10-Q 1 form10q-28869_msx.htm 10-Q MIDDLESEX WATER CO
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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, 2022

 

OR

 

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

 

For the transition period from ___________to ___________

Commission File Number 0-422

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey

22-1114430

(State of incorporation)

(IRS employer identification no.)

 

485C Route One South, Iselin, New Jersey08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

MSEX

NASDAQ

 

 

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

Yes ☒  No ☐

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

Yes ☒  No ☐

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

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

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

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

Yes ☐  No

The number of shares outstanding of each of the registrant's classes of Common Stock, as of October 28, 2022: Common Stock, No Par Value: 17,638,595 shares outstanding.


INDEX

PAGE

PART I.FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited):

Condensed Consolidated Statements of Income

1

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Cash Flows

3

Condensed Consolidated Statements of Capital Stock and Long-Term Debt

4

Condensed Consolidated Statements of Common Stockholders’ Equity

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

 
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3.Quantitative and Qualitative Disclosures of Market Risk 26
   
Item 4.Controls and Procedures 27
   
PART II.OTHER INFORMATION  
   
Item 1.Legal Proceedings 28
   
Item 1A.Risk Factors 28
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 28
   
Item 3.Defaults upon Senior Securities 28
   
Item 4.Mine Safety Disclosures 28
   
Item 5.Other Information 28
   
Item 6.Exhibits 29
   
SIGNATURES 30

 

 

 

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,

2022

2021

2022

2021

 

Operating Revenues

$

47,732

$

39,874

$

123,611

$

109,117

 

Operating Expenses:

Operations and Maintenance

20,312

18,950

59,007

55,265

Depreciation

5,814

5,504

17,107

15,523

Other Taxes

5,031

3,996

13,543

11,456

Total Operating Expenses

31,157

28,450

89,657

82,244

Gain on Sale of Subsidiary

-

-

5232

-

Operating Income

16,575

11,424

39,186

26,873

 

Other Income (Expense):

Allowance for Funds Used During Construction

627

344

1,553

2,376

Other Income (Expense), net

1,412

744

4,185

2,308

 

Total Other Income, net

2,039

1,088

5,738

4,684

 

Interest Charges

2,355

2,101

6,574

5,910

 

Income before Income Taxes

16,259

10,411

38,350

25,647

 

Income Taxes

1,968

 

(1,065

)

3,092

 

(3,658

)

 

Net Income

14,291

11,476

35,258

29,305

 

Preferred Stock Dividend Requirements

30

30

90

90

 

Earnings Applicable to Common Stock

$

14,261

$

11,446

$

35,168

$

29,215

 

Earnings per share of Common Stock:

Basic

$

0.81

$

0.65

$

2

$

1.67

Diluted

$

0.8

$

0.65

$

1.99

$

1.66

 

Average Number of Common Shares Outstanding:

Basic

17,628

17,491

17,583

17,485

Diluted

17,743

17,606

17,698

17,600

See Notes to Condensed Consolidated Financial Statements.

1


Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

September 30,

December 31,

ASSETS

2022

2021

UTILITY PLANT:

Water Production

$

246,426

 

$

247,286

Transmission and Distribution

 

709,748

 

697,200

General

 

96,433

 

95,658

Construction Work in Progress

 

59,152

 

24,947

TOTAL

 

1,111,759

 

1,065,091

Less Accumulated Depreciation

 

211,902

 

199,723

UTILITY PLANT - NET

 

899,857

 

865,368

 

 

 

 

CURRENT ASSETS:

Cash and Cash Equivalents

 

2,908

 

3,533

Accounts Receivable, net of allowance for uncollectible accounts of $2,593 and $2,574, respectively

 

18,081

 

15,311

Unbilled Revenues

 

11,022

 

7,273

Materials and Supplies (at average cost)

 

5,792

 

5,358

Prepayments

 

3,669

 

2,880

TOTAL CURRENT ASSETS

 

41,472

 

34,355

 

 

 

 

OTHER ASSETS:

Operating Lease Right of Use Asset

 

3,992

 

4,503

Preliminary Survey and Investigation Charges

 

3,244

 

3,540

Regulatory Assets

 

104,903

 

100,738

Non-utility Assets - Net

 

11,096

 

11,428

Other

 

105

 

83

TOTAL OTHER ASSETS

 

123,340

 

120,292

TOTAL ASSETS

$

1,064,669

 

$

1,020,015

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

CAPITALIZATION:

Common Stock, No Par Value

$

232,423

 

$

221,919

Retained Earnings

 

165,652

 

145,807

TOTAL COMMON EQUITY

 

398,075

 

367,726

Preferred Stock

 

2,084

 

2,084

Long-term Debt

 

301,238

 

306,520

TOTAL CAPITALIZATION

 

701,397

 

676,330

 

 

 

 

CURRENT

Current Portion of Long-term Debt

 

7,567

 

6,731

LIABILITIES:

Notes Payable

 

40,500

 

13,000

Accounts Payable

 

25,873

 

21,125

Accrued Taxes

 

12,585

 

8,621

Accrued Interest

 

2,174

 

1,986

Unearned Revenues and Advanced Service Fees

 

1,477

 

1,330

Other

 

2,791

 

3,826

TOTAL CURRENT LIABILITIES

 

92,967

 

56,619

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

 

 

 

 

OTHER LIABILITIES:

Customer Advances for Construction

 

22,425

 

23,529

Lease Obligations - Operating

 

3,871

 

4,367

Accumulated Deferred Income Taxes

 

76,979

 

69,500

Employee Benefit Plans

 

8,062

 

11,290

Regulatory Liabilities

 

46,693

 

49,431

Other

 

1,004

 

1,086

TOTAL OTHER LIABILITIES

 

159,034

 

159,203

 

 

 

 

 

CONTRIBUTIONS IN AID OF CONSTRUCTION

 

111,271

127,863

TOTAL CAPITALIZATION AND LIABILITIES

$

1,064,669

 

$

1,020,015

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,

2022

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$

35,258

$

29,305

Adjustments to Reconcile Net Income to

Net Cash Provided by Operating Activities:

Depreciation and Amortization

20,135

17,253

Provision for Deferred Income Taxes

(4,312

)

(11,801

)

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

(914

)

(1,356

)

Cash Surrender Value of Life Insurance

474

(97

)

Stock Compensation Expense

1,270

1,033

Gain on Sale of Subsidiary

(5,232

)

-

Changes in Assets and Liabilities:

Accounts Receivable

(2,770

)

(2,459

)

Unbilled Revenues

(3,749

)

(2,009

)

Materials and Supplies

(434

)

(44

)

Prepayments

(789

)

(1,141

)

Accounts Payable

4,748

(13,103

)

Accrued Taxes

3,964

2,550

Accrued Interest

188

(943

)

Employee Benefit Plans

(1,973

)

1,187

Unearned Revenue & Advanced Service Fees

146

139

Other Assets and Liabilities

(1,769

)

124

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

44,241

18,638

CASH FLOWS FROM INVESTING ACTIVITIES:

Utility Plant Expenditures, Including AFUDC of $639 in 2022 and $1,020 in 2021

(65,939

)

(61,245

)

Proceeds from Sale of Subsidiary

3,122

-

 

NET CASH USED IN INVESTING ACTIVITIES

(62,817

)

(61,245

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Redemption of Long-term Debt

(6,397

)

(28,655

)

Proceeds from Issuance of Long-term Debt

2,663

21,595

Net Short-term Bank Borrowings

27,500

48,000

Deferred Debt Issuance Expense

(612

)

(35

)

Common Stock Issuance Expense

(25

)

-

Proceeds from Issuance of Common Stock

10,064

 

885

Payment of Common Dividends

(15,298

)

(14,294

)

Payment of Preferred Dividends

(90

)

(90

)

Construction Advances and Contributions-Net

146

 

10,079

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

17,951

37,485

NET CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

(625

)

(5,122

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

3,533

 

10,404

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

$

2,908

$

5,282

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:

Utility Plant received as Construction Advances and Contributions

$

5,705

$

4,279

Non-Cash Consideration for Sale of Subsidiary

2,100

-

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash Paid During the Year for:

Interest

$

6,793

$

7,091

Interest Capitalized

$

639

$

1,020

Income Taxes

$

2,125

$

3,235

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,

 

 

 

2022

 

2021

 

Common Stock, No Par Value

 

 

 

 

 

 

 

 

 

Shares Authorized - 40,000

 

 

 

 

 

 

 

 

 

Shares Outstanding - 2022 - 17,638; 2021 - 17,522

 

$

232,423

 

 

$

221,919

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

165,652

 

 

 

145,807

 

 

TOTAL COMMON EQUITY

 

$

398,075

 

 

$

367,726

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

First Mortgage Bonds, 0.00%-5.50%, due 2023-2059

 

$

252,269

 

 

$

203,892

 

 

Amortizing Secured Notes, 3.94%-7.05%, due 2028-2046

 

 

45,592

 

 

 

47,613

 

 

State Revolving Trust Notes, 2.00%-4.22%, due 2022-2041

 

 

9,551

 

 

 

7,510

 

 

Construction Loans, 0.00%

 

 

-

 

 

 

52,131

 

 

SUBTOTAL LONG-TERM DEBT

 

 

307,412

 

 

 

311,146

 

 

Add: Premium on Issuance of Long-term Debt

 

 

6,973

 

 

 

7,271

 

 

Less: Unamortized Debt Expense

 

 

(5,580

)

 

 

(5,166

)

 

Less: Current Portion of Long-term Debt

 

 

(7,567

)

 

 

(6,731

)

 

TOTAL LONG-TERM DEBT

 

$

301,238

 

 

$

306,520

 

 

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, 2021

Balance at July 1, 2021

17,490

$

218,100

$

136,998

$

355,098

Net Income

-

-

11,476

11,476

Middlesex Water Company Invesment Plan

3

289

-

289

Restricted Stock Award - Net - Employees

-

273

-

273

Cash Dividends on Common Stock ($0.2725 per share)

-

-

(4,766

)

(4,766

)

Cash Dividends on Preferred Stock

-

-

(30

)

(30

)

Balance at September 30, 2021

17,493

 

 

$

218,662

 

 

$

143,678

 

 

$

362,340

 

For the Nine Months Ended September 30, 2021

Balance at January 1, 2021

17,473

$

217,451

$

128,757

$

346,208

Net Income

-

-

29,305

29,305

Middlesex Water Company Invesment Plan

11

885

-

885

Restricted Stock Award - Net - Employees

6

81

 

-

81

Restricted Stock Award - Board of Directors

3

245

-

245

Cash Dividends on Common Stock ($0.8175 per share)

-

-

(14,294

)

(14,294

)

Cash Dividends on Preferred Stock

-

-

(90

)

(90

)

Balance at September 30, 2021

17,493

$

218,662

$

143,678

$

362,340

 

For the Three Months Ended September 30, 2022

Balance at July 1, 2022

17,604

$

229,037

$

156,530

$

385,567

Net Income

-

-

14,291

14,291

Middlesex Water Company Invesment Plan

34

3,025

-

3,025

Restricted Stock Award - Net - Employees

-

361

-

361

Cash Dividends on Common Stock ($0.2900 per share)

-

-

(5,114

)

(5,114

)

Cash Dividends on Preferred Stock

-

-

(30

)

(30

)

Common Stock Expenses

-

-

(25

)

(25

)

Balance at September 30, 2022

17,638

 

 

$

232,423

 

 

$

165,652

 

 

$

398,075

 

For the Nine Months Ended September 30, 2022

Balance at January 1, 2022

17,522

$

221,919

$

145,807

$

367,726

Net Income

-

-

35,258

35,258

Middlesex Water Company Invesment Plan

110

10,064

-

10,064

Restricted Stock Award - Net - Employees

3

160

 

-

160

Restricted Stock Award - Board of Directors

3

280

-

280

Cash Dividends on Common Stock ($0.8700 per share)

-

-

(15,298

)

(15,298

)

Cash Dividends on Preferred Stock

-

-

(90

)

(90

)

Common Stock Expenses

-

-

(25

)

(25

)

Balance at September 30, 2022

17,638

$

232,423

$

165,652

$

398,075

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), 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 2021 Annual Report on Form 10-K (the 2021 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, 2022, the results of operations for the three month and nine month periods ended September 30, 2022 and 2021 and cash flows for the nine month periods ended September 30, 2022 and 2021. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2021, has been derived from the Company’s December 31, 2021 audited financial statements included in the 2021 Form 10-K.

Recent Developments

Regulatory Notice of Non-Compliance – In September 2021, the New Jersey Department of Environmental Protection (NJDEP) issued a Notice of Non-Compliance (Notice) to Middlesex based on self-reporting by Middlesex that the level of Perfluorooctanoic Acid (PFOA) in water treated at its Park Avenue Wellfield Treatment Plant in South Plainfield, New Jersey exceeded a recently promulgated NJDEP standard effective in 2021. The NJDEP standard for PFOA was developed based on a Health-based Maximum Contaminant Level of 14 parts per trillion. Neither the NJDEP nor Middlesex has characterized this exceedance as an acute health threat. However, Middlesex was required to notify its affected customers and complied in November 2021 as required by the regulation.

The Notice further required the Company to take any action necessary to comply with the new standard by September 7, 2022. The Company began construction of an enhanced treatment process at the Park Avenue Wellfield Treatment Plant to comply with the new standard prior to the regulation being enacted. Since completion is not expected until mid-2023, in December 2021, the Company implemented an interim solution to meet the Notice requirements. The Park Avenue Wellfield Treatment Plant was taken off-line and alternate sources of supply have been obtained. Simultaneously, the Company accelerated a portion of the enhanced treatment project to allow a restart of the Park Avenue Wellfield Treatment Plant ahead of historical higher water demand periods during the summer months.

In June 2022, construction of the accelerated portion was completed and the Park Avenue Wellfield Treatment Plant is effectively treating ground water to ensure compliance with all state and federal drinking water standards. Working in coordination with the NJDEP, the Company successfully restarted the Park Avenue Wellfield Treatment Plant and introduced wellfield water into the distribution system. Water being delivered to customers is in compliance with all United States Environmental Protection Agency and NJDEP drinking water standards, including the newly established water quality standard for PFOA.

On September 13, 2022, the Company entered into an Administrative Consent Order (ACO) with the NJDEP, which requires the Company to take whatever actions are necessary to achieve and maintain compliance with the Safe Drinking Water Act, N.J.S.A, 58:12A-1 et seq., and the Safe Drinking Water Act regulations N.J.A.C. 7:10-1 et seq., including applicable public notifications. The Company’s agreement to enter into an ACO avoided any further Notice regarding the fact that the permanent treatment solution was not in service by September 7, 2022. The Company must issue the public notifications by February 22, 2023 and continue to complete and distribute public information as prescribed in the ACO. In addition, in accordance with the ACO:

On or before June 30, 2023, the Company shall complete the permanent construction of the Park Avenue Wellfield treatment upgrades, place the treatment upgrades into operation, and all water at the Park Avenue Wellfield Treatment Plant shall be treated to comply with the PFOA NJDEP standards.

The Company must perform required sample testing and reporting for PFOA subsequent to completion of the Park Avenue Wellfield treatment upgrades.

The Company shall submit to the NJDEP quarterly progress reports detailing the Company’s compliance with the ACO.

The Company’s failure to comply with the compliance schedule and/or progress reporting requirements of the ACO could lead to penalties up to $500 per day. In addition, the NJDEP could penalize the Company for other violations, if any, of the ACO.

In November 2021, the Company was served with two PFOA-related class action lawsuits seeking restitution for medical, water replacement and other claimed related costs. These lawsuits are in the early stages of the legal process and their ultimate resolution cannot be predicted at this time. The Company’s insurance provider has acknowledged coverage of potential liability which may result from these lawsuits. In May 2022, the Company impleaded 3M Company (3M) as a third-party defendant in one of these class action lawsuits. The Company has taken this action in addition to a separate lawsuit the Company initiated against 3M seeking to hold 3M accountable for introduction of perfluoroalkyl substances, which include PFOA, into the Company’s water supply at its Park Avenue Wellfield facility.

In January 2022, the Company filed a petition with the New Jersey Board of Public Utilities (NJBPU) seeking to establish a regulatory asset and deferred accounting treatment until its next base rate setting proceeding for all costs associated with the interim solution to comply with the Notice. The Company is currently awaiting a decision on this matter from the NJBPU.

Sale of Subsidiary – In January 2022, Middlesex closed on the Delaware Public Service Commission (DEPSC) approved sale of 100% of the common stock of its subsidiary Tidewater Environmental Services, Inc. to Artesian Wastewater Management, Inc. for $6.4 million in cash and other consideration, resulting in a $5.2 million pre-tax gain. The Company will continue to own and operate its non-regulated water and wastewater contract operations business in Delaware.

Borough of Avalon, New JerseyContract Renewal – In August 2022, USA, Middlesex’s non-regulated subsidiary, was awarded a competitively-bid 10-year operations and maintenance contract with the Borough of Avalon, New Jersey (Avalon) under which USA will continue to operate Avalon’s water utility, sewer utility and storm water system. USA is also required to manage capital projects funded by Avalon. USA previously operated Avalon’s water utility, sewer utility and storm water system under a 10-year contract that expired in August 2022. The new contract commenced September 1, 2022.

Coronavirus (COVID-19) Pandemic – On October 13, 2022, the United States Secretary of Health and Human Services renewed the determination that a nationwide health emergency exists as a result of the COVID-19 Pandemic. 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, the declared COVID-19 State of Emergency ended in March 2022. In Delaware, the declared COVID-19 State of Emergency Order ended in July 2021.

6


Index

The NJBPU and the DEPSC have approved the tracking of COVID-19 related incremental costs for potential recovery in customer rates in future rate proceedings. Neither jurisdiction has established a timetable or definitive formal procedures for seeking cost recovery. 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. Since the ultimate rate treatment to be determined by the NJBPU and the DEPSC regarding incremental costs related to COVID-19 is not definitively known at this time, the Company has not deferred any such costs. We will continue to monitor the effects of COVID-19 and evaluate its impact on the Company’s 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 December 2021, Middlesex’s petition to the NJBPU seeking permission to increase its base water rates was concluded, based on a negotiated settlement, resulting in an expected increase in annual operating revenues of $27.7 million. The approved tariff rates were designed to recover increased operating costs as well as a return on invested capital of $513.5 million, based on an authorized return on common equity of 9.6%. The increase is being implemented in two phases with $20.7 million of the increase effective January 1, 2022 and the remaining $7.0 million effective January 1, 2023. As part of the negotiated settlement, the Purchased Water Adjustment Clause (PWAC), which is a rate mechanism that allows for recovery of increased purchased water costs between base rate case filings, was reset to zero.

In September 2022, the NJBPU approved Middlesex's Emergency Relief Motion to reset its PWAC tariff rate to recover additional costs of $2.7 million for the purchase of treated water from a non-affiliated regulated water utility. The increase, effective October 1, 2022, is on an interim basis and subject to refund with interest, pending final resolution of this matter.

Tidewater - On August 31, 2022, DEPSC issued an Order requiring Tidewater to reduce its base rates charged to general metered and private fire customers by 6%, effective for service rendered on and after September 1, 2022. In June 2022, the Delaware Division of the Public Advocate filed a petition with the DEPSC requesting that Tidewater’s rates be reduced based on the claim that Tidewater had been earning above its authorized rate of return. The rate reduction is expected to reduce annual revenues by approximately $2.2million.

In June 2022, Tidewater notified the DEPSC of its intention to likely file for a base water rate increase in the first quarter of 2023 based on projected increases in operational expenses and capital construction expenditures.

Pinelands - In September 2022, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase base rates by approximately $0.6 million and $0.4 million per year, respectively. These requests were necessitated by capital infrastructure investments both companies have made, or have committed to make, and increased operations and maintenance costs. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the requests. A decision by the NJBPU in either matter is not expected before the first quarter of 2023.

Twin Lakes Utilities, Inc. (Twin Lakes) - Twin Lakes provides water services to approximately 115 residential customers in Shohola, Pennsylvania. Pursuant to the Pennsylvania Public Utility Code, Twin Lakes filed a petition requesting the Pennsylvania Public Utilities Commission (PAPUC) to order the acquisition of Twin Lakes by a capable public utility. The PAPUC assigned an Administrative Law Judge (ALJ) to adjudicate the matter and submit a recommended decision (Recommended Decision) to the PAPUC. As part of this legal proceeding the PAPUC also issued an Order in January 2021 appointing a large Pennsylvania based investor-owned water utility as the receiver (the Receiver Utility) of the Twin Lakes system until the petition is fully adjudicated by the PAPUC. In November 2021, the PAPUC issued an Order affirming the ALJ’s Recommended Decision, ordering the Receiver Utility to acquire the Twin Lakes water system and for Middlesex to submit $1.7 million into an escrow account within 30 days. Twin Lakes immediately filed a Petition For Review (PFR) with the Commonwealth Court of Pennsylvania (the Commonwealth Court) seeking reversal and vacation of the escrow requirement on the grounds that it violates the Pennsylvania Public Utility Code as well as the United States Constitution. In addition, Twin Lakes filed an emergency petition for stay of the PAPUC Order pending the Commonwealth Court’s review of the merits arguments contained in Twin Lakes’ PFR. In December 2021, the Commonwealth Court granted Twin Lakes’ emergency petition, pending its review. In August 2022, the Commonwealth Court issued an opinion upholding PAPUC’s November 2021 Order in its entirety. In September 2022, Twin Lakes filed a Petition For Allowance of Appeal to the Supreme Court of Pennsylvania seeking reversal of the Commonwealth Court’s decision to uphold the escrow requirement on the grounds that the Commonwealth Court erred in failing to address Twin Lakes’ constitutional claims. The timing of the final decision by the Supreme Court of Pennsylvania and the final adjudication of this matter cannot be predicted at this time.

The financial results, total assets and financial obligations of Twin Lakes are not material to Middlesex.

Note 3 – Capitalization

Common Stock - During the nine months ended September 30, 2022 and 2021, there were 110,614 common shares (approximately $10.1 million) and 10,641 common shares (approximately $0.9 million) respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan). The 3% purchase discount offering period on the Company’s common stock through the Investment Plan expired on August 1, 2022.

Long-term Debt - In May 2022, Middlesex repaid its two outstanding New Jersey Infrastructure Bank (NJIB) construction loans by issuing First Mortgage Bonds (FMBs) to the NJIB under two loan agreements. The total amount of FMBs issued is $52.2 million and designated as Series 2022A ($16.2 million) and Series 2022B ($36.0 million). The interest rate on the Series 2022A bond is zero and the interest rate on the Series 2022B bond ranges between 2.7% and 3.0%. The final maturity date for both FMBs is August 1, 2056, with scheduled debt service payments over the life of these loans.

7


Index

In November 2021, Tidewater received approval from the DEPSC to borrow up to $5.0 million under the Delaware State Revolving Fund (SRF) Program for construction of a one million gallon elevated storage tank. Tidewater closed on the $5.0 million loan at an interest rate of 2.0% in December 2021 and began receiving disbursements in January 2022. Through September 30, 2022, Tidewater has drawn a total of $2.6 million and expects borrowing under this loan to continue through mid-2023. The final maturity date on the loan is 2044.

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

(Thousands of Dollars)

September 30, 2022

December 31, 2021

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

FMBs

$147,269

$139,285

$98,828

$107,781

It was not practicable to estimate their fair value on our outstanding long-term debt for which there is no quoted market price and there is not an active trading market. For details, including carrying value, interest rates and due dates on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note”, “State Revolving Trust Note”, “State Revolving Trust Bond”, “Construction Loans” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $160.1 million and $212.3 million at September 30, 2022 and December 31, 2021, respectively. Customer advances for construction have carrying

8


Index

amounts of $22.4 million and $23.5 million at September 30, 2022 and December 31, 2021, 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.

Substantially all of the utility plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions.

Note 4 – Earnings Per Share

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

(In Thousands Except per Share Amounts)

Three Months Ended September 30,

2022

2021

Basic:

Income

Shares

Income

Shares

Net Income

$

14,291

17,628

$

11,476

17,491

Preferred Dividend

(30

)

(30

)

Earnings Applicable to Common Stock

$

14,261

17,628

$

11,446

17,491

 

Basic EPS

$

0.81

$

0.65

 

Diluted:

Earnings Applicable to Common Stock

$

14,261

17,628

$

11,446

17,491

$7.00 Series Preferred Dividend

17

115

17

115

Adjusted Earnings Applicable to Common Stock

$

14,278

17,743

$

11,463

17,606

 

Diluted EPS

$

0.80

$

0.65

(In Thousands Except per Share Amounts)

Nine Months Ended September 30,

2022

2021

Basic:

Income

Shares

Income

Shares

Net Income

$

35,258

17,583

$

29,305

17,485

Preferred Dividend

(90

)

(90

)

Earnings Applicable to Common Stock

$

35,168

17,583

$

29,215

17,485

 

Basic EPS

$

2.00

$

1.67

 

Diluted:

Earnings Applicable to Common Stock

$

35,168

17,583

$

29,215

17,485

$7.00 Series Preferred Dividend

51

115

50

115

Adjusted Earnings Applicable to Common Stock

$

35,219

17,698

$

29,265

17,600

 

Diluted EPS

$

1.99

$

1.66

Note 5 – Business Segment Data

The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey and Delaware. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey and Delaware with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems

9


Index

in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

Operations by Segments:

2022

2021

2022

2021

Revenues:

Regulated

$

44,861

$

37,396

$

115,222

$

100,426

Non – Regulated

3,431

2,995

9,316

9,657

Inter-segment Elimination

(560

)

(517

)

(927

)

(966

)

Consolidated Revenues

$

47,732

$

39,874

$

123,611

$

109,117

 

Operating Income:

Regulated

$

15,750

$

10,654

$

36,793

$

24,082

Non – Regulated

825

770

2,393

2,791

Consolidated Operating Income

$

16,575

$

11,424

$

39,186

$

26,873

 

Net Income:

Regulated

$

13,683

$

10,924

$

33,496

$

27,271

Non – Regulated

608

552

1,762

2,034

Consolidated Net Income

$

14,291

$

11,476

$

35,258

$

29,305

 

Capital Expenditures:

Regulated

$

26,588

$

14,743

$

65,722

$

61,097

Non – Regulated

8

2

217

148

Total Capital Expenditures

$

26,596

$

14,745

$