Work in Progress		43,489		80,055
	TOTAL		1,026,946		981,954
	Less Accumulated Depreciation		191,512		185,356
	UTILITY PLANT - NET		835,434		796,598

CURRENT ASSETS:	Cash and Cash Equivalents		6,026		4,491
	Accounts Receivable, net of allowance for uncollectible accounts of $2,280 and $2,053, respectively		13,280		14,569
	Unbilled Revenues		8,817		7,065
	Materials and Supplies (at average cost)		4,661		5,112
	Prepayments		4,458		2,886
	TOTAL CURRENT ASSETS		37,242		34,123

OTHER ASSETS:	Operating Lease Right of Use Asset		4,852		5,209
	Preliminary Survey and Investigation Charges		7,556		5,192
	Regulatory Assets		118,230		118,144
	Restricted Cash		163		5,913
	Non-utility Assets - Net		11,424		11,207
	Other		74		84
	TOTAL OTHER ASSETS		142,299		145,749
	TOTAL ASSETS	$	1,014,975	$	976,470

CAPITALIZATION AND LIABILITIES
CAPITALIZATION:	Common Stock, No Par Value	$	218,100	$	217,451
	Retained Earnings		136,998		128,757
	TOTAL COMMON EQUITY		355,098		346,208
	Preferred Stock		2,084		2,084
	Long-term Debt		272,504		273,244
	TOTAL CAPITALIZATION		629,686		621,536

CURRENT	Current Portion of Long-term Debt		7,170		7,255
LIABILITIES:	Notes Payable		31,500		2,000
	Accounts Payable		23,100		30,443
	Accrued Taxes		12,220		10,138
	Accrued Interest		2,168		2,137
	Unearned Revenues and Advanced Service Fees		1,404		1,255
	Other		3,183		3,620
	TOTAL CURRENT LIABILITIES		80,745		56,848

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

OTHER LIABILITIES:	Customer Advances for Construction		23,632		23,404
	Lease Obligations		4,703		5,042
	Accumulated Deferred Income Taxes		62,058		61,297
	Employee Benefit Plans		32,906		34,426
	Regulatory Liabilities		56,266		60,792
	Other		1,157		1,135
	TOTAL OTHER LIABILITIES		180,722		186,096

CONTRIBUTIONS IN AID OF CONSTRUCTION			123,822		111,990
	TOTAL CAPITALIZATION AND LIABILITIES	$	1,014,975	$	976,470

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	17,828		$	17,381
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization		12,900			10,304
Provision for Deferred Income Taxes and Investment Tax Credits		(7,852	)		(7,206	)
Equity Portion of Allowance for Funds Used During Construction (AFUDC)		(1,171	)		(1,182	)
Cash Surrender Value of Life Insurance		(109	)		(47	)
Stock Compensation Expense		760			632
Changes in Assets and Liabilities:
Accounts Receivable		1,289			(711	)
Unbilled Revenues		(1,752	)		(1,756	)
Materials & Supplies		451			171
Prepayments		(1,572	)		(1,594	)
Accounts Payable		(7,343	)		(503	)
Accrued Taxes		2,082			2,471
Accrued Interest		31			61
Employee Benefit Plans		790			840
Unearned Revenue & Advanced Service Fees		149			118
Other Assets and Liabilities		(1,902	)		1,803

NET CASH PROVIDED BY OPERATING ACTIVITIES		14,579			20,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures, Including AFUDC of $860 in 2021 and $735 in 2020		(46,500	)		(45,417	)

NET CASH USED IN INVESTING ACTIVITIES		(46,500	)		(45,417	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt		(2,332	)		(2,288	)
Proceeds from Issuance of Long-term Debt		1,595			9,721
Net Short-term Bank Borrowings		29,500			17,500
Deferred Debt Issuance Expense		(14	)		(33	)
Proceeds from Issuance of Common Stock		596			608
Payment of Common Dividends		(9,527	)		(8,942	)
Payment of Preferred Dividends		(60	)		(60	)
Construction Advances and Contributions-Net		7,946			3,762

NET CASH PROVIDED BY FINANCING ACTIVITIES		27,704			20,268
NET CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(4,217	)		(4,367	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		10,406			46,499
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	6,189		$	42,132


SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions	$	3,357		$	3,796

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest	$	3,975		$	3,754
Interest Capitalized	$	860		$	735
Income Taxes	$	2,320		$	377

See Notes to Condensed Consolidated Financial Statements.

Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(Unaudited)

(In thousands)

	June 30,			December 31,
	2021			2020
Common Stock, No Par Value
Shares Authorized - 40,000
Shares Outstanding - 2021 - 17,490; 2020 - 17,473	$	218,100		$	217,451

Retained Earnings		136,998			128,757
TOTAL COMMON EQUITY	$	355,098		$	346,208

Cumulative Preferred Stock, No Par Value:
Shares Authorized - 120
Shares Outstanding - 2021 - 20: 2020 - 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:
First Mortgage Bonds, 0.00%-5.50%, due 2021-2059	$	187,199		$	187,667
Amortizing Secured Notes, 4.45%-8.05%, due 2021-2040		29,133			30,643
State Revolving Trust Notes, 2.00%-4.22%, due 2022-2038		8,032			8,384
State Revolving Fund Bond, 0.00%, due 2021		10			11
Construction Loans, 0.00%		52,131			50,536
SUBTOTAL LONG-TERM DEBT		276,505			277,241
Add: Premium on Issuance of Long-term Debt		7,470			7,669
Less: Unamortized Debt Expense		(4,301	)		(4,411	)
Less: Current Portion of Long-term Debt		(7,170	)		(7,255	)
TOTAL LONG-TERM DEBT	$	272,504		$	273,244

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 June 30, 2020
Balance at April 1, 2020		17,439	$	215,600		$	111,800		$	327,400
Net Income		-		-			9,713			9,713
Dividend Reinvestment & Common Stock Purchase Plan		4		294			-			294
Restricted Stock Award - Net - Employees		17		226			-			226
Restricted Stock Award - Board of Directors		4		245			-			245
Cash Dividends on Common Stock ($0.2563 per share)		-		-			(4,475	)		(4,475	)
Cash Dividends on Preferred Stock		-		-			(30	)		(30	)
Balance at June 30, 2020		17,464	$	216,365		$	117,008		$	333,373

For the Six Months Ended June 30, 2020
Balance at January 1, 2020		17,434	$	215,125		$	108,667		$	323,792
Net Income		-		-			17,381			17,381
Dividend Reinvestment & Common Stock Purchase Plan		9		608			-			608
Restricted Stock Award - Net - Employees		17		387			-			387
Restricted Stock Award - Board of Directors		4		245						245
Cash Dividends on Common Stock ($0.5125 per share)		-		-			(8,942	)		(8,942	)
Cash Dividends on Preferred Stock		-		-			(60	)		(60	)
Common Stock Issuance Expenses		-		-			(38	)		(38	)
Balance at June 30, 2020		17,464	$	216,365		$	117,008		$	333,373

For the Three Months Ended June 30, 2021
Balance at April 1, 2021		17,478	$	217,977		$	130,873		$	348,850
Net Income		-		-			10,923			10,923
Dividend Reinvestment & Common Stock Purchase Plan		3		272			-			272
Restricted Stock Award - Net - Employees		6		(394	)		-			(394	)
Restricted Stock Award - Board of Directors		3		245			-			245
Cash Dividends on Common Stock ($0.2725 per share)		-		-			(4,768	)		(4,768	)
Cash Dividends on Preferred Stock		-		-			(30	)		(30	)
Balance at June 30, 2021		17,490	$	218,100		$	136,998		$	355,098

For the Six Months Ended June 30, 2021
Balance at January 1, 2021		17,473	$	217,451		$	128,757		$	346,208
Net Income		-		-			17,828			17,828
Dividend Reinvestment & Common Stock Purchase Plan		8		596			-			596
Restricted Stock Award - Net - Employees		6		(192	)		-			(192	)
Restricted Stock Award - Board of Directors		3		245						245
Cash Dividends on Common Stock ($0.5450 per share)		-		-			(9,527	)		(9,527	)
Cash Dividends on Preferred Stock		-		-			(60	)		(60	)
Balance at June 30, 2021		17,490	$	218,100		$	136,998		$	355,098

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), and Utility Service Affiliates (Perth Amboy) Inc. (USA-PA). 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 2020 Annual Report on Form 10-K (the 2020 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 June 30, 2021, the results of operations for the three month and six month periods ended June 30, 2021 and 2020 and cash flows for the six month periods ended June 30, 2021 and 2020. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2020, has been derived from the Company’s December 31, 2020 audited financial statements included in the 2020 Form 10-K.

Recent Developments

Loan Agreement - In March 2021, Tidewater entered into a $20 million loan agreement with CoBank, ACB (CoBank). Tidewater has yet to borrow from CoBank under this agreement and has the option to borrow in minimum increments of $0.1 million through September 29, 2021. The interest rate will be set on the date of the applicable borrowing and the term of any borrowing cannot exceed twenty-five years. Proceeds from the loan will first be used to pay off balances under the Company’s lines of credit (see Note 6 – Short Term Borrowings), with remaining proceeds used to finance a portion of Tidewater’s 2021 capital program.

Middlesex Financing Petition – In June 2021, Middlesex received approval from the New Jersey Board of Public Utilities (NJBPU) to redeem up to $45.5 million of outstanding first mortgage bonds and issue replacement first mortgage bonds at an overall lower cost of debt. Middlesex expects to complete the refinancing by December 31, 2021.

Novel Coronavirus (COVID-19) – In March 2020, the United States declared the COVID-19 pandemic a national emergency, which was extended on February 24, 2021, and remains in effect. While the Company’s operations and capital construction program have not been materially disrupted to date from the pandemic, the COVID-19 impact on economic conditions nationally continues to be uncertain and could affect the Company’s results of operations, financial condition and liquidity in the future. In New Jersey and Delaware, where our operations are located, the declared COVID-19 State of Emergency Orders ended in June 2021 and July 2021, respectively.

The NJBPU and the Delaware Public Service Commission (DEPSC) have approved the tracking of COVID-19 related incremental costs for potential recovery in customer rates in future rate proceedings. Neither jurisdiction has established a timetable or definitive formal procedures for seeking cost recovery. Since March 2020, the Company has increased its allowance for doubtful accounts for expected increases in accounts receivable write-offs due to the financial impact of COVID-19 on customers. We will continue to monitor the effects of COVID-19 and evaluate its impact on the Company’s business, results of operations, financial condition and liquidity.

Index

Recent Accounting Guidance

There is no 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 May 2021, Middlesex filed a petition with the NJBPU seeking permission to increase annual base water revenues by approximately $31 million. The request was necessitated predominantly by capital infrastructure investments Middlesex has made, or has committed to make, to address aging drinking water infrastructure and a variety of other improvements to help ensure continued resiliency, reliability and overall quality of service since Middlesex’s last base rate increase filing in New Jersey in 2017. We cannot predict when and whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. Under New Jersey statute, the NJPBU must render a decision within nine months of filing a base rate change petition.

In March 2021, the NJBPU approved Middlesex’s petition to reset its Purchased Water Adjustment Clause (PWAC) tariff rate to recover additional costs of $1.1 million for the purchase of treated water from a non-affiliated regulated water utility. The new PWAC rate became effective April 4, 2021. 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 January 1, 2021, Tidewater increased its DEPSC-approved Distribution System Improvement Charge (DSIC) rate, which was expected to generate revenues of approximately $0.6 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.

In March 2021, Tidewater was notified by the DEPSC that it had determined Tidewater’s earned rate of return exceeded the rate of return authorized by the DEPSC. Consequently, Tidewater reset its DSIC rate to zero effective April 1, 2021 and is refunding customers, with interest, in the form of an account credit for DSIC revenue billed between April 1, 2020 and March 31, 2021. Accordingly, in March 2021, Tidewater recorded a $0.8 million reserve, net of tax, for such refunds. Tidewater applied the refund credits to individual customer accounts during the second quarter of 2021.

Twin Lakes Utilities, Inc. (Twin Lakes) - Twin Lakes provides water services to approximately 115 residential customers in Shohola, Pennsylvania. In 2020, Twin Lakes filed a petition requesting the Pennsylvania Public Utilities Commission (PAPUC) to order the acquisition of Twin Lakes by a public utility pursuant to Section 529 of the Pennsylvania Public Utility Code. The PAPUC assigned an Administrative Law Judge (ALJ) to adjudicate the matter and submit a recommended decision (Recommended Decision) to the PAPUC. In April 2021, the ALJ issued a Recommended Decision concluding Twin Lakes has fully met the criteria for the PAPUC to order the acquisition of Twin Lakes by a public utility pursuant to Section 529. The ALJ, however, recommended that the PAPUC condition the acquisition of Twin Lakes pursuant to Section 529 upon Twin Lakes’ parent, Middlesex, contributing $1.7 million to an escrow account for the purpose of offsetting future capital expenditures assumed by the ALJ to be incurred by the ultimate purchaser of the Twin Lakes water system. The sale price and final agreement to sell Twin Lakes would be subsequently negotiated. In May 2021, Twin Lakes filed a brief with the PAPUC detailing its objections to certain of the ALJ’s conclusions.

Twin Lakes remains under the operation of a large PAPUC regulated investor-owned water utility as the receiver, which had been appointed by the PAPUC under an Order effective January 15, 2021. The receivership is to remain in place until the final outcome of the Section 529 proceeding.

It is unknown at this time if the PAPUC will affirm or deny the Recommended Decision in whole, or in part. Separate from the disposition of this matter by the PAPUC, or any further litigation which may proceed beyond the PAPUC’s final decision, the financial results, total assets and financial obligations of Twin Lakes are not material to Middlesex.

Index

Note 3 – Capitalization

Common Stock - During the six months ended June 30, 2021 and 2020, there were 7,787 common shares (approximately $0.6 million) and 9,378 common shares (approximately $0.6 million), respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan).

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.

Middlesex currently has two projects that are in the construction loan phase of the New Jersey SRF program:

In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the construction of a 4.5 mile 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 and completed withdrawal of the proceeds in June 2021.

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.

The Company anticipates that these two construction loans will be converted into long-term securitized loans by the NJIB during the fourth 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 through December 31, 2023 to help fund Middlesex’s multi-year capital construction program. In November 2020, Middlesex closed on a $40 million private placement loan with a payment maturity date of November 2050 and an interest rate of 2.90% by issuing First Mortgage Bonds (FMBs) designated as Series 2020A. Proceeds from this loan were used to reduce the Company’s existing short-term borrowings under its lines of credit and to fund the 2020 capital program.

As part of its ongoing comprehensive financing plan, Middlesex received approval from the NJBPU in February 2019 to issue and sell up to $140 million of FMBs through the New Jersey Economic Development Authority (NJEDA) in one or more transactions through December 31, 2022. Because the interest paid to the bondholders is exempt from federal and New Jersey income taxes, the interest rate on debt issued through the NJEDA is generally lower than otherwise achievable in the traditional taxable corporate bond market. However, the interest received by the bondholder is subject to the Alternative Minimum Tax.

Index

In August 2019, Middlesex priced and closed on a NJEDA debt financing transaction of $53.7 million by issuing FMBs 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, were 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 proceeds were initially recorded as Restricted Cash on the balance sheet and held in escrow by a bond trustee. Funds were drawn down by requisition for the qualifying projects as costs were incurred with the final requisition made in February 2021.

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 publicly traded 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)
	June 30, 2021		December 31, 2020
	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
Bonds	$147,209	$157,436	$147,667	$159,195

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 rates and due dates on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note”, “State Revolving Trust Note”, “State Revolving Trust Bond”, “Construction Loans” and “Series 2020A” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $129.3 million and $129.6 million at June 30, 2021 and December 31, 2020, respectively. Customer advances for construction have carrying amounts of $23.6 million and $23.4 million at June 30, 2021 and 2020, 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.

Index

	(In Thousands Except per Share Amounts)
	Three Months Ended June 30,
	2021					2020
Basic:	Income			Shares		Income			Shares
Net Income	$	10,923			17,488	$	9,713			17,462
Preferred Dividend		(30	)				(30	)
Earnings Applicable to Common Stock	$	10,893			17,488	$	9,683			17,462

Basic EPS	$	0.62				$	0.55

Diluted:
Earnings Applicable to Common Stock	$	10,893			17,488	$	9,683			17,462
$7.00 Series Preferred Dividend		17			115		17			115
Adjusted Earnings Applicable to Common Stock	$	10,910			17,603	$	9,700			17,577

Diluted EPS	$	0.62				$	0.55

	Six Months Ended June 30,
	2021					2020
Basic:	Income			Shares		Income			Shares
Net Income	$	17,828			17,482	$	17,381			17,449
Preferred Dividend		(60	)				(60	)
Earnings Applicable to Common Stock	$	17,768			17,482	$	17,321			17,449

Basic EPS	$	1.02				$	0.99

Diluted:
Earnings Applicable to Common Stock	$	17,768			17,482	$	17,321			17,449
$7.00 Series Preferred Dividend		34			115		34			115
Adjusted Earnings Applicable to Common Stock	$	17,802			17,597	$	17,355			17,564

Diluted EPS	$	1.01				$	0.99

Note 5 – Business Segment Data

The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey and Delaware. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey and Delaware with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.

Index

	(In Thousands)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
Operations by Segments:	2021			2020			2021			2020
Revenues:
Regulated	$	33,609		$	32,289		$	63,030		$	61,226
Non – Regulated		3,405			3,180			6,662			6,141
Inter-segment Elimination		(313	)		(192	)		(450	)		(321	)
Consolidated Revenues	$	36,701		$	35,277		$	69,242		$	67,046

Operating Income:
Regulated	$	8,711		$	8,639		$	13,427		$	14,480
Non – Regulated		1,103			746			2,021			1,432
Consolidated Operating Income	$	9,814		$	9,385		$	15,448		$	15,912

Net Income:
Regulated	$	10,108		$	9,192		$	16,347		$	16,371
Non – Regulated		815			521			1,481			1,010
Consolidated Net Income	$	10,923		$	9,713		$	17,828		$	17,381

Capital Expenditures:
Regulated	$	24,391		$	19,913		$	46,354		$	44,882
Non – Regulated		76			357			146			535
Total Capital Expenditures	$	24,467		$	20,270		$	46,500		$	45,417

	As of			As of
	June 30,			December 31,
	2021			2020
Assets:
Regulated	$	1,022,776		$	998,932
Non – Regulated		8,459			8,289
Inter-segment Elimination		(16,260	)		(30,751	)
Consolidated Assets	$	1,014,975		$	976,470

Note 6 – Short-term Borrowings

The Company maintains lines of credit aggregating $110.0 million.

	(Millions)
	As of June 30, 2021							Renewal Date
	Outstanding		Available		Maximum		Credit Type	Renewal Date
Bank of America	$	-	$	30.0	$	30.0	Uncommitted	January 27, 2022
PNC Bank		21.0		47.0		68.0	Committed	January 31, 2023
CoBank		10.5		1.5		12.0	Committed	November 30, 2023
	$	31.5	$	78.5	$	110.0

The interest rate for borrowings under the lines of credit is set using the London InterBank Offered Rate (LIBOR) and adding a credit spread, which varies by financial institution. There is no requirement for a compensating balance under any of the established lines of credit. Each of the lines of credit includes a provision for a replacement benchmark for when LIBOR is fully phased-out and no longer available to set the interest rate on borrowings under these lines of credit.

Index

The weighted average interest rate on the outstanding borrowings at June 30, 2021 under these credit lines is 1.11%.

The weighted average daily amounts of borrowings outstanding under the Company’s lines of credit and the weighted average interest rates on those amounts were as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2021			2020			2021			2020
Average Daily Amounts Outstanding	$	19,665		$	36,445		$	13,843		$	28,901
Weighted Average Interest Rates		1.18	%		1.65	%		1.16	%		1.96	%

The $31.5 million of loans under the lines of credit outstanding as of June 30, 2021 matured in July 2021 and were renewed and rolled over by the Company.

Note 7 – Commitments and Contingent Liabilities

Water Supply - Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27.0 million gallons a day (mgd). Pricing is set annually by the NJWSA through a public rate making process. The agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds.

Middlesex has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2026, provides for the minimum purchase of 3.0 mgd of treated water with provisions for additional purchases.

Tidewater contracts with the City of Dover, Delaware to purchase 15.0 million gallons of treated water annually.

Purchased water costs are shown below:

	(In Thousands)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
		2021		2020			2021		2020
Treated		$	871	$	932		$	1,748	$	1,725
Untreated			782		782			1,642		1,652
Total Costs		$	1,653	$	1,714		$	3,390	$	3,377

Guarantees - As part of an agreement with the County of Monmouth, New Jersey (County), prior to 2020 Middlesex had served as guarantor of the performance of an unaffiliated wastewater treatment contractor and partner (Contractor), to operate a County-owned leachate pretreatment facility.

In November 2019, Middlesex was notified that the County terminated its Agreement with the Contractor. The Contractor had initiated legal action against the County that, in part, contests the County’s exercise of this termination. The County filed a counter-claim against the Contractor’s parent company and has brought Middlesex into the suit as a third-party defendant. We continue to monitor this litigation. However, given the cancellation of the underlying operating contract by the County, the fact that the Company had not been requested by the County to perform under the guarantee and the continuation of the litigation, we do not anticipate the ultimate outcome will have a material impact on the Company’s results of operations or financial condition.

Index

Leases - The Company determines if an arrangement is a lease at inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.

The Company has entered into an operating lease of office space for administrative purposes, expiring in 2030. The Company has not entered into any finance leases. The exercise of a lease renewal option for the Company’s administrative offices is solely at the discretion of the Company.

The right-of-use (ROU) asset recorded represents the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company’s operating lease does not provide an implicit discount rate and as such the Company used an estimated incremental borrowing rate (4.03%) based on the information available at commencement date in determining the present value of lease payments.

Given the impacts of accounting for regulated operations, and the resulting recognition of expense at the amounts recovered in customer rates, expenditures for operating leases are consistent with lease expense and were $0.2 million for each of the three months ended June 30, 2021 and 2020, respectively and $0.4 million for each of the six months ended June 30, 2021 and 2020, respectively.

Information related to operating lease ROU assets and lease liabilities is as follows:

	(In Millions)
	As of June 30, 2021			As of December 31, 2020
ROU Asset at Lease Inception	$	7.3		$	7.3
Accumulated Amortization		(2.4	)		(2.1	)
Current ROU Asset	$	4.9		$	5.2

The Company’s future minimum operating lease commitments as of June 30, 2021 are as follows:

	(In Millions)
2021	$	0.4
2022		0.8
2023		0.8
2024		<