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MSEX Middlesex Water

Filed: 5 May 21, 4:07pm


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 March 31, 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 April 30, 2021: Common Stock, No Par Value: 17,478,462 shares outstanding.


INDEX

PAGE

PART I.FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited):

1

Condensed Consolidated Statements of Income

1

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Cash Flows

3

Condensed Consolidated Statements of Capital Stock and Long-Term Debt

4

Condensed Consolidated Statements of Common Stockholders’ Equity

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.Quantitative and Qualitative Disclosures of Market Risk

22

Item 4.Controls and Procedures

23

PART II.OTHER INFORMATION

Item 1.Legal Proceedings

24

Item 1A.Risk Factors

24

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

24

Item 3.Defaults upon Senior Securities

24

Item 4.Mine Safety Disclosures

24

Item 5.Other Information

24

Item 6.Exhibits

24

SIGNATURES

25

 

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

Three Months Ended March 31,

2021

2020

 

Operating Revenues

$

32,541

 

$

31,769

 

 

 

 

Operating Expenses:

 

 

 

Operations and Maintenance

 

18,356

 

17,192

Depreciation

 

4,832

 

4,448

Other Taxes

 

3,719

 

3,602

 

 

 

 

Total Operating Expenses

 

26,907

 

25,242

 

 

 

 

Operating Income

 

5,634

 

6,527

 

 

 

 

Other Income (Expense):

 

 

 

Allowance for Funds Used During Construction

 

1,263

 

1,123

Other Income (Expense), net

 

775

 

385

 

 

 

 

Total Other Income, net

 

2,038

 

1,508

 

 

 

 

Interest Charges

 

1,738

 

1,669

 

 

 

 

Income before Income Taxes

 

5,934

 

6,366

 

 

 

 

Income Taxes

 

(973

)

(1,302

)

 

 

 

 

Net Income

 

6,907

 

7,668

 

 

 

 

Preferred Stock Dividend Requirements

 

30

 

30

 

 

 

 

Earnings Applicable to Common Stock

$

6,877

 

$

7,638

 

 

 

 

Earnings per share of Common Stock:

 

 

 

Basic

$

0.39

 

$

0.44

Diluted

$

0.39

 

$

0.44

 

 

 

 

Average Number of Common Shares Outstanding:

 

 

 

Basic

 

17,476

 

17,437

Diluted

 

17,591

 

17,552

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

March 31,

December 31,

ASSETS

2021

2020

UTILITY PLANT:

Water Production

$

173,375

 

$

168,080

Transmission and Distribution

 

654,667

 

648,763

General

 

85,990

 

85,056

Construction Work in Progress

 

89,717

 

80,055

TOTAL

 

1,003,749

 

981,954

Less Accumulated Depreciation

 

188,565

 

185,356

UTILITY PLANT - NET

 

815,184

 

796,598

 

 

 

 

CURRENT ASSETS:

Cash and Cash Equivalents

 

4,046

 

4,491

Accounts Receivable, net of allowance for doubtful accounts of $2,183 and $2,053, respectively

 

12,709

 

14,569

Unbilled Revenues

 

7,210

 

7,065

Materials and Supplies (at average cost)

 

5,193

 

5,112

Prepayments

 

2,222

 

2,886

TOTAL CURRENT ASSETS

 

31,380

 

34,123

 

 

 

 

OTHER ASSETS:

Operating Lease Right of Use Asset

 

5,030

 

5,209

Preliminary Survey and Investigation Charges

 

5,923

 

5,192

Regulatory Assets

 

117,204

 

118,144

Restricted Cash

 

163

 

5,913

Non-utility Assets - Net

 

11,253

 

11,207

Other

 

73

 

84

TOTAL OTHER ASSETS

 

139,646

 

145,749

TOTAL ASSETS

$

986,210

 

$

976,470

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

CAPITALIZATION:

Common Stock, No Par Value

$

217,976

 

$

217,451

Retained Earnings

 

130,872

 

128,757

TOTAL COMMON EQUITY

 

348,848

 

346,208

Preferred Stock

 

2,084

 

2,084

Long-term Debt

 

272,664

 

273,244

TOTAL CAPITALIZATION

 

623,596

 

621,536

 

 

 

 

CURRENT

Current Portion of Long-term Debt

 

7,159

 

7,255

LIABILITIES:

Notes Payable

 

13,000

 

2,000

Accounts Payable

 

24,414

 

30,443

Accrued Taxes

 

14,025

 

10,138

Accrued Interest

 

2,310

 

2,137

Unearned Revenues and Advanced Service Fees

 

1,237

 

1,255

Other

 

3,656

 

3,620

TOTAL CURRENT LIABILITIES

 

65,801

 

56,848

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

 

 

 

 

OTHER LIABILITIES:

Customer Advances for Construction

 

23,290

 

23,404

Lease Obligations

 

4,872

 

5,042

Accumulated Deferred Income Taxes

 

61,474

 

61,297

Employee Benefit Plans

 

33,672

 

34,426

Regulatory Liabilities

 

58,565

 

60,792

Other

 

1,163

 

1,135

TOTAL OTHER LIABILITIES

 

183,036

 

186,096

 

 

 

 

 

 

CONTRIBUTIONS IN AID OF CONSTRUCTION

 

113,777

 

111,990

TOTAL CAPITALIZATION AND LIABILITIES

$

986,210

 

$

976,470

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Three Months Ended March 31,

 

 

2021

 

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net Income

 

$

6,907

 

 

$

7,668

 

Adjustments to Reconcile Net Income to

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

6,296

 

 

 

5,108

 

Provision for Deferred Income Taxes and Investment Tax Credits

 

 

(2,359

)

 

 

(3,430

)

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

 

 

(732

)

 

 

(694

)

Cash Surrender Value of Life Insurance

 

 

27

 

 

 

205

 

Stock Compensation Expense

 

 

203

 

 

 

162

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

1,860

 

 

 

1,085

 

Unbilled Revenues

 

 

(145

)

 

 

481

 

Materials & Supplies

 

 

(81

)

 

 

169

 

Prepayments

 

 

664

 

 

 

577

 

Accounts Payable

 

 

(6,029

)

 

 

810

 

Accrued Taxes

 

 

3,887

 

 

 

3,530

 

Accrued Interest

 

 

173

 

 

 

(1,169

)

Employee Benefit Plans

 

 

95

 

 

 

450

 

Unearned Revenue & Advanced Service Fees

 

 

(18

)

 

 

(1

)

Other Assets and Liabilities

 

 

(1,306

)

 

 

1,187

 

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

9,442

 

 

 

16,138

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Utility Plant Expenditures, Including AFUDC of $531 in 2021, $429 in 2020

 

 

(22,033

)

 

 

(25,147

)

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(22,033

)

 

 

(25,147

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Redemption of Long-term Debt

 

 

(1,324

)

 

 

(1,330

)

Proceeds from Issuance of Long-term Debt

 

 

687

 

 

 

5,398

 

Net Short-term Bank Borrowings

 

 

11,000

 

 

 

13,500

 

Deferred Debt Issuance Expense

 

 

(2

)

 

 

(24

)

Common Stock Issuance Expense

 

 

0-

 

 

 

(37

)

Proceeds from Issuance of Common Stock

 

 

322

 

 

 

313

 

Payment of Common Dividends

 

 

(4,762

)

 

 

(4,468

)

Payment of Preferred Dividends

 

 

(30

)

 

 

(30

)

Construction Advances and Contributions-Net

 

 

505

 

 

 

2,489

 

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

6,396

 

 

 

15,811

 

NET CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(6,195

)

 

 

6,802

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

10,404

 

 

 

46,499

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

4,209

 

 

$

53,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:

 

 

 

 

 

 

 

 

Utility Plant received as Construction Advances and Contributions

 

$

1,169

 

 

$

1,422

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

 

 

 

 

 

 

 

 

Cash Paid During the Year for:

 

 

 

 

 

 

 

 

Interest

 

$

1,726

 

 

$

3,022

 

Interest Capitalized

 

$

531

 

 

$

429

 

Income Taxes

 

$

0-

 

 

$

2

 

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

 

March 31,

 

December 31,

 

 

 

2021

 

2020

 

Common Stock, No Par Value

 

 

 

 

 

 

 

 

 

Shares Authorized - 40,000

 

 

 

 

 

 

 

 

 

Shares Outstanding - 2021 - 17,478; 2020 - 17,473

 

$

217,976

 

 

$

217,451

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

130,872

 

 

 

128,757

 

 

TOTAL COMMON EQUITY

 

$

348,848

 

 

$

346,208

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Preferred Stock, No Par Value:

 

 

 

 

 

 

 

 

 

Shares Authorized - 120

 

 

 

 

 

 

 

 

 

Shares Outstanding - 20

 

 

 

 

 

 

 

 

 

Convertible:

 

 

 

 

 

 

 

 

 

Shares Outstanding, $7.00 Series - 10

 

$

1,005

 

 

$

1,005

 

 

Nonredeemable:

 

 

 

 

 

 

 

 

 

Shares Outstanding, $7.00 Series - 1

 

 

79

 

 

 

79

 

 

Shares Outstanding, $4.75 Series - 10

 

 

1,000

 

 

 

1,000

 

 

TOTAL PREFERRED STOCK

 

$

2,084

 

 

$

2,084

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Debt:

 

 

 

 

 

 

 

 

 

8.05%, Amortizing Secured Note, due December 20, 2021

 

$

255

 

 

$

336

 

 

6.25%, Amortizing Secured Note, due May 19, 2028

 

 

3,010

 

 

 

3,115

 

 

6.44%, Amortizing Secured Note, due August 25, 2030

 

 

2,637

 

 

 

2,707

 

 

6.46%, Amortizing Secured Note, due September 19, 2031

 

 

2,917

 

 

 

2,987

 

 

4.22%, State Revolving Trust Note, due December 31, 2022

 

 

119

 

 

 

119

 

 

3.60%, State Revolving Trust Note, due May 1, 2025

 

 

1,170

 

 

 

1,170

 

 

3.30% State Revolving Trust Note, due March 1, 2026

 

 

243

 

 

 

266

 

 

3.49%, State Revolving Trust Note, due January 25, 2027

 

 

286

 

 

 

307

 

 

4.03%, State Revolving Trust Note, due December 1, 2026

 

 

390

 

 

 

389

 

 

0.00%, State Revolving Fund Bond, due August 1, 2021

 

 

10

 

 

 

11

 

 

3.64%, State Revolving Trust Note, due July 1, 2028

 

 

192

 

 

 

192

 

 

3.64%, State Revolving Trust Note, due January 1, 2028

 

 

62

 

 

 

62

 

 

3.45%, State Revolving Trust Note, due August 1, 2031

 

 

763

 

 

 

793

 

 

6.59%, Amortizing Secured Note, due April 20, 2029

 

 

2,819

 

 

 

2,907

 

 

7.05%, Amortizing Secured Note, due January 20, 2030

 

 

2,208

 

 

 

2,271

 

 

5.69%, Amortizing Secured Note, due January 20, 2030

 

 

4,530

 

 

 

4,658

 

 

4.45%, Amortizing Secured Note, due April 20, 2040

 

 

8,397

 

 

 

8,506

 

 

4.47%, Amortizing Secured Note, due April 20, 2040

 

 

3,116

 

 

 

3,156

 

 

3.75%, State Revolving Trust Note, due July 1, 2031

 

 

1,699

 

 

 

1,699

 

 

2.00%, State Revolving Trust Note, due February 1, 2036

 

 

934

 

 

 

961

 

 

2.00%, State Revolving Trust Note, due November 1, 2038

 

 

1,543

 

 

 

1,543

 

 

3.75%, State Revolving Trust Note, due November 30, 2030

 

 

883

 

 

 

883

 

 

0.00% Construction Loans

 

 

51,223

 

 

 

50,536

 

 

First Mortgage Bonds:

 

 

 

 

 

 

 

 

 

0.00%, Series BB, due August 1, 2021

 

 

116

 

 

 

119

 

 

4.00% to 5.00%, Series CC, due August 1, 2021

 

 

164

 

 

 

164

 

 

0.00%, Series EE, due August 1, 2023

 

 

996

 

 

 

1,036

 

 

3.00% to 5.50%, Series FF, due August 1, 2024

 

 

1,870

 

 

 

1,870

 

 

0.00%, Series GG, due August 1, 2026

 

 

531

 

 

 

541

 

 

4.00% to 5.00%, Series HH, due August 1, 2026

 

 

620

 

 

 

620

 

 

0.00%, Series II, due August 1, 2024

 

 

326

 

 

 

338

 

 

3.40% to 5.00%, Series JJ, due August 1, 2027

 

 

500

 

 

 

500

 

 

0.00%, Series KK, due August 1, 2028

 

 

704

 

 

 

719

 

 

5.00% to 5.50%, Series LL, due August 1, 2028

 

 

846

 

 

 

846

 

 

0.00%, Series MM, due August 1, 2030

 

 

903

 

 

 

937

 

 

3.00% to 4.375%, Series NN, due August 1, 2030

 

 

1,105

 

 

 

1,105

 

 

0.00%, Series OO, due August 1, 2031

 

 

1,605

 

 

 

1,656

 

 

2.00% to 5.00%, Series PP, due August 1, 2031

 

 

600

 

 

 

600

 

 

5.00%, Series QQ, due October 1, 2023

 

 

9,915

 

 

 

9,915

 

 

3.80%, Series RR, due October 1, 2038

 

 

22,500

 

 

 

22,500

 

 

4.25%, Series SS, due October 1, 2047

 

 

23,000

 

 

 

23,000

 

 

0.00%, Series TT, due August 1, 2032

 

 

1,756

 

 

 

1,806

 

 

3.00% to 3.25%, Series UU, due August 1, 2032

 

 

705

 

 

 

705

 

 

0.00%, Series VV, due August 1, 2033

 

 

1,813

 

 

 

1,861

 

 

3.00% to 5.00%, Series WW, due August 1, 2033

 

 

715

 

 

 

715

 

 

0.00%, Series XX, due August 1, 2047

 

 

10,121

 

 

 

10,247

 

 

3.00% to 5.00%, Series YY, due August 1, 2047

 

 

3,710

 

 

 

3,710

 

 

0.00%, Series 2018A, due August 1, 2047

 

 

6,167

 

 

 

6,246

 

 

3.00%-5.00%, Series 2018B, due August 1, 2047

 

 

2,211

 

 

 

2,211

 

 

4.00%, Series 2019A, due August 1, 2059

 

 

32,500

 

 

 

32,500

 

 

5.00%, Series 2019B, due August 1, 2059

 

 

21,200

 

 

 

21,200

 

 

2.90%, Series 2020A, due November 18, 2050

 

 

40,000

 

 

 

40,000

 

 

SUBTOTAL LONG-TERM DEBT

 

 

276,605

 

 

 

277,241

 

 

Add: Premium on Issuance of Long-term Debt

 

 

7,569

 

 

 

7,669

 

 

Less: Unamortized Debt Expense

 

 

(4,351

)

 

 

(4,411

)

 

Less: Current Portion of Long-term Debt

 

 

(7,159

)

 

 

(7,255

)

 

TOTAL LONG-TERM DEBT

 

$

272,664

 

 

$

273,244

 

 

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands except per share amounts)

 

 

Common

 

Common

 

 

 

 

 

 

Stock

 

Stock

 

Retained

 

 

 

 

Shares

 

Amount

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

17,434

 

 

$

215,125

 

 

$

108,667

 

 

$

323,792

 

Net Income

 

 

-

 

 

 

-

 

 

 

7,668

 

 

 

7,668

 

Dividend Reinvestment & Common Stock Purchase Plan

 

 

5

 

 

 

313

 

 

 

-

 

 

 

313

 

Restricted Stock Award - Net - Employees

 

 

-

 

 

 

162

 

 

 

-

 

 

 

162

 

Cash Dividends on Common Stock ($0.2563 per share)

 

 

-

 

 

-

 

 

 

(4,468

)

 

 

(4,468

)

Cash Dividends on Preferred Stock

 

 

-

 

 

 

-

 

 

 

(30

)

 

 

(30

)

Common Stock Expenses

 

 

-

 

 

 

-

 

 

 

(37

)

 

 

(37

)

Balance at March 31, 2020

 

 

17,439

 

 

$

215,600

 

 

$

111,800

 

 

$

327,400

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

17,473

 

 

$

217,451

 

 

$

128,757

 

 

$

346,208

 

Net Income

 

 

-

 

 

 

-

 

 

 

6,907

 

 

 

6,907

 

Dividend Reinvestment & Common Stock Purchase Plan

 

 

5

 

 

 

322

 

 

 

-

 

 

 

322

 

Restricted Stock Award - Net - Employees

 

 

-

 

 

 

203

 

 

 

-

 

 

 

203

 

Cash Dividends on Common Stock ($0.2725 per share)

 

 

-

 

 

-

 

 

 

(4,762

)

 

 

(4,762

)

Cash Dividends on Preferred Stock

 

 

-

 

 

 

-

 

 

 

(30

)

 

 

(30

)

Balance at March 31, 2021

 

 

17,478

 

 

$

217,976

 

 

$

130,872

 

 

$

348,848

 

See Notes to Condensed Consolidated Financial Statements.

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 March 31, 2021 and the results of operations and cash flows for the three month periods ended March 31, 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 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 February 2021, Middlesex requested 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 a lower rate of interest. We cannot predict whether the NJBPU will ultimately approve or deny this request, for which a decision is expected in the second quarter of 2021.

Novel Coronavirus (COVID-19) – In March 2020, the United States declared the COVID-19 pandemic a national emergency, which 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 Governors have been relaxing many of the elements of their respective declared State of Emergency Orders (SEOs) and requirements as more of the citizenry is inoculated for the virus.

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 the issuance of the SEOs, 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 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 expects to apply the account credits in 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. On April 22, 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. The ALJ established a schedule for filing Briefs on Exceptions. Twin Lakes takes exception to certain of the ALJ’s conclusions and expects to file a Brief before the Recommended Decision goes before the PAPUC for their disposition of the matter.

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 - For each of the three months ended March 31, 2021 and 2020, the Company received proceeds of $0.3 million for the issuance of approximately 5,000 shares of its common stock under the Middlesex Water Company 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. Through March 31, 2021, Middlesex has drawn a total of $42.6 million and expects to draw any remaining funding requests on this construction loan in the second quarter of 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.

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 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:

March 31, 2021

December 31, 2020

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Bonds

$147,209

$159,764

$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 rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note”, “State Revolving Trust Note”, “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 $129.4 million and $129.6 million at March 31, 2021 and December 31, 2020, respectively. Customer advances for construction have carrying amounts of $23.3 million and $23.4 million at March 31, 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 March 31,

2021

2020

Basic:

Income

Shares

Income

Shares

Net Income

$

6,907

17,476

$

7,668

17,437

Preferred Dividend

(30

)

(30

)

Earnings Applicable to Common Stock

$

6,877

17,476

$

7,638

17,437

 

Basic EPS

$

0.39

$

0.44

 

Diluted:

Earnings Applicable to Common Stock

$

6,877

17,476

$

7,638

17,437

$7.00 Series Preferred Dividend

17

115

17

115

Adjusted Earnings Applicable to Common Stock

$

6,894

17,591

$

7,655

17,552

 

Diluted EPS

$

0.39

$

0.44

Note 5 – Business Segment Data

The Company has identified 2 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.

(In Thousands)

Three Months Ended

March 31,

Operations by Segments:

2021

2020

Revenues:

Regulated

$

29,421

$

28,937

Non – Regulated

3,257

2,961

Inter-segment Elimination

(137

)

(129

)

Consolidated Revenues

$

32,541

$

31,769

 

Operating Income:

Regulated

$

4,716

$

5,843

Non – Regulated

918

684

Consolidated Operating Income

$

5,634

$

6,527

 

Net Income:

Regulated

$

6,240

$

7,181

Non – Regulated

667

487

Consolidated Net Income

$

6,907

$

7,668

 

Capital Expenditures:

Regulated

$

21,963

$

24,968

Non – Regulated

70

179

Total Capital Expenditures

$

22,033

$

25,147

As of

As of

March 31,

December 31,

2021

2020

Assets:

Regulated

$

1,004,405

$

998,932

Non – Regulated

7,918

8,289

Inter-segment Elimination

(26,113

)

(30,751

)

Consolidated Assets

$

986,210

$

976,470

Note 6 – Short-term Borrowings

The Company maintains lines of credit aggregating $110.0 million.

(Millions)

As of March 31, 2020

Outstanding

Available

Maximum

Credit Type

Renewal Date

Bank of America

$

0-

$

30.0

$

30.0

Uncommitted

January 27, 2022

PNC Bank

10.0

58.0

68.0

Committed

January 31, 2023

CoBank

3.0

9.0

12.0

Committed

November 30, 2023

$

13.0

$

97.0

$

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.

The weighted average interest rate on the outstanding borrowings at March 31, 2021 under these credit lines is 1.09%.

The weighted average daily amounts of outstanding borrowings under the Company’s credit lines and the weighted average interest rates on those amounts were $8.0 million and $21.4 million at 1.12% and 2.58% for the three months ended March 31, 2021 and 2020, respectively.

The maturity dates for the $13.0 million outstanding as of March 31, 2021 were in April 2021 and were extended at the discretion of 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

 

March 31,

2021

 

2020

Treated

 

$

877

$

793

Untreated

 

861

870

Total Costs

 

$

1,738

$

1,663

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 and the continuation of the litigation matter, we do not anticipate having to perform under the guaranty nor do we 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 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 March 31, 2021 and 2020, respectively.

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

 

(In Millions)

As of

 

March

31, 2021

December

31, 2020

ROU Asset at Lease Inception

 

$

7.3

$

7.3

Accumulated Amortization

 

(2.3

)

(2.1

)

Current ROU Asset

 

$

5.0

$

5.2

The Company’s future minimum operating lease commitments as of March 31, 2021 are as follows:

 

 

(In Millions)

2021

 

$

0.6

 

2022

 

 

0.8

 

2023

 

0.8

 

2024

 

 

0.8

 

2025

 

 

0.8

 

Thereafter

 

 

3.6

 

Total Lease Payments

 

$

7.4

 

Imputed Interest

 

 

(1.8

)

Present Value of Lease Payments

 

 

5.6

 

Less Current Portion*

 

 

(0.7

)

Non-Current Lease Liability

 

$

4.9

 

 

 

 

 

 

*Included in Other Current Liabilities

 

 

 

 

Construction - The Company has forecasted to spend approximately $121 million for its construction program in 2021. The Company has entered into several construction contracts that, in the aggregate, obligate expenditure of an estimated $17 million in the future. The timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

Contingencies - Based on our operations in the heavily-regulated water and wastewater industries, the Company is routinely involved in disputes, claims, lawsuits and other regulatory and legal matters, including responsibility for fines and penalties relative to regulatory compliance. At this time, Management does not believe the final resolution of any such matters, whether asserted or unasserted, will have a material adverse effect on the Company’s financial position, results of operations or cash flows. In addition, the Company maintains business insurance coverage that may mitigate the effect of any current or future loss contingencies.

Change in Control Agreements - The Company has Change in Control Agreements with certain of its officers that provide compensation and benefits in the event of termination of employment in connection with a change in control of the Company.

Note 8 – Employee Benefit Plans

Pension Benefits - The Company’s Pension Plan covers all active employees hired prior to April 1, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides for a potential annual contribution in an amount that is at the discretion of the Company. In order to be eligible for a contribution, the participant must be employed by the Company on December 31st of the year to which the contribution relates. For each of the three month periods ended March 31, 2021 and 2020, the Company did not make Pension Plan cash contributions. The Company expects to make Pension Plan cash contributions of approximately $3.4 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.4 million in annual benefits to the retired participants.

Other Postretirement Benefits - The Company’s retirement plan other than pensions (Other Benefits Plan) covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three month period ended March 31, 2021, the Company did not make Other Benefits Plan cash contributions. For the three month period ended March 31, 2020, the Company made Other Benefits Plan cash contributions of $0.3 million. The Company expects to make additional Other Benefits Plan cash contributions of $0.8 million and $0.3 million over the remainder of the current year.

The following table sets forth information relating to the Company’s periodic costs for its employee retirement benefit plans:

(In Thousands)

Pension Benefits

Other Benefits

Three Months Ended March 31,

2021

2020

2021

2020

 

Service Cost

$

674

$

609

$

229

$

248

Interest Cost

677

775

309

425

Expected Return on Assets

(1,556

)

(1,409

)

(786

)

(721

)

Amortization of Unrecognized Losses

717

515

132

338

Net Periodic Benefit Cost (Benefit)*

$

512

$

490

$

(116

)

$

290

*Service cost is included in Operations and Maintenance expense on the Condensed Consolidated Statements of Income; all other amounts are included in Other Income/Expense, net.

Note 9 – Revenue Recognition from Contracts with Customers

The Company’s revenues are primarily generated from regulated tariff-based sales of water and wastewater services and non-regulated operation and maintenance contracts for services on water and wastewater systems owned by others. Revenue from contracts with customers is recognized when control of a promised good or service is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.

The Company’s regulated revenue from contracts with customers is derived from tariff-based sales that result from the obligation to provide water and wastewater services to residential, industrial, commercial, fire-protection and wholesale customers. The Company’s residential customers are billed quarterly while most of the Company’s industrial, commercial, fire-protection and wholesale customers are billed monthly. Payments by customers are due between 15 and 30 days after the invoice date. The Company recognizes revenue as the water and wastewater services are delivered to customers, as well as records unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing factors such as historical customer data, regional weather indicators and general economic conditions in its service territories. Unearned Revenues and Advance Service Fees include fixed service charge billings in advance of service provided to Tidewater customers and are recognized as service is provided.

Non-regulated service contract revenues consist of base service fees, as well as fees for additional billable services provided to customers. Fees are billed monthly and are due within 30 days after the invoice date. The Company considers the amounts billed to represent the value of these services provided to customers. These contracts expire at various times through June 2030 and contain remaining performance obligations for which the Company expects to recognize revenue in the future. These contracts also contain termination provisions.

Almost all of the amounts included in operating revenues and accounts receivable are from contracts with customers. The Company records its allowance for doubtful accounts based on historical write-offs combined with an evaluation of current economic conditions within its service territories.

The Company’s contracts do not contain any significant financing components.

The Company’s operating revenues are comprised of the following:

(In Thousands)

Three Months Ended March 31,

2021

2020

Regulated Tariff Sales

Residential

$

16,957

$

16,681

Commercial

3,576

3,369

Industrial

2,177

2,081

Fire Protection

3,104

3,045

Wholesale

3,539

3,698

Non-Regulated Contract Operations

3,151

2,859

Total Revenue from Contracts with Customers

$

32,504

$

31,733

Other Regulated Revenues

68

62

Other Non-Regulated Revenues

106

103

Inter-segment Elimination

(137

)

(129

)

Total Revenue

$

32,541

$

31,769

Note 10 – Income Taxes

The Company’s federal income tax returns for the tax years 2014 through 2017 were selected for examination by the Internal Revenue Service (IRS), which included the tax year in which the Company had adopted the final IRS tangible property regulations and changed its accounting method for the tax treatment of expenditures that qualified as deductible repairs. As a result of the audit examination, the Company agreed to certain modifications of its accounting method for expenditures that qualify as deductible repairs. In 2019, the Company paid $2.7 million in income taxes and $0.1 million in interest in connection with the conclusion of the 2014 through 2017 federal income tax return audits. As of March 31, 2021, the Company has reduced its income tax reserve provision and interest expense liability to $0.5 million and $0.2 million, respectively.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Forward-Looking Statements

Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The Company intends that these statements be covered by the safe harbors created under those laws. They include, but are not limited to statements as to:

-

expected financial condition, performance, prospects and earnings of the Company;

-

strategic plans for growth;

-

the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;

-

the Company’s expected liquidity needs during the upcoming fiscal year and beyond and the sources and availability of funds to meet its liquidity needs;

-

expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results;

-

financial projections;

-

the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on plan assets;

-

the ability of the Company to pay dividends;

-

the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs;

-

the safety and reliability of the Company’s equipment, facilities and operations;

-

the Company’s plans to renew municipal franchises and consents in the territories it serves;

-

trends; and

-

the availability and quality of our water supply.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to:

-

effects of general economic conditions;

-

increases in competition for growth in non-franchised markets to be potentially served by the Company;

-

ability of the Company to adequately control selected operating expenses which are necessary to maintain safe and proper utility services, and which may be beyond the Company’s control;

-

availability of adequate supplies of water;

-

actions taken by government regulators, including decisions on rate increase requests;

-

new or modified water quality standards and compliance with related regulatory requirements;

-

weather variations and other natural phenomena impacting utility operations;

-

financial and operating risks associated with acquisitions and, or privatizations;

-

acts of war or terrorism;

-

changes in the pace of housing development;

-

availability and cost of capital resources;

-

impact of the Novel Coronavirus (COVID-19) pandemic; and

-

other factors discussed elsewhere in this quarterly report.

Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company’s understanding as of the date of this report. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Overview

Middlesex has operated as a water utility in New Jersey since 1897 and in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate water and wastewater systems under contract for governmental entities and private entities primarily in New Jersey and Delaware and provide regulated wastewater services in New Jersey and Delaware through five subsidiaries. We are regulated as to rates charged to customers for water and wastewater services, as to the quality of water service we provide and as to certain other matters in New Jersey and Delaware. Only our Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Services, Inc. (White Marsh) subsidiaries are not regulated utilities.

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 61,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of over 0.2 million. Our Bayview subsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to approximately 2,500 customers in Southampton Township, New Jersey.

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 53,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services approximately 1,900 customers in Delaware and Maryland through various operations and maintenance contracts.

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 4,000 residential retail customers in Sussex County, Delaware.

USA-PA operates the water and wastewater systems for the City of Perth Amboy, New Jersey (Perth Amboy) under a 10-year operations and maintenance contract expiring in 2028. In addition to performing day-to day operations, USA-PA is also responsible for emergency responses and management of capital projects funded by Perth Amboy.

USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2022. In addition to performing day to day operations, USA is responsible for billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. Beginning July 1, 2020, USA began operating the Borough of Highland Park, New Jersey’s (Highland Park) water and wastewater systems under a 10-year operations and maintenance contract. Under a marketing agreement with HomeServe USA (HomeServe), USA offers residential customers in New Jersey and Delaware a menu of water and wastewater related home maintenance programs. HomeServe is a leading national provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. USA also provides unregulated water and wastewater services under contract with several New Jersey municipalities.

Recent Developments

Loan Agreement - In March 2021, Tidewater entered into a $20 million loan agreement with CoBank, ACB (CoBank). Tidewater 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 February 2021, Middlesex requested 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 a lower rate of interest. We cannot predict whether the NJBPU will ultimately approve or deny this request, for which a decision is expected in the second quarter of 2021.

Capital Construction Program - The Company’s multi-year capital construction program encompasses numerous projects designed to upgrade and replace utility infrastructure as well as enhance the integrity and reliability of assets to better serve the current and future generations of water and wastewater customers. The Company plans to invest approximately $121 million in 2021 in connection with this plan for projects that include, but are not limited to:

Completion of construction of a facility to provide an enhanced treatment process at the Company’s largest water treatment plant in Edison, New Jersey to mitigate the formation of disinfection by-products that can develop during the water treatment process, as well as other improvements;

Construction of a facility to provide an enhanced treatment process at the Company’s largest wellfield in South Plainfield, New Jersey to comply with new state water quality regulations relative to poly- and perfluoro-alkyl substances, collectively referred to as PFAS, and integrate surge protection to mitigate spikes in water pressures along with enhancements to corrosion control and chlorination processes;

Renovations and related construction at our 37-year old Middlesex Operations facility in New Jersey, including more efficient work space to meet the evolved needs of the business, enhancements to information technology infrastructure, improved energy efficiency and regulatory requirements;

Replacement of approximately four miles of water mains including service lines, valves, fire hydrants and meters in Metuchen, New Jersey; and

Construction of a new expandable wastewater treatment plant with enhanced processes to meet changing regulatory requirements to serve our customer base in the Town of Milton, Delaware.

The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

COVID-19 – In March 2020, the United States declared the COVID-19 pandemic a national emergency, which remains in effect. While the Company’s operations and capital construction program have not been 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 primary operations are located, the Governors have been relaxing many of the elements of their respective declared State of Emergency Orders (SEOs) and requirements as more of the citizenry is inoculated for the virus.

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 the issuance of the SEOs, 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.

Outlook

Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management and customer growth. These factors are evident in comparison discussions in the Results of Operations section below. Weather patterns which can result in lower customer demand for water may occur in 2021. Water rates for our Middlesex customers were last reset in April 2018 and were determined using a rate base of $245 million. Our additional investments in system infrastructure since that time has grown significantly. Operating costs are anticipated to increase in 2021 in a variety of categories, in particular due to wage inflation in a specialized labor market where we compete for such resources. In addition, the repair tax benefits approved by the NJBPU in the 2017 Middlesex rate case are due to expire in April 2022. These factors, among others, will require Middlesex to file a request for an increase in its water rates during the second quarter of 2021.

A non-controllable factor that may affect our outlook in 2021 is the pace at which remediation of the COVID-19 pandemic continues to occur, and the related impact on the regional and national economic recoveries. In addition, the New Jersey SEO moratorium on customer service terminations remains in effect, currently through June 30, 2021. For further discussion of the impact of COVID-19 on the Company, see Recent Developments, COVID-19 above.

Organic residential customer growth for our Tidewater system is expected to continue at the 5% pace achieved in 2020, delaying any foreseeable need to seek an increase in customer base rates in 2021.

Our strategy for profitable growth is focused on the following key areas:

Invest in projects, products and services that complement our core water and wastewater competencies;

Timely and adequate recovery of infrastructure investments and other costs to maintain service quality;

Prudent acquisitions of investor and municipally-owned water and wastewater utilities; and

Operation of municipal and industrial water and wastewater systems on a contract basis which meet our risk profile.

Operating Results by Segment

The discussion of the Company’s operating results is on a consolidated basis and includes significant factors by subsidiary. The Company has two operating segments, Regulated and Non-Regulated. The operations of the Regulated segment are subject to regulations promulgated by state public utility commissions as to rates and level of service. Rates and level of service in the Non-Regulated segment are subject to the terms of individually-negotiated and executed contracts with municipal, industrial and other clients. Both segments are subject to federal and state environmental, water and wastewater quality and other associated legal and regulatory requirements.

The segments in the tables included below consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands, Southern Shores and TESI; Non-Regulated-USA, USA-PA, and White Marsh.

Results of Operations – Three Months Ended March 31, 2021

(In Thousands)

Three Months Ended March 31,

2021

2020

Regulated

Non-

Regulated

Total

Regulated

Non-

Regulated

Total

Revenues

$

29,390

$

3,151

$

32,541

$

28,911

$

2,858

$

31,769

Operations and maintenance expenses

16,249

2,107

18,356

15,142

2,050

17,192

Depreciation expense

4,774

58

4,832

4,399

49

4,448

Other taxes

3,651

68

3,719

3,527

75

3,602

Operating income

4,716

918

5,634

5,843

684

6,527

 

Other income, net

1,979

59

2,038

1,472

36

1,508

Interest expense

1,738

-

1,738

1,668

1

1,669

Income taxes

(1,283

)

310

(973

)

(1,534

)

232

(1,302

)

Net income

$

6,240

$

667

$

6,907

$

7,181

$

487

$

7,668

Operating Revenues

Operating revenues for the three months ended March 31, 2021 increased $0.8 million from the same period in 2020 due to the following factors:

Middlesex System revenues increased $0.3 million due to increased demand from customers;

Tidewater System revenues increased $0.2 million due primarily to additional customers, net of the a Distribution System Improvement Charge revenue refund (for further information, see Note 2, Rate and Regulatory Matters, Tidewater); and

Non-regulated revenues increased $0.3 million due to USA’s contract to operate and maintain Highland Park’s water and wastewater systems, which commenced July 1, 2020.

Operation and Maintenance Expense

Operation and maintenance expenses for the three months ended March 31, 2021 increased $1.2 million from the same period in 2020 due to the following factors:

Higher weather-related main break activity in our Middlesex system during the winter months resulted in $0.4 million of additional non-labor costs;

Labor costs increased $0.3 million due to wage increases, overall averaging approximately 3%;

Variable production costs increased $0.1 million due to higher customer water consumption;

Non-regulated operation and maintenance expenses increased $0.1 million due to USA’s contract to operate and maintain Highland Park’s water and wastewater systems, which commenced July 1, 2020; and

All other operation and maintenance expense categories increased $0.2 million.

Depreciation

Depreciation expense for the three months ended March 31, 2021 increased $0.4 million from the same period in 2020 due to a higher level of utility plant in service.

Other Taxes

Other taxes for the three months ended March 31, 2021 increased $0.1 million from the same period in 2020 primarily due to higher revenue related taxes on increased revenues in our Middlesex system.

Other Income, net

Other Income, net for the three months ended March 31, 2021 increased $0.5 million from the same period in 2020 primarily due to higher Allowance for Funds Used During Construction resulting from a higher level of capital projects in progress and lower actuarially-determined retirement benefit plans non-service expense.

Interest Charges

Interest charges for the three months ended March 31, 2021 increased $0.1 million from the same period in 2020 due to higher average short-term and long-term debt outstanding in 2021 as compared to 2020 partially offset by lower average interest rates.

Income Taxes

The benefit from income taxes for the three months ended March 31, 2021 decreased by $0.3 million from the same period in 2020, primarily due to lower tax benefits associated with decreased repair expenditures on tangible property owned by Middlesex, partially offset by lower pre-tax income.

Net Income and Earnings Per Share

Net income for the three months ended March 31, 2021 decreased $0.8 million as compared with the same period in 2020. Basic and diluted earnings per share were $0.39 and $0.44 for the three months ended March 31, 2021 and 2020, respectively.

Liquidity and Capital Resources

Operating Cash Flows

Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and growth. The effect of those factors on net income is discussed in “Results of Operations.”

For the three months ended March 31, 2021, cash flows from operating activities decreased $6.7 million to $9.4 million. The decrease in cash flows from operating activities primarily resulted from the timing of payments to vendors.

Investing Cash Flows

For the three months ended March 31, 2021, cash flows used in investing activities decreased $3.1 million to $22.0 million. The decrease in cash flows used in investing activities resulted from decreased utility plant expenditures.

For further discussion on the Company’s future capital expenditures and expected funding sources, see “Capital Expenditures and Commitments” below.

Financing Cash Flows

For the three months ended March 31, 2021, cash flows from financing activities decreased $9.4 million to $6.4 million. The decrease in cash flows provided by financing activities is due to net lower proceeds from the issuance of long-term debt, a reduction in net short-term bank borrowings and lower net construction advances and contributions.

Capital Expenditures and Commitments

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings, proceeds from sales of common stock under the Middlesex Water Company Investment Plan (Investment Plan) and proceeds from sales offerings to the public of our common stock. See below for a more detailed discussion regarding the funding of our capital program.

The capital investment program for 2021 is currently estimated to be approximately $121 million. Through March 31, 2021, we have expended $22 million and expect to incur approximately $99 million for capital projects for the remainder of 2020.

We currently project that we may expend approximately $193 million for capital projects in 2022 and 2023. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

To pay for our capital program for the remainder of 2021, we plan on utilizing some or all of the following:

Internally generated funds;

Short-term borrowings, as needed, through $110 million of lines of credit established with three financial institutions. As of March 31, 2021, there was $97.0 million of available credit under these lines (for further discussion on Company lines of credit, see Note 6Short Term Borrowings);

Proceeds from the Delaware State Revolving Fund (SRF). SRF programs provide low cost financing for projects that meet certain water quality and system improvement;

Proceeds from Tidewater’s $20 million CoBank loan (see Recent Developments, Loan Agreement above)

Remaining proceeds from Middlesex’s August 2018 SRF Construction loan;

Proceeds from the sale and issuance of First Mortgage Bonds in private placement offerings and/or through the New Jersey Economic Development Authority; and

Proceeds from the Middlesex Water Company Investment Plan.

In order to fully fund the ongoing large investment program in our utility plant infrastructure and maintain a balanced capital structure for a regulated water utility, Middlesex may offer for sale additional shares of its common stock. The amount, the timing and the sales method of the common stock is dependent on the timing of the construction expenditures, the level of additional debt financing and financial market conditions. As previously approved by the NJBPU in 2019, the Company is authorized to issue and sell up to 0.7 million shares of its common stock in one or more transactions through December 31, 2022.

Recent Accounting Pronouncements – See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and guidance.

Item 3.Quantitative and Qualitative Disclosures of Market Risk

We are exposed to market risk associated with changes in interest rates and commodity prices. The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company’s interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2021 to 2059. Over the next twelve months, approximately $7.2 million of the current portion of existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

Our risks associated with commodity price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, financial position and cash flows.

We are exposed to credit risk for both our Regulated and Non-Regulated business segments. Our Regulated operations serve residential, commercial, industrial and municipal customers while our Non-Regulated operations engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.

The Company's retirement benefit plan assets are subject to fluctuating market prices of debt and equity securities. Changes to the Company's retirement benefit plan asset values can impact the Company's retirement benefit plan expense, funded status and future minimum funding requirements. Our risk is mitigated by our ability to recover retirement benefit plan costs through rates for regulated utility services charged to our customers.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (the Exchange Act), an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted by the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

None.

Item 1A.Risk Factors

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.

Exhibits

 

10.19(b)

Promissory Note and Supplement, dated March 29, 2021, between Tidewater Utilities, Inc. and CoBank, ACB; Amendment to Combination Water Utility Real Estate Mortgage and Security Agreement, effective March 29,2021, between Tidewater Utilities, Inc. and CoBank, ACB

 

10.29(b)

Amendment to Loan Documents between the Company, Pinelands Wastewater Company, Tidewater Environmental Services, Inc., Tidewater Utilities, Inc., Utility Service Affiliates (Perth Amboy) Inc., Utility Service Affiliates Inc. and While Marsh Environmental Systems, Inc., and PNC Bank, N.A.

 

31.1

Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

31.2

Section 302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

32.1

Section 906 Certification by Dennis W. Doll pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.2

Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Schema Document

 

101.CAL

XBRL Calculation Linkbase Document

 

101.LAB

XBRL Labels Linkbase Document

 

101.PRE

XBRL Presentation Linkbase Document

 

101.DEF

XBRL Definition Linkbase Document

��

104

Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MIDDLESEX WATER COMPANY

 

By:

/s/A. Bruce O’Connor

A. Bruce O’Connor

Senior Vice President, Treasurer and

Chief Financial Officer

(Principal Accounting Officer)

Date: May 5, 2021

25