Water Supply - Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27.0 million gallons a day (mgd). Pricing is set annually by the NJWSA through a public rate making process. The agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds.

Middlesex also has an agreement with a non-affiliated NJBPU-regulated water utility for the purchase of treated water. This agreement, which expires February 28, 2026, provides for the minimum purchase of 3.0 mgd of treated water with provisions for additional purchases if needed.

Tidewater contracts with the City of Dover, Delaware to purchase 15.0 million gallons of treated water annually.

	(In Thousands)
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
		2020		2019			2020		2019
Treated		$	933	$	818		$	2,657	$	2,415
Untreated			878		878			2,530		2,521
Total Costs		$	1,811	$	1,696		$	5,187	$	4,936

Guarantees - As part of an agreement with the County of Monmouth, New Jersey (County), Middlesex serves as guarantor of the performance of Applied Water Management, Inc. (AWM), an unaffiliated wastewater treatment contractor and partner, to operate a County-owned leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey. The performance guaranty is effective through 2029 unless another guarantor, acceptable to the County, replaces Middlesex before such date. In addition, Middlesex may provide operational support to the facility, as needed. AWM and its parent company, Natural Systems Utilities (NSU), serve as guarantor to Middlesex with respect to the performance of AWM and have indemnified Middlesex against any claims that may arise under the Middlesex guaranty to the County.

If requested to perform under the guaranty to the County and, if AWM and NSU, as guarantor to Middlesex, do not fulfill their obligations to indemnify Middlesex against any claims that may arise under the Middlesex guaranty to the County, Middlesex would potentially be required to fulfill the remaining operational commitment of AWM. The liability and asset for the guaranty are included in Other Non-Current Liabilities and Other Non-Current Assets on the balance sheet and are approximately $1.3 million and $1.4 million as of September 30, 2020 and December 31, 2019, respectively.

In November 2019, Middlesex was notified that the County terminated its Agreement with AWM. AWM had initiated legal action against the County in the Superior Court of New Jersey, Monmouth County that in part contests the County’s exercise of this termination. The County filed a counter-claim against NSU and has brought Middlesex into the suit as a third-party defendant. We continue to monitor this litigation; however, given the cancellation of the underlying operating contract by the County, we do not anticipate the ultimate outcome will have a material impact on the Company’s results of operations or financial condition.

Index

Leases - The Company determines if a contractual arrangement meets the criteria to be characterized as a lease at inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.

The Company has entered into an operating lease of office space for administrative purposes, expiring in 2030. The Company has not entered into any financing leases. The exercise of a lease renewal option for the Company’s administrative offices is solely at the discretion of the Company.

The right-of-use (ROU) asset recorded represents the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company’s operating lease does not provide an implicit discount rate and as such, the Company used an estimated incremental borrowing rate (4.03%) based on the information available at commencement date in determining the present value of lease payments.

Given the impact of accounting for regulated operations, and the resulting recognition of expense at the amounts recovered in customer rates, expenditures for operating leases are consistent with lease expense and were $0.2 million for each of the three months ended September 30, 2020 and 2019, respectively, and $0.6 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively.

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

	(In Millions)
	As of September 30, 2020			As of December 31, 2019
ROU Asset at Lease Inception	$	7.3		$	7.3
Accumulated Amortization		(1.9	)		(1.4	)
Current ROU Asset	$	5.4		$	5.9

The Company’s future minimum operating lease commitments are as follows:

	(In Millions)
	September 30, 2020
2020	$	0.2
2021		0.8
2022		0.8
2023		0.8
2024		0.8
Thereafter		4.4
Total Lease Payments	$	7.8
Imputed Interest		(1.8	)
Present Value of Lease Payments		6.0
Less Current Portion*		(0.8	)
Non-Current Lease Liability	$	5.2

*Included in Other Current Liabilities

Construction - The Company has forecasted to spend approximately $113 million for its construction program in 2020. The Company has entered into several construction contracts that, in the aggregate, obligate expenditure of an estimated $41 million in the future. The timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects and could be impacted if the effects of the COVID-19 pandemic continue for an extended period of time (for further discussion of the impact of COVID-19 on the Company, see Note 1- Basis of Presentation and Recent Developments, Recent Developments).

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

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