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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 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.

1


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.

2


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.

3


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.

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 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.

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 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.

6


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.

7


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:

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 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.

8


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.

9


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.

10


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

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.

11


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.

12


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

 

 

0.8

 

2025

 

 

0.8

 

Thereafter