MIDDLESEX WATER COMPANY
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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, 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 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, 2021: Common Stock, No Par Value: 17,497,015 shares outstanding.


INDEX

PAGE

PART I.FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited):

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

25

Item 4.Controls and Procedures

26

PART II.OTHER INFORMATION

Item 1.Legal Proceedings

27

Item 1A.Risk Factors

27

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.Defaults upon Senior Securities

27

Item 4.Mine Safety Disclosures

27

Item 5.Other Information

27

Item 6.Exhibits

27

SIGNATURES

28


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,

2021

2020

2021

2020

 

Operating Revenues

$

39,874

$

39,920

$

109,117

$

106,965

 

Operating Expenses:

Operations and Maintenance

18,950

17,949

55,265

52,761

Depreciation

5,504

4,721

15,523

13,798

Other Taxes

3,996

4,073

11,456

11,318

 

Total Operating Expenses

28,450

26,743

82,244

77,877

 

Operating Income

11,424

13,177

26,873

29,088

 

Other Income (Expense):

Allowance for Funds Used During Construction (AFUDC)

344

953

2,376

2,871

Other Income (Expense), net

744

444

2,308

1,164

 

Total Other Income, net

1,088

1,397

4,684

4,035

 

Interest Charges

2,101

1,906

5,910

5,521

 

Income before Income Taxes

10,411

12,668

25,647

27,602

 

Income Taxes

(1,065

)

(69

)

(3,658

)

(2,516

)

 

Net Income

11,476

12,737

29,305

30,118

 

Preferred Stock Dividend Requirements

30

30

90

90

 

Earnings Applicable to Common Stock

$

11,446

$

12,707

$

29,215

$

30,028

 

Earnings per share of Common Stock:

Basic

$

0.65

$

0.73

$

1.67

$

1.72

Diluted

$

0.65

$

0.72

$

1.66

$

1.71

 

Average Number of Common Shares Outstanding:

Basic

17,491

17,466

17,485

17,455

Diluted

17,606

17,581

17,600

17,570

See Notes to Condensed Consolidated Financial Statements.

1


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

September 30,

December 31,

ASSETS

2021

2020

UTILITY PLANT:

Water Production

$

243,145

 

$

168,080

Transmission and Distribution

 

688,271

 

648,763

General

 

94,425

 

85,056

Construction Work in Progress

 

19,277

 

80,055

TOTAL

 

1,045,118

 

981,954

Less Accumulated Depreciation

 

195,206

 

185,356

UTILITY PLANT - NET

 

849,912

 

796,598

 

 

 

 

CURRENT ASSETS:

Cash and Cash Equivalents

 

5,282

 

4,491

Accounts Receivable, net of allowance for uncollectible accounts of $2,473 and $2,053, respectively

 

17,028

 

14,569

Unbilled Revenues

 

9,074

 

7,065

Materials and Supplies (at average cost)

 

5,156

 

5,112

Prepayments

 

4,027

 

2,886

TOTAL CURRENT ASSETS

 

40,567

 

34,123

 

 

 

 

OTHER ASSETS:

Operating Lease Right of Use Asset

 

4,676

 

5,209

Preliminary Survey and Investigation Charges

 

3,939

 

5,192

Regulatory Assets

 

118,969

 

118,144

Restricted Cash

 

-

 

5,913

Non-utility Assets - Net

 

11,359

 

11,207

Other

 

170

 

84

TOTAL OTHER ASSETS

 

139,113

 

145,749

TOTAL ASSETS

$

1,029,592

 

$

976,470

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

CAPITALIZATION:

Common Stock, No Par Value

$

218,662

 

$

217,451

Retained Earnings

 

143,678

 

128,757

TOTAL COMMON EQUITY

 

362,340

 

346,208

Preferred Stock

 

2,084

 

2,084

Long-term Debt

 

266,483

 

273,244

TOTAL CAPITALIZATION

 

630,907

 

621,536

 

 

 

 

CURRENT

Current Portion of Long-term Debt

 

6,806

 

7,255

LIABILITIES:

Notes Payable

 

50,000

 

2,000

Accounts Payable

 

17,340

 

30,443

Accrued Taxes

 

12,688

 

10,138

Accrued Interest

 

1,194

 

2,137

Unearned Revenues and Advanced Service Fees

 

1,394

 

1,255

Other

 

3,072

 

3,620

TOTAL CURRENT LIABILITIES

 

92,494

 

56,848

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

 

 

 

 

OTHER LIABILITIES:

Customer Advances for Construction

 

23,546

 

23,404

Lease Obligations

 

4,535

 

5,042

Accumulated Deferred Income Taxes

 

63,347

 

61,297

Employee Benefit Plans

 

32,140

 

34,426

Regulatory Liabilities

 

54,043

 

60,792

Other

 

1,181

 

1,135

TOTAL OTHER LIABILITIES

 

178,792

 

186,096

 

 

 

 

 

 

CONTRIBUTIONS IN AID OF CONSTRUCTION

 

127,399

 

111,990

TOTAL CAPITALIZATION AND LIABILITIES

$

1,029,592

 

$

976,470

See Notes to Condensed Consolidated Financial Statements.

2


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended September 30,

2021

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$

29,305

$

30,118

Adjustments to Reconcile Net Income to

Net Cash Provided by Operating Activities:

Depreciation and Amortization

17,253

15,595

Provision for Deferred Income Taxes

(11,801

)

(10,991

)

Equity Portion of Allowance for Funds Used During Construction (AFUDC)

(1,356

)

(1,789

)

Cash Surrender Value of Life Insurance

(97

)

(166

)

Stock Compensation Expense

1,033

820

Changes in Assets and Liabilities:

Accounts Receivable

(2,459

)

(3,659

)

Unbilled Revenues

(2,009

)

(1,640

)

Materials and Supplies

(44

)

683

Prepayments

(1,141

)

(1,002

)

Accounts Payable

(13,103

)

1,554

 

Accrued Taxes

2,550

3,007

Accrued Interest

(943

)

(94

)

Employee Benefit Plans

1,187

1,234

Unearned Revenue & Advanced Service Fees

139

100

Other Assets and Liabilities

124

3,520

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

18,638

37,290

CASH FLOWS FROM INVESTING ACTIVITIES:

Utility Plant Expenditures, Including AFUDC of $1,020 in 2020 and $1,082 in 2020

(61,245

)

(70,785

)

 

NET CASH USED IN INVESTING ACTIVITIES

(61,245

)

(70,785

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Redemption of Long-term Debt

(28,655

)

(6,391

)

Proceeds from Issuance of Long-term Debt

21,595

10,319

Net Short-term Bank Borrowings

48,000

16,500

Deferred Debt Issuance Expense

(35

)

(41

)

Common Stock Issuance Expense

-

(37

)

Proceeds from Issuance of Common Stock

885

 

921

Payment of Common Dividends

(14,294

)

(13,418

)

Payment of Preferred Dividends

(90

)

(90

)

Construction Advances and Contributions-Net

10,079

 

7,420

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

37,485

15,183

NET CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

(5,122

)

(18,312

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

10,404

 

46,499

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

$

5,282

$

28,187

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:

Utility Plant received as Construction Advances and Contributions

$

4,279

$

3,747

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash Paid During the Year for:

Interest

$

7,091

$

5,834

Interest Capitalized

$

1,020

$

1,082

Income Taxes

$

3,235

$

1,783

See Notes to Condensed Consolidated Financial Statements.

3


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

 

September 30,

 

December 31,

 

 

 

2021

 

2020

 

Common Stock, No Par Value

 

 

 

 

 

 

 

 

 

Shares Authorized - 40,000

 

 

 

 

 

 

 

 

 

Shares Outstanding - 2021 - 17,493; 2020 - 17,473

 

$

218,662

 

 

$

217,451

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

143,678

 

 

 

128,757

 

 

TOTAL COMMON EQUITY

 

$

362,340

 

 

$

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

 

$

161,828

 

 

$

187,667

 

 

Amortizing Secured Notes, 4.45%-8.05%, due 2021-2040

 

 

48,374

 

 

 

30,643

 

 

State Revolving Trust Notes, 2.00%-4.22%, due 2022-2038

 

 

7,849

 

 

 

8,384

 

 

State Revolving Fund Bond, 0.00%, due 2021

 

 

-

 

 

 

11

 

 

Construction Loans, 0.00%

 

 

52,131

 

 

 

50,536

 

 

SUBTOTAL LONG-TERM DEBT

 

 

270,182

 

 

 

277,241

 

 

Add: Premium on Issuance of Long-term Debt

 

 

7,371

 

 

 

7,669

 

 

Less: Unamortized Debt Expense

 

 

(4,264

)

 

 

(4,411

)

 

Less: Current Portion of Long-term Debt

 

 

(6,806

)

 

 

(7,255

)

 

TOTAL LONG-TERM DEBT

 

$

266,483

 

 

$

273,244

 

 

See Notes to Condensed Consolidated Financial Statements.

4


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, 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

 

For the Three Months Ended September 30, 2021

Balance at July 1, 2021

17,490

$

218,100

$

136,998

$

355,098

Net Income

-

-

11,476

11,476

Dividend Reinvestment & Common Stock Purchase Plan

3

289

-

289

Restricted Stock Award - Net - Employees

-

273

-

273

Cash Dividends on Common Stock ($0.2725 per share)

-

-

(4,766

)

(4,766

)

Cash Dividends on Preferred Stock

-

-

(30

)

(30

)

Balance at September 30, 2021

17,493

 

 

$

218,662

 

 

$

143,678

 

 

$

362,340

 

For the Nine Months Ended September 30, 2021

Balance at January 1, 2021

17,473

$

217,451

$

128,757

$

346,208

Net Income

-

-

29,305

29,305

Dividend Reinvestment & Common Stock Purchase Plan

11

885

-

885

Restricted Stock Award - Net - Employees

6

81

 

-

81

Restricted Stock Award - Board of Directors

3

245

-

245

Cash Dividends on Common Stock ($0.8175 per share)

-

-

(14,294

)

(14,294

)

Cash Dividends on Preferred Stock

-

-

(90

)

(90

)

Balance at September 30, 2021

17,493

$

218,662

$

143,678

$

362,340

See Notes to Condensed Consolidated Financial Statements.

5


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 September 30, 2021, the results of operations for the three month and nine month periods ended September 30, 2021 and 2020 and cash flows for the nine month periods ended September 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

Sale of Subsidiary – On October 27, 2021, the Delaware Public Service Commission (DEPSC) approved a request by Middlesex to sell its entire interest in TESI, which is its regulated Delaware wastewater utility business. In August 2021, Middlesex entered into a definitive agreement with Artesian Wastewater Management, Inc. to sell 100% of the common stock of TESI for $6.4 million. The transaction is expected to be finalized prior to December 31, 2021. The Company will continue to own and operate its regulated water utilities in Delaware as well as its non-regulated operations and maintenance contract business.

Regulatory Notice of Non Compliance - In October 2021, Middlesex issued a notice (Notice) to customers in New Jersey that in September 2021, the level of Perfluorooctanoic Acid (PFOA) in water from its Park Avenue Treatment Plant exceeded a new standard that went into effect in 2021 (New Jersey Standards) promulgated by the New Jersey Department of Environmental Protection (NJDEP). Neither the NJDEP nor Middlesex has characterized this exceedance as an acute health emergency. The New Jersey Standard for PFOA was developed based on a Health-based Maximum Contaminant Level (MCL) of 14 parts per trillion (ppt). Although the United States Environmental Protection Agency (USEPA) has not yet implemented an enforceable regulation relative to PFOA, the water distributed from the Park Avenue Treatment Plant does meet the USEPA’s current health advisory level of 70 parts per trillion (ppt) and would meet the NJDEP’s prior guidance level of 40 ppt. Construction of a facility to provide an enhanced treatment process at the Park Avenue Treatment Plant to comply with the New Jersey Standards related to poly- and perfluoro-alkyl substances, collectively referred to as PFAS, and which include PFOA, is expected to be completed in mid-2023. The Notice requires the Company to take any action necessary to bring the water into compliance with the MCL of 14 ppt for PFOA by September 7, 2022. The Company is performing hydraulic and other analyses to assess the operational feasibility of complying with the new standard before September 2022, the costs of which may be significant and may or may not be recoverable through the rate making process. While the Company believes it to be unlikely, the issuance of this Notice does not preclude the State of New Jersey or any of its agencies from initiating formal administrative and/or judicial enforcement action, including assessment of penalties of up to $25,000 per day per offense.

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.

6


Index

The New Jersey Board of Public Utilities (NJBPU) and the 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.

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 with certainty 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 has refunded 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.

7


Index

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.

Note 3 – Capitalization

Common Stock - During the nine months ended September 30, 2021 and 2020, there were 10,641 common shares (approximately $0.9 million) and 14,223 common shares (approximately $0.9 million), respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan). On September 1, 2021, the Company began offering shares of its common stock for purchase at a 3% discount to participants in the Investment Plan. The discount offering will continue until 200,000 shares are purchased at the discounted price or August 1, 2022, whichever event occurs first. The discount applies to all common stock purchases made under the Investment Plan, whether by optional cash payment or by dividend reinvestment.

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) and submit requisitions for cost reimbursements over the life of the construction period. The interest rate on the Company’s current construction loan borrowings is near zero percent. 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. Under the Delaware SRF program, borrowers typically enter into a long-term note agreement for a term not to exceed twenty years and submit requisitions for cost reimbursements for up to two years after the agreement is executed.

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

1)

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.

2)

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 by December 31, 2021.

In October 2021, Tidewater filed an application with the DEPSC seeking approval to borrow up to $5.0 million under the Delaware SRF Program for construction of a one million gallon elevated storage tank. If approved by the DEPSC, Tidewater expects to close on the loan in 2021 and complete the project in 2023.

8


Index

In June 2021, Middlesex received approval from the NJBPU to redeem up to $45.5 million of outstanding first mortgage bonds, and issue replacement first mortgage bonds (FMBs) at an overall lower cost of debt. Middlesex expects to complete the redemption and replacement in November 2021 through a private placement loan of $45.5 million with a payment maturity date of November 2051 and an interest rate of 2.90%. Proceeds from the loan will be used to complete the redemption of the Series RR ($22.5 million) and the Series SS ($23.0 million) FMBs.

In March 2021, Tidewater entered into a loan agreement with CoBank, ACB pursuant to which Tidewater borrowed $20.0 million in September 2021 at an interest rate of 3.94% with a payment maturity date of September 2046. Proceeds from the loan were used to reduce the Company’s existing short-term borrowing balances under its lines of credit.

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. Completed or pending transactions totaling $59.5 million are detailed as follows:

1)

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 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.

2)

In November 2021, Middlesex expects to close on a $19.5 million private placement loan with a payment maturity date of November 2041 and an interest rate of 2.79%. Proceeds from this loan will be used to reduce the Company’s existing short-term borrowings under its bank lines of credit.

In August 2019, Middlesex 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:

September 30, 2021

December 31, 2020

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Bonds

$121,828

$130,665

$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 Notes”, “State Revolving Trust Notes”, “State Revolving Fund Bond” and “Construction Loans” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $148.4 million and $129.6 million at September 30, 2021 and December 31, 2020, respectively.

9


Index

Customer advances for construction have carrying amounts of $23.5 million and $23.4 million at September 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.

(In Thousands Except per Share Amounts)

Three Months Ended September 30,

2021

2020

Basic:

Income

Shares

Income

Shares

Net Income

$

11,476

17,491

$

12,737

17,466

Preferred Dividend

(30

)

(30

)

Earnings Applicable to Common Stock

$

11,446

17,491

$

12,707

17,466

 

Basic EPS

$

0.65

$

0.73

 

Diluted:

Earnings Applicable to Common Stock

$

11,446

17,491

$

12,707

17,466

$7.00 Series Preferred Dividend

17

115

17

115

Adjusted Earnings Applicable to Common Stock

$

11,463

17,606

$

12,724

17,581

 

Diluted EPS

$

0.65

$

0.72

(In Thousands Except per Share Amounts)

Nine Months Ended September 30,

2021

2020

Basic:

Income

Shares

Income

Shares

Net Income

$

29,305

17,485

$

30,118

17,455

Preferred Dividend

(90

)

(90

)

Earnings Applicable to Common Stock

$

29,215

17,485

$

30,028

17,455

 

Basic EPS

$

1.67

$

1.72

 

Diluted:

Earnings Applicable to Common Stock

$

29,215

17,485

$

30,028

17,455

$7.00 Series Preferred Dividend

50

115

50

115

Adjusted Earnings Applicable to Common Stock

$

29,265

17,600

$

30,078

17,570

 

Diluted EPS

$

1.66

$

1.71

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

10


Index

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.

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

Operations by Segments:

2021

2020

2021

2020

Revenues:

Regulated

$

37,396

$

37,041

$

100,426

$

98,267

Non – Regulated

2,995

3,204

9,657

9,345

Inter-segment Elimination

(517

)

(325

)

(966

)

(647

)

Consolidated Revenues

$

39,874

$

39,920

$

109,117

$

106,965

 

Operating Income:

Regulated

$

10,654

$

12,119

$

24,082

$

26,598

Non – Regulated

770

1,058

2,791

2,490

Consolidated Operating Income

$

11,424

$

13,177

$

26,873

$

29,088

 

Net Income:

Regulated

$

10,924

$

11,993

$

27,271

$

28,364

Non – Regulated

552

744

2,034

1,754

Consolidated Net Income

$

11,476

$

12,737

$

29,305

$

30,118

 

Capital Expenditures:

Regulated

$

14,743

$

25,266

$

61,097

$

70,398

Non – Regulated

2

101

148

387

Total Capital Expenditures

$

14,745

$

25,367

$

61,245

$

70,785

As of

As of

September 30, 2021

December 31, 2020

Assets:

Regulated

$

1,037,503

$

998,932

Non – Regulated

7,592

8,289

Inter-segment Elimination

(15,503

)

(30,751

)

Consolidated Assets

$

1,029,592

$

976,470

Note 6 – Short-term Borrowings

The Company maintains lines of credit aggregating $110.0 million.

(Millions)

As of September 30, 2021

Renewal Date

Outstanding

Available

Maximum

Credit Type

Bank of America

$

3.0

$

27.0

$

30.0

Uncommitted

January 27, 2022

PNC Bank

47.0

21.0

68.0

Committed

January 31, 2023

CoBank

-

12.0

12.0

Committed

November 30, 2023

$

50.0

$

60.0

$

110.0

11


Index

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.

The weighted average interest rate on the outstanding borrowings at September 30, 2021 under these credit lines is 1.01%.

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

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

Average Daily Amounts Outstanding

$

40,543

$

35,576

$

22,841

$

31,372

Weighted Average Interest Rates

1.13

%

1.24

%

1.14

%

1.63

%

The $50.0 million of loans under the lines of credit outstanding as of September 30, 2021 mature in October 2021 and November 2021, and, if needed, were or will be 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 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

Nine Months Ended

 

 

September 30,

September 30,

 

2021

2020

2021

2020

 

Treated

 

$

889

$

933

$

2,641

$

2,657

 

Untreated

 

841

878

2,483

2,530

 

Total Costs

 

$

1,730

$

1,811

$

5,124

$

5,187

 

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

12


Index

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.

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 obtain