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Capitalization | 12 Months Ended
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Dec. 31, 2019
CAPITALIZATION: |
Capitalization | 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 In November 2019, the Company sold and issued 0.8 million shares of common stock in a public offering priced at $60.50 per share. The net proceeds of $43.7 million were used for general corporate purposes including repayment of a portion of the Company’s short-term debt. 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. 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 remains 0.4 million shares registered with the SEC for the Investment Plan and available for potential issuance to participants. In January 2019, the Company activated a limited share purchase discount feature of the Investment Plan. Investment Plan participants were invited to purchase shares directly as well as reinvest their common stock dividends at a 5% discount. In August 2019, the 0.2 million share purchase limit was reached and the discount offer terminated. The Company raised approximately $12.7 million through the issuance of over 0.2 million shares under the Investment Plan during 2019. 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, 2019, 2018 and 2017, 3,521, 4,004, 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 56,643 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. 53 Index Preferred Stock At December 31, 2019 and 2018, 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. In 2019, all remaining outstanding no par $8.00 Series Cumulative and Convertible Preferred Stock (3,000 shares or approximately $0.3 million) were converted into 41,142 shares of common stock. 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 interest rate on the Company’s current construction loan borrowings is zero percent (0%). When construction on the qualifying project is substantially complete, NJIB will coordinate the conversion of the construction loan into a long-term securitized loan with a portion of the principal balance having a stated interest rate of zero percent (0%) and a portion of the principal balance at a market interest rate at the time of closing using the credit rating of the State of New Jersey. The current term of the long-term loans offered through the NJIB is up to thirty years. The NJIB generally schedules its long-term debt financings in May and November. Middlesex currently has two projects that are in the construction loan phase of New Jersey SRF program: 1) In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the construction of a large-diameter transmission pipeline from the Carl J. Olsen water treatment plant and interconnect with our distribution system. Middlesex closed on a $43.5 million NJIB interest-free construction loan in August 2018. Through December 31, 2019, Middlesex has drawn a total of $31.8 million and expects to draw down the remaining proceeds through the first quarter of 2020. 2) In March 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the 2018 RENEW Program, which is an ongoing initiative to eliminate all unlined water distribution mains in the Middlesex system. Middlesex closed on an $8.7 million NJIB construction loan in September 2018 and completed drawing on the proceeds in October 2019. The Company expects that the large-diameter transmission pipeline and the 2018 RENEW construction loans will be included in the NJIB May 2020 long-term debt financing program. 54 Index 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. As a result of all these changes, the Company’s future capital funding plan does not include participating in the NJIB SRF program. In order to help ensure adherence to its comprehensive financing plan, Middlesex received approval from the NJBPU in February 2019 to issue and sell up to $140 million of First Mortgage Bonds (FMB) through the New Jersey Economic Development Authority (NJEDA) in one or more transactions through December 31, 2022. Because the interest paid to the bondholders is exempt from federal and New 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. In August 2019, Middlesex priced and closed on an 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, are being used to finance several projects under the Water For Tomorrow capital program initiated by the Company to upgrade and replace aging water utility infrastructure. The total proceeds of $60.8 million, initially recorded as Restricted Cash on the balance sheet, is held in escrow by a bond trustee and are drawn down by requisition for the qualifying projects. Through December 31, 2019, Middlesex has drawn a total of $17.3 million and currently expects to draw the remaining $43.8 million of proceeds, currently included in Restricted Cash, through the third quarter of 2021. In May 2018, Middlesex repaid its RENEW 2017 interest-free construction loan by issuing to the NJIB FMBs in the amount of $9.5 million 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%. The final maturity date for both bonds is August 1, 2047, with scheduled debt service payments over the life of the loans. In March 2018, the DEPSC approved Tidewater’s request to borrow up to $0.9 million under the Delaware SRF program to fund the replacement of an entire water distribution system of a small Delaware community. Tidewater closed on the SRF loan in May 2018. In April 2019, Tidewater received approval from the DEPSC to increase the borrowing to $1.7 million based on revised project cost estimates. Tidewater closed on the additional SRF loan in October 2019. Through December 31, 2019, Tidewater has drawn a total of $1.3 million and expects to draw down the remaining proceeds through the first quarter of 2020. Bond Series QQ, RR, SS, 2019A and 2019B are term bonds with single maturity dates subsequent to 2024. Principal repayments for all series of the Company’s long-term debt except for Bond Series BB, CC, EE, FF and II extend beyond 2024. 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
| 2020 | $ 7.2
| 2021 | $ 7.2
| 2022 | $ 6.7
| 2023 | $ 6.2
| 2024 | $ 6.0
* Included in Other Current Liabilities
55 Index The weighted average interest rate on all long-term debt at December 31, 2019 and 2018 was 3.17% and 3.30%, respectively. Except for the Amortizing Secured Notes ($33.6 million), all of the Company’s outstanding long-term debt has been issued through the NJEDA ($109.1 million), the NJIB SRF program ($82.7 million) and the Delaware SRF program ($8.9 million). In 2019, the NJIB de-obligated principal payments of $0.1 million on Series NN of the Company’s FMBs. 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 years ended December 31, 2019, 2018 and 2017. 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 (fully converted into common stock in September 2019).
|  | (In Thousands, Except Per Share Amounts)
|  | 2019 |  | 2018 |  | 2017
Basic: |  | Income |  | Shares |  | Income |  | Shares |  | Income |  | Shares
Net Income |  | $ | 33,888 |  |  |  | 16,685 |  |  | $ | 32,452 |  |  |  | 16,384 |  |  | $ | 22,809 |  |  |  | 16,330 |
Preferred Dividend |  |  | (132 | ) |  |  |  |  |  |  | (144 | ) |  |  |  |  |  |  | (144 | ) |  |  |  |
Earnings Applicable to Common Stock |  | $ | 33,756 |  |  |  | 16,685 |  |  | $ | 32,308 |  |  |  | 16,384 |  |  | $ | 22,665 |  |  |  | 16,330 |
Basic EPS |  | $ | 2.02 |  |  |  |  |  |  | $ | 1.97 |  |  |  |  |  |  | $ | 1.39 |  |  |  |  |
Diluted: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings Applicable to Common Stock |  | $ | 33,756 |  |  |  | 16,685 |  |  | $ | 32,308 |  |  |  | 16,384 |  |  | $ | 22,665 |  |  |  | 16,330 |
$7.00 Series Dividend |  |  | 67 |  |  |  | 115 |  |  |  | 67 |  |  |  | 115 |  |  |  | 67 |  |  |  | 115 |
$8.00 Series Dividend |  |  | 12 |  |  |  | 29 |  |  |  | 24 |  |  |  | 41 |  |  |  | 24 |  |  |  | 41 |
Adjusted Earnings Applicable to Common Stock |  | $ | 33,835 |  |  |  | 16,829 |  |  | $ | 32,399 |  |  |  | 16,540 |  |  | $ | 22,756 |  |  |  | 16,486 |
Diluted EPS |  | $ | 2.01 |  |  |  |  |  |  | $ | 1.96 |  |  |  |  |  |  | $ | 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,
|  | 2019 |  | 2018
|  | Carrying |  | Fair |  | Carrying |  | Fair
|  | Amount |  | Value |  | Amount |  | Value
Bonds |  | $ | 151,361 |  |  | $ | 160,772 |  |  | $ | 101,411 |  |  | $ | 102,789 |
56 Index 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 $83.0 million and $61.5 million at December 31, 2019 and 2018, respectively. Customer advances for construction have carrying amounts of $23.9 million and $22.6 million at December 31, 2019 and 2018, 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.

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