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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from ___________to ___________

Commission File Number 0-422

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey

22-1114430

(State of incorporation)

(IRS employer identification no.)

 

485C Route One South, IselinNew Jersey 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

MSEX

NASDAQ

 

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

Yes ☒  No ☐

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

Yes ☒  No ☐

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

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

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

Yes  No ☒

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


INDEX

PAGE

PART I.FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited):

1

Condensed Consolidated Statements of Income

1

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Cash Flows

3

Condensed Consolidated Statements of Capital Stock and Long-Term Debt

4

Condensed Consolidated Statements of Common Stockholders’ Equity

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

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

16

Item 3.Quantitative and Qualitative Disclosures of Market Risk

24

Item 4.Controls and Procedures

24

PART II.OTHER INFORMATION

Item 1.Legal Proceedings

25

Item 1A.Risk Factors

25

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

25

Item 3.Defaults upon Senior Securities

25

Item 4.Mine Safety Disclosures

25

Item 5.Other Information

25

Item 6.Exhibits

25

SIGNATURES

26

 

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

 

Operating Revenues

$

39,920

$

37,769

$

106,965

$

101,859

 

Operating Expenses:

Operations and Maintenance

17,949

17,669

52,761

50,569

Depreciation

4,721

4,246

13,798

12,415

Other Taxes

4,073

3,871

11,318

10,913

 

Total Operating Expenses

26,743

25,786

77,877

73,897

 

Operating Income

13,177

11,983

29,088

27,962

 

Other Income (Expense):

Allowance for Funds Used During Construction

953

871

2,871

2,030

Other Income (Expense), net

444

(4

)

1,164

(142

)

 

Total Other Income, net

1,397

867

4,035

1,888

 

Interest Charges

1,906

1,996

5,521

4,984

 

Income before Income Taxes

12,668

10,854

27,602

24,866

 

Income Taxes

(69

)

(265

)

(2,516

)

(952

)

 

Net Income

12,737

11,119

30,118

25,818

 

Preferred Stock Dividend Requirements

30

30

90

102

 

Earnings Applicable to Common Stock

$

12,707

$

11,089

$

30,028

$

25,716

 

Earnings per share of Common Stock:

Basic

$

0.73

$

0.67

$

1.72

$

1.56

Diluted

$

0.72

$

0.66

$

1.71

$

1.55

 

Average Number of Common Shares Outstanding:

Basic

17,466

16,610

17,455

16,520

Diluted

17,581

16,757

17,570

16,673

See Notes to Condensed Consolidated Financial Statements.

1


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

September 30,

December 31,

ASSETS

2020

2019

UTILITY PLANT:

Water Production

$

165,010

$

160,870

Transmission and Distribution

625,746

556,517

General

83,606

83,043

Construction Work in Progress

73,340

75,520

TOTAL

947,702

875,950

Less Accumulated Depreciation

181,661

170,220

UTILITY PLANT - NET

766,041

705,730

 

CURRENT ASSETS:

Cash and Cash Equivalents

5,346

2,230

Accounts Receivable, net

15,567

11,908

Unbilled Revenues

8,823

7,183

Materials and Supplies (at average cost)

4,762

5,445

Prepayments

3,369

2,367

TOTAL CURRENT ASSETS

37,867

29,133

 

AND OTHER ASSETS:

Operating Lease Right of Use Asset

5,390

5,944

Preliminary Survey and Investigation Charges

3,307

2,054

Regulatory Assets

112,176

110,479

Restricted Cash

22,841

44,269

Non-utility Assets - Net

10,845

10,370

Other

1,367

1,899

TOTAL DEFERRED CHARGES AND OTHER ASSETS

155,926

175,015

TOTAL ASSETS

$

959,834

$

909,878

 

CAPITALIZATION AND LIABILITIES

CAPITALIZATION:

Common Stock, No Par Value

$

216,866

215,125

Retained Earnings

125,240

108,667

TOTAL COMMON EQUITY

342,106

323,792

Preferred Stock

2,084

2,084

Long-term Debt

234,489

230,777

TOTAL CAPITALIZATION

578,679

556,653

 

CURRENT

Current Portion of Long-term Debt

7,239

7,178

LIABILITIES:

Notes Payable

36,500

20,000

Accounts Payable

24,860

23,306

Accrued Taxes

10,642

7,635

Accrued Interest

1,937

2,031

Unearned Revenues and Advanced Service Fees

1,311

1,211

Other

2,865

3,620

TOTAL CURRENT LIABILITIES

85,354

64,981

 

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

 

DEFERRED CREDITS

Customer Advances for Construction

25,100

23,905

AND OTHER LIABILITIES:

Lease Obligations

5,214

5,732

Accumulated Deferred Income Taxes

58,970

54,408

Employee Benefit Plans

33,310

34,671

Regulatory Liabilities

62,979

69,152

Other

2,432

2,546

TOTAL DEFERRED CREDITS AND OTHER LIABILITIES

188,005

190,414

 

CONTRIBUTIONS IN AID OF CONSTRUCTION

107,796

97,830

TOTAL CAPITALIZATION AND LIABILITIES

$

959,834

$

909,878

See Notes to Condensed Consolidated Financial Statements.

2


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended September 30,

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$

30,118

$

25,818

Adjustments to Reconcile Net Income to

Net Cash Provided by Operating Activities:

Depreciation and Amortization

15,595

12,858

Provision for Deferred Income Taxes and Investment Tax Credits

(10,991

)

(8,379

)

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

(1,789

)

(1,330

)

Cash Surrender Value of Life Insurance

(166

)

(187

)

Stock Compensation Expense

820

409

Changes in Assets and Liabilities:

Accounts Receivable

(3,659

)

(1,645

)

Unbilled Revenues

(1,640

)

(2,124

)

Materials & Supplies

683

252

Prepayments

(1,002

)

(933

)

Accounts Payable

1,554

853

Accrued Taxes

3,007

(2,098

)

Accrued Interest

(94

)

(490

)

Employee Benefit Plans

1,234

(640

)

Unearned Revenue & Advanced Service Fees

100

12

Other Assets and Liabilities

3,520

 

972

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

37,290

23,348

CASH FLOWS FROM INVESTING ACTIVITIES:

Utility Plant Expenditures, Including AFUDC of $1,082 in 2020, $700 in 2019

(70,785

)

(61,220

)

 

NET CASH USED IN INVESTING ACTIVITIES

(70,785

)

(61,220

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Redemption of Long-term Debt

(6,391

)

(6,315

)

Proceeds from Issuance of Long-term Debt

10,319

82,446

Net Short-term Bank Borrowings

16,500

10,000

Deferred Debt Issuance Expense

(41

)

(754

)

Common Stock Issuance Expense

(37

)

(22

)

Proceeds from Issuance of Common Stock

921

12,449

Payment of Common Dividends

(13,418

)

(11,893

)

Payment of Preferred Dividends

(90

)

(102

)

Construction Advances and Contributions-Net

7,420

3,480

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

15,183

89,289

NET CHANGES IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

(18,312

)

(51,417

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

46,499

5,661

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

$

28,187

$

57,078

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:

Utility Plant received as Construction Advances and Contributions

$

3,747

$

5,375

Long term Debt Deobligation

$

-

$

130

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash Paid During the Year for:

Interest

$

5,834

$

5,929

Interest Capitalized

$

1,082

$

700

Income Taxes

$

1,783

$

6,752

See Notes to Condensed Consolidated Financial Statements.

3


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(Unaudited)

(In thousands)

September 30,

December 31,

2020

2019

Common Stock, No Par Value

Shares Authorized - 40,000

Shares Outstanding - 2020 - 17,469; 2019 - 17,434

$

216,866

$

215,125

 

Retained Earnings

125,240

108,667

TOTAL COMMON EQUITY

$

342,106

$

323,792

 

Cumulative Preferred Stock, No Par Value:

Shares Authorized - 120

Shares Outstanding - 2020 - 20: 2019 - 20

Convertible:

Shares Outstanding, $7.00 Series - 10

$

1,005

$

1,005

Nonredeemable:

Shares Outstanding, $7.00 Series - 1

79

79

Shares Outstanding, $4.75 Series - 10

1,000

1,000

TOTAL PREFERRED STOCK

$

2,084

$

2,084

 

Long-term Debt:

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

$

415

$

643

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

3,220

3,535

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

2,777

2,987

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

3,057

3,267

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

147

175

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

1,288

1,405

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

266

309

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

307

349

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

419

446

4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021

4

60

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

11

50

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

203

214

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

66

69

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

793

851

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

2,994

3,255

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

2,333

2,521

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

4,786

5,171

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

8,617

8,946

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

3,197

3,320

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

1,765

1,829

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

960

1,013

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

1,579

1,309

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

919

955

0.00% Construction Loans

50,536

40,467

First Mortgage Bonds:

0.00%, Series BB, due August 1, 2021

119

241

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

164

331

0.00%, Series EE, due August 1, 2023

1,036

1,456

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

1,870

2,440

0.00%, Series GG, due August 1, 2026

542

632

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

620

710

0.00%, Series II, due August 1, 2024

338

429

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

500

588

0.00%, Series KK, due August 1, 2028

719

807

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

846

928

0.00%, Series MM, due August 1, 2030

937

1,037

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

1,105

1,190

0.00%, Series OO, due August 1, 2031

1,655

1,806

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

600

660

5.00%, Series QQ, due October 1, 2023

9,915

9,915

3.80%, Series RR, due October 1, 2038

22,500

22,500

4.25%, Series SS, due October 1, 2047

23,000

23,000

0.00%, Series TT, due August 1, 2032

1,806

1,957

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

705

755

0.00%, Series VV, due August 1, 2033

1,861

2,004

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

715

755

0.00%, Series XX, due August 1, 2047

10,247

10,627

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

3,710

3,785

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

6,247

6,678

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

2,210

2,320

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

32,500

32,500

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

21,200

21,200

SUBTOTAL LONG-TERM DEBT

238,326

234,397

Add: Premium on Issuance of Long-term Debt

7,766

8,064

Less: Unamortized Debt Expense

(4,364

)

(4,506

)

Less: Current Portion of Long-term Debt

(7,239

)

(7,178

)

TOTAL LONG-TERM DEBT

$

234,489

$

230,777

See Notes to Condensed Consolidated Financial Statements.

4


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands)

Common

Common

Stock

Stock

Retained

Shares

Amount

Earnings

Total

 

For the Three Months Ended September 30, 2019

Balance at July 1, 2019

16,554

$

165,138

$

98,146

$

263,284

Net Income

11,119

11,119

Dividend Reinvestment & Common Stock Purchase Plan

92

5,368

5,368

Restricted Stock Award, Net - Employees

1

172

172

Shares Forefeited

(18

)

(466

)

(466

)

Conversion of $8.00 Convertible Preferred Stock

41

350

350

Cash Dividends on Common Stock ($0.2400 per share)

(3,987

)

(3,987

)

Cash Dividends on Preferred Stock

(30

)

(30

)

Common Stock Expenses

(15

)

(15

)

Balance at September 30, 2019

16,670

$

170,562

$

105,233

$

275,795

 

For the Nine Months Ended September, 2019

Balance at January 1, 2019

16,403

$

157,354

$

91,433

$

248,787

Net Income

25,818

25,818

Dividend Reinvestment & Common Stock Purchase Plan

222

12,449

12,449

Restricted Stock Award, Net - Employees

18

679

679

Stock Award - Board Of Directors

4

196

196

Shares Forefeited

(18

)

(466

)

(466

)

Conversion of $8.00 Convertible Preferred Stock

41

350

350

Cash Dividends on Common Stock ($0.7200 per share)

(11,893

)

(11,893

)

Cash Dividends on Preferred Stock

(102

)

(102

)

Common Stock Expenses

(23

)

(23

)

Balance at September 30, 2019

16,670

$

170,562

$

105,233

$

275,795

 

For the Three Months Ended September 30, 2020

Balance at July 1, 2020

17,464

$

216,365

$

117,008

$

333,373

Net Income

12,737

12,737

Dividend Reinvestment & Common Stock Purchase Plan

5

313

313

Restricted Stock Award - Net - Employees

188

188

Cash Dividends on Common Stock ($0.2563 per share)

(4,475

)

(4,475

)

Cash Dividends on Preferred Stock

(30

)

(30

)

Balance at September 30, 2020

17,469

 

 

$

216,866

 

$

125,240

 

$

342,106

 

For the Nine Months Ended September 30, 2020

Balance at January 1, 2020

17,434

$

215,125

$

108,667

$

323,792

Net Income

30,118

30,118

Dividend Reinvestment & Common Stock Purchase Plan

14

921

921

Restricted Stock Award - Net - Employees

17

575

575

Restricted Stock Award - Board Of Directors

4

245

245

Cash Dividends on Common Stock ($0.7688 per share)

(13,418

)

(13,418

)

Cash Dividends on Preferred Stock

(90

)

(90

)

Common Stock Expenses

(37

)

(37

)

Balance at September 30, 2020

17,469

$

216,866

$

125,240

$

342,106

See Notes to Condensed Consolidated Financial Statements.

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

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

Recent Developments

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

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

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

Recently Adopted Accounting Guidance

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

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

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

Note 2 Rate and Regulatory Matters

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

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

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

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

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

6


Index

Note 3 – Capitalization

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

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

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

1)

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

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.

7


Index

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

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

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

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

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

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

(In Thousands)

September 30, 2020

December 31, 2019

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Bonds

$147,681

$158,579

$151,361

$160,772

8


Index

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

Note 4 – Earnings Per Share

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

(In Thousands Except per Share Amounts)

Three Months Ended September 30,

2020

2019

Basic:

Income

Shares

Income

Shares

Net Income

$

12,737

17,466

$

11,119

16,610

Preferred Dividend

(30

)

(30

)

Earnings Applicable to Common Stock

$

12,707

17,466

$

11,089

16,610

 

Basic EPS

$

0.73

$

0.67

 

Diluted:

Earnings Applicable to Common Stock

$

12,707

17,466

$

11,089

16,610

$7.00 Series Preferred Dividend

17

115

17

115

$8.00 Series Preferred Dividend

32

Adjusted Earnings Applicable to Common Stock

$

12,724

17,581

$

11,106

16,757

 

Diluted EPS

$

0.72

$

0.66

9


Index

(In Thousands Except per Share Amounts)

Nine Months Ended September 30,

2020

2019

Basic:

Income