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Capitalization

12 Months Ended

Dec. 31, 2018

Note 6 - Capitalization

All the transactions discussed below related to the issuance of securities were approved by either the NJBPU or DEPSC, except where otherwise noted.

Common Stock

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 sale and dividend reinvestment plan for Middlesex common stock. Since the inception of the Investment Plan and its predecessor plan, the Company has periodically replenished the level of authorized shares in the plans. Currently, there are three million shares registered with the SEC, of which there remains 0.6 million for potential issuance to participants. For the years ended December 31, 2018, 2017 and 2016, the Company raised approximately $1.2 million, $1.2 million and $1.5 million, respectively, through the issuance of shares under the Investment Plan. The Company is offering shares of its common stock at a 5% discount to participants in the Investment Plan for purchases made by participants commencing January 2, 2019 which will continue until 200,000 shares are purchased at the discounted price or December 30, 2019, whichever event occurs first. This offer applies to all common stock purchases made under the Investment Plan, whether by optional cash payment or by dividend reinvestment.

The Company issues shares under a restricted stock plan for certain management employees, which is described in Note 7 – Employee Benefit Plans.

The Company maintains a stock plan for its outside directors (the Outside Director Stock Compensation Plan). For the years ended December 31, 2018, 2017 and 2016, 4,004, 3,976, and 3,976 shares, respectively, of Middlesex common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan and 60,164 shares remain available for future awards. The maximum number of shares authorized for grant under the Outside Director Stock Compensation Plan is 100,000.

In the event dividends on the preferred stock are in arrears, no dividends may be declared or paid on the common stock of the Company.

Preferred Stock

At December 31, 2018 and 2017, there were 0.1 million shares of preferred stock authorized and less than 0.1 million shares of preferred stock outstanding. There were no preferred stock dividends in arrears.

The Company may not pay any dividends on its common stock unless full cumulative dividends to the preceding dividend date for all outstanding shares of preferred stock have been paid or set aside for payment. If four or more quarterly dividends are in arrears, the preferred shareholders, as a class, are entitled to elect two members to the Board of Directors in addition to Directors elected by holders of the common stock. In addition, if Middlesex were to liquidate, holders of preferred stock would be paid back the stated value of their preferred shares before any distributions could be made to common stockholders.

The conversion feature of the no par $7.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for twelve shares of the Company's common stock. In addition, the Company may redeem up to 10% of the outstanding convertible stock in any calendar year at a price equal to the fair value of twelve shares of the Company's common stock for each share of convertible stock redeemed.

The conversion feature of the no par $8.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for 13.714 shares of the Company's common stock. The preferred shares are convertible into common stock at the election of the security holder or Middlesex.

Long-term Debt

Subject to regulatory approval, the Company periodically issues long-term debt to fund its investments in utility plant and other assets. To the extent possible, the Company finances qualifying capital projects under State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest-free. Under the New Jersey SRF program, borrowers first enter into a construction loan agreement with the New Jersey Infrastructure Bank (NJIB) at a below market interest rate. The NJIB was formerly known as the New Jersey Environmental Infrastructure Trust. The current interest rate on construction loan borrowings is zero percent (0%). When construction on the qualifying project is substantially complete, NJIB will coordinate the conversion of the construction loan into a long-term securitized loan with a portion of the principal balance having a stated interest rate of zero percent (0%) and a portion of the principal balance at a market interest rate at the time of closing using the credit rating of the State of New Jersey. The current term of the long-term loans offered through the NJIB is up to thirty years. The current portion of the principal balance having a stated interest rate of zero percent (0%) is 75% with the remaining portion of 25% having a market based interest rate. NJIB generally schedules its long-term debt financings in May and November.

In September 2018, the NJIB announced changes to the SRF program for project funding priority ranking, the proportions of interest free loans and market interest rate loans and overall loan limits on interest free loan balances to investor-owned water utilities. These changes affect SRF projects for which the construction loan closes after September 2018. Under the 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. The only project financing currently affected by these changes is the upgrade to the Company’s Carl J. Olsen (CJO) water treatment plant. In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program and borrow up to $55.0 million for this upgrade project. It is uncertain at this time if the CJO water treatment plant upgrade project will continue to qualify for the funding under the new SRF program ranking system. The Company is awaiting further guidance from the NJIB.

In order to maintain the estimated financing time schedule for the CJO water treatment plant upgrade project and other projects that were expected to qualify under the prior SRF program ranking system, Middlesex requested approval from the NJBPU to issue and sell up to $140 million of First Mortgage Bonds through the New Jersey Economic Development Authority (NJEDA) in whole or in phases periodically through December 31, 2022. The request was filed with the NJBPU in December 2018 and approved in February 2019. The Company expects to issue and sell the first phase of First Mortgage Bonds by the third quarter of 2019. The amount of the offering could be between $25 million and $75 million depending on the guidance received from the NJIB.

In May 2018, Middlesex closed out its $9.5 million RENEW 2017 construction loan by issuing to the NJIB first mortgage bonds designated as Series 2018A ($7.1 million) and Series 2018B ($2.4 million). The interest rate on the Series 2018A bond is zero and the interest rate on the Series 2018B bond ranges between 3.0% and 5.0%. Through December 31, 2018, Middlesex has drawn down a total of $9.3 million and expects to draw down the remaining proceeds during the first quarter of 2019. The final maturity date for both bonds is August 1, 2047, with scheduled debt service payments over the life of the loans.

In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the construction of a large-diameter transmission pipeline from the CJO water treatment plant and interconnect with our distribution system. Middlesex closed on a $43.5 million NJIB construction loan in August 2018. Through December 31, 2018, Middlesex has drawn down a total of $10.5 million and expects to draw down the remaining proceeds through the end of 2019.

In March 2018, the NJBPU approved Middlesex’s request to borrow up to $14.0 million under the NJIB program to fund the 2018 RENEW Program, which is an ongoing initiative to eliminate all unlined water distribution mains in the Middlesex system. Middlesex closed on an $8.7 million NJIB construction loan in September 2018. Through December 31, 2018, Middlesex has drawn down a total of $6.1 million and expects to draw down the remaining proceeds during the remainder of 2019. The NJIB has informed the Company that the RENEW 2018 construction loan is scheduled for the May 2019 long-term debt financing program.

In March 2018, the DEPSC approved Tidewater’s request to borrow up to $0.9 million under the Delaware SRF program to fund the replacement of an entire water distribution system of a small Delaware subdivision. Tidewater closed on the SRF loan in May 2018. Management is currently evaluating revised project cost estimates and the potential need for additional Delaware SRF program funding.

In November 2017, Middlesex closed out three of its NJIB construction loans (booster station upgrade, RENEW 2015 and RENEW 2016 projects) by issuing to the NJIB first mortgage bonds designated as Series XX ($11.3 million) and Series YY ($3.9 million). The interest rate on the Series XX bond is zero and the interest rate on the Series YY bond range between 3.0% and 5.0%. Through December 31, 2018, Middlesex has drawn down $15.1 million and expects to draw down the remaining proceeds during the first quarter of 2019. The final maturity date for both bonds is August 1, 2047, with scheduled debt service payments over the life of the loan.

In February 2016, Tidewater closed on a $1.2 million General Obligation Note loan with the Delaware SRF program to fund the replacement of the water distribution system in a manufactured home community. Tidewater has drawn $1.1 million on this loan and the project is considered complete. The interest rate on the $1.1 million is 2.0% with a final repayment maturity date of February 1, 2036.

Bond Series QQ, RR and SS are term bonds with single maturity dates subsequent to 2022. Principal repayments for all series of the Company’s long-term debt except for Bond Series Z, AA, BB, CC and EE extend beyond 2023. The aggregate annual principal repayment obligations for all long-term debt over the next five years are shown below:

Year	(Millions of Dollars) Annual Maturities
2019	$ 7.3
2020	$ 7.2
2021	$ 7.2
2022	$ 6.7
2023	$ 6.2

The weighted average interest rate on all long-term debt at December 31, 2018 and 2017 was 3.30% and 3.77%, respectively. Except for the Amortizing Secured Notes ($36.6 million), all of the Company’s outstanding long-term debt has been issued through the NJEDA ($55.4 million), the NJIB SRF program ($62.5 million) and the Delaware SRF program ($8.4 million).

In 2016, the NJIB de-obligated principal payments of $0.5 million on several series of SRF long-term debt.

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.

Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share (EPS) for the three years ended December 31, 2018. Basic EPS is computed on the basis of the weighted average number of shares outstanding. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and $8.00 Series.

	(In Thousands, Except Per Share Amounts)
	2018					2017					2016
Basic:	Income			Shares		Income			Shares		Income			Shares
Net Income	$	32,452			16,384	$	22,809			16,330	$	22,742			16,270
Preferred Dividend		(144	)				(144	)				(144	)
Earnings Applicable to Common Stock	$	32,308			16,384	$	22,665			16,330	$	22,598			16,270
Basic EPS	$	1.97				$	1.39				$	1.39
Diluted:
Earnings Applicable to Common Stock	$	32,308			16,384	$	22,665			16,330	$	22,598			16,270
$7.00 Series Dividend		67			115		67			115		67			115
$8.00 Series Dividend		24			41		24			41		24			41
Adjusted Earnings Applicable to Common Stock	$	32,399			16,540	$	22,756			16,486	$	22,689			16,426
Diluted EPS	$	1.96				$	1.38				$	1.38

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 consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of First Mortgage and State Revolving Fund Bonds (collectively, the Bonds) issued by Middlesex is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable and the Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Bonds were as follows:

	(Thousands of Dollars) At December 31,
	2018				2017
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Bonds	$	101,411	$	102,789	$	95,322	$	98,036

For other long-term debt issuances for which there is no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value. For details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series of long-term debt described as “Amortizing Secured Note”, “State Revolving Trust Note” and “Construction Loans” on the Consolidated Statements of Capital Stock and Long-Term Debt. The carrying amount of these instruments was $61.5 million and $52.5 million at December 31, 2018 and December 31, 2017, respectively. Customer advances for construction have carrying amounts of $22.6 million and $21.4 million at December 31, 2018 and December 31, 2017, 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.