MIDDLESEX WATER COMPANY The following discussion of the Company's historical results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and related notes.
Management's Overview
Operations
Middlesex Water Company (Middlesex or the Company) has operated as a water utility inNew Jersey since 1897 and inDelaware 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 operate water and wastewater systems under contract for governmental entities and private entities primarily inNew Jersey andDelaware and also provide regulated wastewater services inNew Jersey . We are regulated by state public utility commissions as to rates charged to customers for water and wastewater services, as to the quality of water and wastewater services we provide and as to certain other matters in the states in which our regulated subsidiaries operate. Only ourUtility Service Affiliates, Inc. (USA ),Utility Service Affiliates (Perth Amboy ), Inc. (USA -PA) andWhite Marsh Environmental Services, Inc. (White Marsh) subsidiaries are not regulated public utilities as related to rates and services quality. All municipal or commercial entities whose utility operations are managed by these entities however, are subject to environmental regulation at the federal and state levels. Our principalNew Jersey water utility system (the Middlesex System) provides water services to approximately 61,000 retail customers, primarily in centralNew Jersey . The Middlesex System also provides water sales under contract to municipalities in centralNew Jersey with a total population of over 0.2 million. Our Bayview system provides water services inDowne Township, New Jersey . Our otherNew Jersey subsidiaries,Pinelands Water Company (Pinelands Water) andPinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to approximately 2,500 customers inSouthampton Township ,New Jersey .
Our
USA -PA operates the water and wastewater systems for theCity 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 response and management of capital projects funded byPerth Amboy .USA operates the Borough ofAvalon, New Jersey's (Avalon ) water utility, sewer utility and storm water system under a 10-year operations and maintenance contract expiring inJune 2022 .USA expects to participate in the public proposal process for the extension of this contract. In addition to performing day-to-day service operations,USA is responsible for billing, collections, customer service, emergency response and management of capital projects funded byAvalon . BeginningJuly 1, 2020 ,USA began operating the Borough ofHighland Park, New Jersey's (Highland Park ) water and wastewater systems under a 10-year operations and maintenance contract. Under a marketing agreement withHomeServe USA Corp. (HomeServe) expiring in 2031,USA offers residential customers inNew Jersey andDelaware water and wastewater related services and 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 severalNew Jersey municipalities. 22
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Recent Developments
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$88 million in 2022 in connection with this plan for projects that include, but are not limited to: • Construction of a facility to provide an enhanced treatment process at the Company's largest wellfield inSouth Plainfield, New Jersey to comply with new state water quality regulations relative to poly- and perfluoroalkyl 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; •
Replacement of approximately six miles of water mains including full main and
service line replacements, meter pit installations and fire hydrants
replacements in the Township of
Upgrade of Work and Asset Management Information System; •
Construction of two elevated water storage tanks in our Tidewater service territory; and •
Various water main replacements and improvements.
Regulatory Notice of Non-Compliance - InSeptember 2021 , theNew 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 itsPark Avenue Wellfield Treatment Plant inNew Jersey exceeded a recently promulgated NJDEP standard effective in 2021. Neither the NJDEP nor Middlesex has characterized this exceedance as an acute health emergency. However, Middlesex was required to notify its affected customers and complied inNovember 2021 . Further, the Notice required the Company to take any action necessary to comply with the new standard bySeptember 7, 2022 . The NJDEP standard for PFOA was developed based on a Health-based Maximum Contaminant Level (MCL) of 14 parts per trillion (ppt). Although theUnited States Environmental Protection Agency (USEPA) has not yet implemented an enforceable regulation relative to PFOA, the water distributed from thePark Avenue Well Field Treatment Plant does meet the USEPA's current health advisory level of 70 parts per trillion (ppt) and would meet the NJDEP's pre-2021 standard guidance level of 40 ppt, which was not a regulation. Construction of an enhanced treatment process at thePark Avenue Well Field Treatment Plant to comply with the NJDEP standard had already begun when the Notice was issued by the NJDEP. Since completion is not expected until mid-2023, inDecember 2021 , the Company implemented an interim solution to meet the Notice requirements.The Park Avenue Well Field Treatment Plant was taken off-line and alternate sources of supply have been obtained. The Company is in the process of implementing an acceleration of a portion of the Park Avenue Wellfield treatment upgrades in order to meet anticipated increases in the historical higher water demand periods during the summer months and is also intended to result in compliance with the requirements of the Notice. InNovember 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 resulting from these lawsuits. For further discussion of this matter, see Item 3 - Legal Proceedings. In 2018, the Company identified the party believed to be the source of the PFAS in the wells supplying thePark Avenue Well Field Treatment Plant and filed a lawsuit against that entity seeking compensatory damages for the resulting damage to its properties and costs to remediate PFAS, punitive damages and attorney's fees and costs. The ultimate resolution of this matter cannot be predicted at this time. 23
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InJanuary 2022 , the Company filed a petition with theNew Jersey Board of Public Utilities (NJBPU) seeking to establish a regulatory asset and deferred accounting until its next base rate setting proceeding for all costs associated with the interim solution to comply with the Notice. While the Company believes other administrative or monetary penalties are unlikely, the issuance of the Notice does not preclude theState of New Jersey or any of its agencies from initiating formal administrative and/or judicial enforcement action, including assessment of penalties of up to$25,000 per day per offense if the Company is not in compliance with the requirements of the Notice bySeptember 7, 2022 . Sale of Subsidiary - InAugust 2021 , Middlesex entered into a definitive agreement withArtesian Wastewater Management, Inc. to sell 100% of the common stock ofTidewater Environmental Services, Inc. (TESI) for$6.4 million in cash and other consideration. TheDelaware Public Service Commission (DEPSC) approved the transaction which closed onJanuary 14, 2022 . The Company will continue to own and operate its non-regulated contract operations business inDelaware . Coronavirus (COVID-19) Pandemic - OnJanuary 16, 2022 ,the United States Secretary ofHealth 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. InNew Jersey , the declared COVID-19 State of Emergency Order remains in effect through at leastMarch 10, 2022 . InDelaware , the declared COVID-19 State of Emergency Order ended inJuly 2021 . 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. SinceMarch 2020 , the Company has increased its allowance for doubtful accounts for expected increases in accounts receivable write-offs due to the financial impact of COVID-19 on customers. The Company has not deferred any COVID-19 related incremental 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. Middlesex Financings - InJune 2021 , Middlesex received approval from the NJBPU to redeem up to$45.5 million of outstanding first mortgage bonds (FMBs), specifically Series RR ($22.5 million ) and Series SS ($23.0 million ), and issue replacement FMBs at an overall lower cost of debt. InNovember 2021 , Middlesex closed on a$45.5 million , 2.90% private placement of FMBs with a 2051 maturity date to effectuate the redemptions.
In
Tidewater Financings - InMarch 2021 , Tidewater entered into a loan agreement with CoBank, ACB, pursuant to which Tidewater borrowed$20.0 million inSeptember 2021 at an interest rate of 3.94% with a 2046 maturity date. Proceeds from the loan were used to pay off its outstanding balances under its lines of credit. InNovember 2021 , Tidewater received approval from the DEPSC to borrow up to$5.0 million under theDelaware State Revolving Fund (SRF) Program for construction of a one million gallon elevated storage tank. Tidewater closed on the$5.0 million loan inDecember 2021 and began receiving disbursements inJanuary 2021 . Borrowing under this loan is expected to continue through mid-2023. The final maturity date on the loan is 2044. Common Stock Purchase Discount - The Company issues shares of its common stock in connection with its Middlesex Water Company Investment Plan (the Investment Plan), a direct share purchase and dividend reinvestment plan for the Company's common stock. OnSeptember 1, 2021 , the Company began offering shares of its common stock for purchase at a 3% discount to participants in the Investment Plan. The discount offering will continue until 200,000 shares are purchased at the discounted price orAugust 1, 2022 , whichever event occurs first. ThroughFebruary 25, 2022 , 44,323 shares have been purchased through the discounted offering. The discount applies to all common stock purchases made under the Investment Plan, whether by optional cash payment or by dividend reinvestment. 24
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Twin Lakes Utilities, Inc. (Twin Lakes) - Twin Lakes provides water services to approximately 115 residential customers inShohola, Pennsylvania . Pursuant to the Pennsylvania Public Utility Code, Twin Lakes filed a petition requesting thePennsylvania 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 inJanuary 2021 appointing a largePennsylvania 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. InNovember 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 theCommonwealth Court of Pennsylvania (thePennsylvania 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 thePennsylvania Court's review of the merits arguments contained in Twin Lakes' PFR. InDecember 2021 , thePennsylvania Court granted Twin Lakes' emergency petition, pending its review. A final decision by thePennsylvania Court is not expected beforeJune 2022 . 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.
Strategy for Growth
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.
Rates
Middlesex - InDecember 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 effectiveJanuary 1, 2022 and the remaining$7.0 million effectiveJanuary 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. InMarch 2021 , the NJBPU approved Middlesex's annual petition to reset its 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 effectiveApril 4, 2021 . InMarch 2020 , the NJBPU approved Middlesex's annual petition to reset its 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 onApril 4, 2020 . 25
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Tidewater - EffectiveJanuary 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. InMarch 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 effectiveApril 1, 2021 and has refunded customers, with interest, principally in the form of an account credit for DSIC revenue billed betweenApril 1, 2020 andMarch 31, 2021 . Accordingly, inMarch 2021 , Tidewater recorded a$0.8 million reserve, net of tax, for such refunds. Tidewater applied the refund credits to individual customer accounts during the second quarter of 2021. EffectiveMarch 1, 2019 , Tidewater received approval from the DEPSC to reduce its rates to reflect the lower corporate income tax rate enacted by the Tax Cuts and Jobs Act of 2017 (the Tax Act), resulting in a 3.35% rate decrease for certain customer classes. Pinelands - EffectiveNovember 4, 2019 , Pinelands received approval from the NJBPU to increase base rates by$0.5 million . The increased revenues were necessitated by capital infrastructure investments and increased operations and maintenance costs. Southern Shores - EffectiveJanuary 1, 2020 , the DEPSC approved the renewal of a multi-year agreement for water service to a 2,200 unit condominium community we serve inSussex County, Delaware . Under the agreement, current rates will remain in effect untilDecember 31, 2024 . In the event there are 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 agreement expires onDecember 31, 2029 . 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 (which 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 2022. As operating costs are anticipated to increase in 2022 in a variety of categories, we continue to implement plans to further streamline operations and further reduce, and mitigate increases in, operating costs. Changes in customer water usage habits, as well as increases in capital expenditures and operating costs, are significant factors in determining the timing and extent of rate increase requests. An additional factor that may affect our outlook in 2022 is the impact of COVID-19 on the general economy and the resulting impact on our customers. For example, while many commercial and industrial business operations may have returned to normal levels of operations in our service territories, potentially new variants of COVID-19 could lead to renewed economic disruptions resulting in lower water demand for those classes of customer (for further discussion of the impact of COVID-19 on the Company, see Recent Developments, Coronavirus (COVID-19) above). In addition, our customer collection efforts for Middlesex and Pinelands have been suspended based on State of Emergency Orders (SEOs) since 2020 and are presently scheduled to end inMarch 2022 .
Organic residential customer growth for our Tidewater system is expected to be comparable to that experienced in 2021, which was approximately 6%.
The Company has projected to spend approximately$229 million for the 2022-2024 capital investment program, including approximately$39 million for PFAS-related treatment upgrades in the Middlesex System,$33 million on the RENEW Program, which is our ongoing initiative to replace water mains in the Middlesex System,$13 million for construction of elevated storage tanks in our Tidewater and Middlesex Systems and$10 million for the rehabilitation and other improvements associated with Middlesex's main field operations and inventory facilities. 26
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Operating Results by Segment
The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed approximately 91% of total revenues for each of the years endedDecember 31, 2021 , 2020, and 2019 and approximately 93% of net income for each of the years endedDecember 31, 2021 , 2020, and 2019. The discussion of the Company's results of operations is on a consolidated basis and includes significant factors by subsidiary. The segments in the tables included below are comprised of the following companies: Regulated- Middlesex, Tidewater, Pinelands, Southern Shores and TESI; Non-Regulated-USA ,USA -PA, and White Marsh.
Results of Operations for 2021 as Compared to 2020
(In Millions)
Years Ended December 31,
2021 2020
Non- Non-
Regulated Regulated Total Regulated Regulated Total
Revenues $ 130.8 $ 12.3 $ 143.1 $ 129.5 $ 12.1 $ 141.6
Operations and
maintenance
expenses 65.4 8.3 73.7 62.5 8.3 70.8
Depreciation
expense 20.9 0.2 21.1 18.3 0.2 18.5
Other taxes 14.9 0.2 15.1 14.7 0.2 14.9
Operating income 29.6 3.6 33.2 34.0 3.4 37.4
Other income
(expense), net 5.6 0.3 5.9 4.3 0.1 4.4
Interest expense 8.1 - 8.1 7.5 - 7.5
Income taxes (6.7 ) 1.2 (5.5 ) (5.1 ) 1.0 (4.1 )
Net income $ 33.8 $ 2.7 $ 36.5 $ 35.9 $ 2.5 $ 38.4
Operating Revenues
Operating revenues for the year ended
•
Middlesex System revenues decreased by$0.4 million due to lower water demand from general meter service and wholesale customers, offset by an increase in the PWAC tariff rate effectiveApril 4, 2021 (see Rates, Middlesex above for further discussion); • Tidewater System revenues increased$1.7 million due to additional customers and higher customer demand for water, partially offset by$1.0 million due to the DSIC revenue refund (for further information, see Rates, Tidewater above for further discussion); • Non-regulated revenues increased$0.3 million , primarily due toUSA's contract to operate and maintainHighland Park's water and wastewater systems, which commencedJuly 1, 2020 ; and •
All other revenue categories decreased
Operation and Maintenance Expense
Operation and maintenance expenses for the year ended
•
Higher weather-related water main break activity in our Middlesex system during
the winter months resulted in
Labor costs increased$0.9 million due to wage increases and lower allocation of labor to capital projects; • Increased business insurance premiums resulted in$0.3 million of additional costs; •
Increased
Outside services and consultant costs increased$0.2 million due to higher regulatory and corporate activity, including compliance with America's Water Infrastructure Act of 2018; •
Transportation expenses increased
Information technology costs increased
All other operation and maintenance expense categories increased
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Depreciation
Depreciation expense for the year ended
Other Taxes
Other taxes for the year endedDecember 31, 2021 increased$0.2 million from the same period in 2020 primarily due to higher payroll taxes on increased labor costs. Other Income, net Other Income, net for the year endedDecember 31, 2021 increased$1.6 million from the same period in 2020 primarily due to lower actuarially-determined retirement benefit plans non-service expense offset by lower Allowance forFunds Used During Construction (AFUDC) on a lower average level of capital construction projects in progress.
Interest Charges
Interest charges for the year ended
Income Taxes
The benefit from income taxes for the year ended
Net Income and Earnings Per Share
Net income for the year endedDecember 31, 2021 decreased$1.9 million as compared with the same period in 2020. Basic earnings per share were$2.08 and$2.19 for the year endedDecember 31, 2021 and 2020, respectively. Diluted earnings per share were$2.07 and$2.18 for the year endedDecember 31, 2021 and 2020, respectively. In anticipation of this expected decrease, in 2021, Middlesex filed and settled a base rate increase request with the NJBPU, with rate increases becoming effective onJanuary 1, 2022 andJanuary 1, 2023 (for further discussion of Middlesex's rate increase, see Rates, Middlesex above). 28
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Results of Operations for 2020 as Compared to 2019
(In Millions)
Years Ended December 31,
2020 2019
Non- Non-
Regulated Regulated Total Regulated Regulated Total
Revenues $ 129.5 $ 12.1 $ 141.6 $ 122.8 $ 11.8 $ 134.6
Operations and
maintenance
expenses 62.5 8.3 70.8 60.5 7.5 68.0
Depreciation
expense 18.3 0.2 18.5 16.5 0.2 16.7
Other taxes 14.7 0.2 14.9 14.2 0.2 14.4
Operating income 34.0 3.4 37.4 31.6 3.9 35.5
Other income
(expense), net 4.3 0.1 4.4 2.8 (0.3 ) 2.5
Interest expense 7.5 - 7.5 7.2 0.1 7.3
Income taxes (5.1 ) 1.0 (4.1 ) (4.4 ) 1.2 (3.2 )
Net income $ 35.9 $ 2.5 $ 38.4 $ 31.6 $ 2.3 $ 33.9
Operating Revenues
Operating revenues for the year ended
•
Middlesex System revenues increased$3.1 million due to increased customer water consumption resulting from increased demand from our residential and wholesale contract customers; • Tidewater System revenues increased$2.9 million due to additional customers and related residential developer connection fees; • Pinelands revenues increased$0.5 million due to the base rate increase that went into effect inNovember 2019 ; •
Non-regulated revenues increased
All other revenue categories increased
Operation and Maintenance Expense
Operation and maintenance expenses for the year ended
•
Variable production costs increased$1.7 million due to higher customer water consumption and higher treatment costs due to weather-impacted changes in raw water quality; •
Retirement benefit plan expenses increased
Bad debt expense increased
All other operation and maintenance expense categories decreased
Depreciation
Depreciation expense for the year ended
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Other Taxes
Other taxes for the year endedDecember 31, 2020 increased$0.5 million from the same period in 2019 primarily due to higher revenue related taxes on increased revenues in our Middlesex system.
Other Income, net
Other Income, net for the year endedDecember 31, 2020 increased$1.9 million from the same period in 2019 primarily due to higher AFUDC resulting from a higher level of capital projects in progress and lower actuarially-determined non-service expense for our employee retirement benefit plans partially offset by higher new business development costs.
Interest Expense
Interest expense for the year endedDecember 31, 2020 increased$0.2 million from the same period in 2019 due to higher average balance of debt outstanding partially offset by lower average interest rates on both long-term and short-term borrowings.
Income Taxes
The benefit from income taxes for the year endedDecember 31, 2020 increased overall by$1.0 million from the same period in 2019, primarily due to the regulatory accounting treatment of tax benefits associated with repair expenditures on tangible property owned by Middlesex, partially offset by higher pre-tax income.
Net Income and Earnings Per Share
Net income for the year endedDecember 31, 2020 increased$4.5 million as compared with the same period in 2019. Basic earnings per share were$2.19 and$2.02 for the year endedDecember 31, 2020 and 2019, respectively. Diluted earnings per share were$2.18 and$2.01 for the year endedDecember 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Cash flows from operating activities are largely influenced by four factors: weather, adequate and timely rate increases, effective cost management and customer growth. The effect of those factors on net income is discussed in the Results of Operations section above.
For the year ended
Increases in certain operating costs impact our liquidity and capital resources. We continually monitor the need for timely rate filing to minimize the lag between the time we experience increased operating costs and capital expenditures and the time we receive appropriate rate relief. There can be no assurances however that our regulated subsidiaries' respective utility commissions will approve base water and/or wastewater rate increase requests in whole or in part or when the decisions will be rendered.
Cash Flows from Investing Activities
For the year ended
For further discussion on the Company's future capital expenditures and expected funding sources, see "Capital Expenditures and Commitments" below.
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Cash Flows from Financing Activities
For the year endedDecember 31, 2021 , cash flows provided by financing activities increased$23.3 million to$39.5 million . The increase in cash flows provided by financing activities is due to increases in short-term and long-term borrowings and proceeds from the issuance of common stock offset by higher repayment of long-term debt and higher common stock dividends.
For further discussion on the Company's short-term and long-term debt, see "Sources of Liquidity" below.
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
Investment Plan and, when market conditions are favorable, proceeds from sales
to the public of our common stock.
The table below summarizes our estimated capital expenditures for the years
2022-2024.
(Millions)
2022 2023 2024 2022-2024
Distribution/Network System $ 48 $ 56 $ 45 $ 149
Production System 33 21 3 57
Information Technolgy (IT) Systems 4 1 2 7
Other 3 5 8 16
Total Estimated Capital Expenditures
Our estimated capital expenditures for the items listed above are primarily comprised of the following:
•
Distribution/Network System - Projects associated with replacement, installation and relocation of water mains and service lines and wastewater collection systems, construction of water storage tanks, installation and replacement of hydrants, meters and meter pits and the RENEW Program. RENEW is our ongoing initiative to replace water mains in the Middlesex System. In connection with RENEW, we expect to spend approximately$11 million in each of 2022, 2023 and 2024. We expect to spend$13 million between 2022 and 2023 for construction of elevated storage tanks in our Tidewater andMiddlesex systems. • Production System - Projects associated with our treatment plants, including$39 million of expenditures between 2022 and 2023 for wellfield PFAS treatment upgrades in ourMiddlesex system. •
Information Technology (IT) Systems - Further upgrade of our enterprise resource planning system and hardware and software purchases for other IT systems. •
Other - Purchase of transportation equipment, tools, furniture, laboratory
equipment, security systems and other general infrastructure needs including
improvements to field and inventory management facilities in
The actual amount and timing of capital expenditures is dependent on the need for replacement of existing infrastructure, customer growth, residential new home construction and sales, project scheduling and continued refinement of project scope and costs and, could be impacted if new variants of the COVID-19 pandemic arise and continue for an extended period of time. To pay for our capital program in 2022, we plan on utilizing some or all of the following: • Internally generated funds; • Short-term borrowings, as needed, through$140 million of available lines of credit with several financial institutions. As ofDecember 31, 2021 ,$13.0 million was outstanding under these lines (see discussion under "Sources of Liquidity-Short-term Debt" below); • Proceeds from theDelaware State Revolving Fund (SRF). SRF programs provide low cost financing for projects meeting certain water quality and system improvement benchmarks (see discussion under "Sources of Liquidity-Long-term Debt" below); •
Proceeds from the sale and issuance of FMBs in private placement offerings; •
Proceeds from the Investment Plan (see discussion under "Sources of Liquidity-Common Stock" below); and •
Proceeds from a common stock sale (see discussion under "Sources of Liquidity-Common Stock" below).
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Sources of Liquidity
Short-term Debt. In
The weighted average daily amounts of borrowings outstanding under the credit lines and the weighted average interest rates on those amounts were$23.7 million and$28.3 million at 1.12% and 1.55 % for the years endedDecember 31, 2021 and 2020, respectively. Long-term Debt. Subject to regulatory approval, the Company periodically issues long-term debt to fund investments in utility plant. To the extent possible and fiscally prudent, the Company finances qualifying capital projects under SRF loan programs inNew Jersey andDelaware . These government programs provide financing at interest rates 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 theNew Jersey Infrastructure Bank (NJIB) and submit requisitions for cost reimbursements over the life of the construction period. The interest rate on the Company's current construction loan borrowings is near zero percent. When construction on the qualifying project is substantially complete, NJIB will coordinate the conversion of the construction loan into a long-term securitized loan with a portion of the principal balance having a stated interest rate of zero percent (0%) and a portion of the principal balance at a market interest rate at the time of closing using the credit rating of theState of New Jersey . The term of the long-term loans currently offered through the NJIB is up to thirty years. Under the Delaware SRF program, borrowers typically enter into a long-term note agreement for a term not to exceed twenty years and submit requisitions for cost reimbursements for up to two years after the agreement is executed.
• InApril 2018 , the NJBPU approvedMiddlesex'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 inEdison, New Jersey and interconnect with our distribution system.Middlesex closed on a$43.5 million NJIB interest-free construction loan inAugust 2018 and completed withdrawal of the proceeds inJune 2021 ; and
•
InMarch 2018 , the NJBPU approvedMiddlesex's request to participate in the NJIB loan program to fund the 2018 RENEW Program, which is an ongoing initiative to rehabilitate or replace water distribution mains in theMiddlesex system.Middlesex closed on an$8.7 million NJIB construction loan inSeptember 2018 and completed withdrawal of the proceeds inOctober 2019 .
The Company anticipates these two construction loans will be converted into
long-term securitized loans by the NJIB by
The NJIB has changed 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 afterSeptember 2018 . Under the new guidelines, the principal balance having a stated interest rate of zero percent (0%) is 25% of the loan balance with the remaining portion of 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 currently does not include participating in the NJIB SRF program. 32
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InJune 2021 ,Middlesex received approval from the NJBPU to redeem up to$45.5 million of outstanding FMBs, specifically Series RR ($22.5 million ) and Series SS ($23.0 million ), and issue replacement FMBs at an overall lower cost of debt. InNovember 2021 ,Middlesex closed on a$45.5 million , 2.90% private placement of FMBs, designated as Series 2021B with a 2051 maturity date to effectuate the redemptions. InMay 2020 ,Middlesex received approval from the NJBPU to borrow up to$100 million , in one or more private placement transactions throughDecember 31, 2023 to help fundMiddlesex's multi-year capital construction program. In connection with this approval: • InNovember 2021 ,Middlesex closed on a$19.5 million , 2.79% private placement of FMBs with a 2041 maturity date designated as Series 2021A. Proceeds were used to reduce the Company's outstanding balances under its lines of credit.; and
•
InNovember 2020 ,Middlesex closed on a$40.0 million , 2.90% private placement of FMBs with a 2050 maturity date designated as Series 2020A. Proceeds were used to reduce the Company's outstanding balances under its lines of credit and for the Company's 2020 capital program. InNovember 2021 , Tidewater received approval from the DEPSC to borrow up to$5.0 million under the Delaware SRF Program for construction of a one million gallon elevated storage tank. Tidewater closed on the$5.0 million loan inDecember 2021 and began receiving disbursements inJanuary 2022 . Borrowing under this loan is expected to continue through mid-2023. The final maturity date on the loan is 2044.
In
In order to help ensure adherence to its comprehensive financing plan,Middlesex received approval from the NJBPU inFebruary 2019 to issue and sell up to$140 million of FMBs through theNew Jersey Economic Development Authority (NJEDA) in one or more transactions throughDecember 31, 2022 . Because the interest paid to the bondholders is exempt from federal andNew 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. InAugust 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 total proceeds of$60.8 million , initially recorded as Restricted Cash on the balance sheet, were held in escrow by a bond trustee. Funds were drawn by requisition for the qualifying projects as costs were incurred with the final requisition made inFebruary 2021 . InMarch 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 smallDelaware community. Tidewater closed on the SRF loan inMay 2018 . InApril 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 inOctober 2019 and completed withdrawal of the proceeds inApril 2020 .
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.
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Common Stock. The Company issues shares of its common stock in connection with the Investment Plan, a direct share purchase and dividend reinvestment plan for the Company's common stock. The Company raised approximately$3.8 million through the issuance of shares under the Investment Plan during 2021. OnSeptember 1, 2021 , the Company began offering shares of its common stock for purchase at a 3% discount to participants in the Investment Plan. The discount offering will continue until 200,000 shares are purchased at the discounted price orAugust 1, 2022 , whichever event occurs first. ThroughFebruary 25, 2022 , 44,323 shares have been purchased through the discounted offering. The discount applies to all common stock purchases made under the Investment Plan, whether by optional cash payment or by dividend reinvestment.
In
In order to fully fund the ongoing capital investment program 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 approved by the NJBPU, the Company is authorized to issue and sell up to 0.7 million shares of its common stock in one or more transactions throughDecember 31, 2022 . Contractual Obligations In the course of normal business activities, the Company enters into a variety of contractual obligations and commercial commitments. Some result in direct obligations on the Company's balance sheet while others are commitments, some firm and some based on uncertainties, which are disclosed in the Company's consolidated financial statements.
The table below presents our known contractual obligations for the periods
specified as of
Payment Due by Period (Millions of Dollars)
2-3 4-5 More than 5
Total Less than 1 Year Years Years Years
Long-term Debt $ 311.1 $ 6.7 $ 22.2 $ 10.9 $ 271.3
Notes Payable 13.0 13.0 - - -
Interest on Long-term Debt 207.4 8.8 16.4 15.0 167.2
Purchased Water Contracts 25.8 6.5 12.6 6.2 0.5
Commercial Office Leases 6.8 0.8 1.6 1.7 2.7
Total $ 564.1 $ 35.8 $ 52.8 $ 33.8 $ 441.7
The table above does not reflect any anticipated cash payments for retirement
benefit plan obligations. The effect on the timing and amount of these payments
resulting from potential changes in actuarial assumptions and returns on plan
assets cannot be estimated. In 2021, the Company contributed $4.2 million to its
retirement benefit plans and expects to contribute approximately $4.2 million in
2022.
We do not currently have, nor have we ever had, any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements,
or for other contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded contracts.
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Critical Accounting Policies and Estimates
The application of accounting policies and standards often requires the use of estimates, assumptions and judgments. The Company regularly evaluates these estimates, assumptions and judgments, including those related to the calculation of pension and other retirement benefits, unbilled revenues, and the recoverability of certain assets, including regulatory assets. The Company bases its estimates, assumptions and judgments on historical experience and current operating environment. Changes in any of the variables that are used for the Company's estimates, assumptions and judgments may lead to significantly different financial statement results.
Our critical accounting policies are set forth below.
Regulatory Accounting
We maintain our books and records in accordance with accounting principles generally accepted inthe United States of America .Middlesex and certain of its subsidiaries, which account for approximately 91% of Operating Revenues and 99% of Total Assets, are subject to regulation in the states in which they operate. Those companies are required to maintain their accounts in accordance with regulatory authorities' rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance in the Financial Accounting Standards Board Accounting Standards Codification Topic 980 Regulated Operations (Regulatory Accounting). In accordance with Regulatory Accounting, costs and obligations are deferred if it is probable that these items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are recorded will be treated differently by the regulators in the future. Revenues 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 Company expects to be entitled in exchange for those goods and services. The Company's regulated revenue results from tariff-based sales from provision of water and wastewater services to residential, industrial, commercial, fire-protection and wholesale customers. Residential customers are billed quarterly while most industrial, commercial, fire-protection and wholesale customers are billed monthly. Payments by customers are due between 15 to 30 days after the invoice date. Revenue is recognized as the water and wastewater services are delivered to customers as well as from accrual of 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 the relevant service territories. Unearned Revenues and Advance Service Fees include fixed service charge billings in advance to Tidewater customers recognized as service is provided to the customer. 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 2030 and thus, contain remaining performance obligations for which the Company expects to recognize revenue in the future. These contracts also contain customary termination provisions.
Substantially all of the amounts included in operating revenues are from contracts with customers.
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Retirement Benefit Plans
We maintain a noncontributory defined benefit pension plan (Pension Plan) which covers all currently active employees hired prior toApril 1, 2007 . In addition, the Company maintains an unfunded supplemental plan for certain executive officers.
The Company has a retirement benefit plan other than pensions (Other Benefits
Plan) for substantially all of its retired employees. Employees hired after
The costs for providing retirement benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Future retirement benefit plan obligations and expense will depend on future investment performance, changes in future discount rates and various other demographic factors related to the population participating in the Company's retirement benefit plans, all of which can change significantly in future years.
The allocation by asset category of retirement benefit plan assets at
Asset Category 2021 2020 Target 2021 2020 Target Equity Securities 59.6 % 60.6 % 55 % 66.8 % 62.3 % 43 % Debt Securities 37.9 % 37.5 % 38 % 30.7 % 31.0 % 50 % Cash 1.0 % 1.2 % 2 % 2.5 % 6.7 % 2 % Real Estate/Commodities 1.5 % 0.7 % 5 % 0.0 % 0.0 % 5 % Total 100.0 % 100.0 % 100.0 % 100.0 % The primary assumptions used for determining future retirement benefit plans' obligations and costs are as follows: • Discount Rate - calculated based on market rates for long-term, high-quality corporate bonds specific to the expected duration of our Pension Plan and Other Benefits Plan's liabilities; •
Compensation Increase - based on management projected future employee compensation increases; •
Long-Term Rate of Return - determined based on expected returns from our asset allocation for our Pension Plan and Other Benefits Plan assets; •
Mortality - The Company utilizes the
Healthcare Cost Trend Rate - based on management projected future healthcare costs.
The discount rate, compensation increase rate and long-term rate of return used to determine future obligations of our retirement benefit plans as ofDecember 31, 2021 are as follows: Pension Plan Other Benefits Plan Discount Rate 2.72% 2.72% Compensation Increase 3.00% 3.00% Long-term Rate of Return 7.00% 7.00% For the 2021 valuation, costs and obligations for our Other Benefits Plan assumed an 7.5% annual rate of increase in the per capita cost of covered healthcare benefits in 2022 with the annual rate of increase declining 0.5% per year for 2023-2028, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 4.5% by year 2028.
The following is a sensitivity analysis for certain actuarial assumptions used in determining projected benefit obligations (PBO) and expenses for our retirement benefit plans:
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Pension Plan
Estimated Estimated
Increase/ Increase/
(Decrease) (Decrease)
on PBO on Expense
Actuarial Assumptions (000s) (000s)
Discount Rate 1% Increase
Other Benefits Plan
Estimated Estimated
Increase/ Increase/
(Decrease) (Decrease)
on PBO on Expense
Actuarial Assumptions (000s) (000s)
Discount Rate 1% Increase $ (7,569 ) $ (899 )
Discount Rate 1% Decrease 9,829 1,134
Healthcare Cost Trend Rate 1% Increase 7,882 1,449 Healthcare Cost Trend Rate 1% Decrease (6,228 ) (1,126 )
Recent Accounting Standards
See Note 1(r) of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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