Capitalization

12 Months Ended

Dec. 31, 2012

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 June 2010, the Company sold and issued 1.9 million shares of common stock in a public offering that was priced at $15.21 per share. The net proceeds of approximately $27.8 million were used to repay certain of the Company’s short-term debt outstanding.

The number of shares authorized under the Dividend Reinvestment and Common Stock Purchase Plan (DRP) is 2.3 million shares. The cumulative number of shares issued under the DRP at December 31, 2012 is 2.1 million. For the years ended December 31, 2012, December 31, 2011 and December 31, 2010, the Company raised approximately $1.6 million, $1.5 million and $1.9 million, respectively, through the issuance of shares under the DRP.

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, 2012, December 31, 2011 and December 31, 2010, 5,768 shares, 3,833 shares and 1,416 shares, respectively, of common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan and 87,429 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. At December 31, 2012, no preferred stock dividends were in arrears.

Preferred Stock

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.

At December 31, 2012 and 2011, there were less than 0.1 million shares of preferred stock authorized and outstanding and there were no 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. All such preferred dividends have been paid. 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 February 2011, the Company repurchased 93 shares of its $7.00 Series, nonredeemable cumulative preferred stock at par value for approximately $9 thousand.

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

In November 2012, Middlesex completed the transaction for the redemption and refinance of $57.5 million of First Mortgage Bonds (Bonds).  The Bonds were originally issued in five separate transactions or series under the loan program of the New Jersey Economic Development Authority (NJEDA) and were replaced with three new series of Bonds designated as Series QQ, RR and SS totaling $55.4 million issued through the NJEDA, net of a $2.2 million issuance premium. The restricted proceeds of the new Bonds were used to redeem $51.5 million of the original Bonds in December 2012 and $6.0 million of the original Bonds in January 2013.

In May 2012, Middlesex borrowed $3.9 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey State Revolving Fund (SRF) loan program and issued Bonds designated as Series OO ($3.0 million) and Series PP ($0.9 million).  The interest rate on the Series OO Bonds is zero and the interest rate on the Series PP Bonds ranges from 2.0% to 5.0% depending on the serial maturity date. The final maturity date for the Bonds is August 1, 2031. Proceeds may only be used for the Middlesex 2012 RENEW Program, which is Middlesex’s program to clean and cement unlined mains in the Middlesex system.

In December 2010, Middlesex issued $4.0 million of Bonds through the NJEIT under the New Jersey SRF program. The Company closed on the Bonds designated as Series MM and NN in December 2010. Proceeds may only be used for the Middlesex 2011 RENEW Program.

In March 2011, Tidewater closed on a $2.8 million loan with the Delaware SRF program which allowed, but did not obligate, Tidewater to draw against a General Obligation Note for a specific project. The interest rate on all draws was set at 3.75% with a final maturity of July 1, 2031. As of December 31, 2012, Tidewater has borrowed $2.7 million against this loan and does not anticipate any future borrowings under this loan.

In March 2011, Southern Shores closed on a $1.6 million loan with the Delaware SRF program, which allowed, but did not obligate, Southern Shores to draw against a General Obligation Note for a specific project. The interest rate on any draw was set at 3.75% with a final maturity of November 30, 2030. As of December 31, 2012, Southern Shores has borrowed $1.4 million against this loan and does not anticipate any future borrowings under this loan.

First Mortgage Bonds Series QQ through SS are term bonds with single maturity dates subsequent to 2017. Principal repayments for all series of the Company’s long-term debt extend beyond 2017. 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
2013	$11.1
2014	$5.2
2015	$5.3
2016	$5.4
2017	$5.5

The weighted average interest rate on all long-term debt at both December 31, 2012 and 2011 was 4.34% and 5.13%, respectively. Except for the Amortizing Secured Notes, all of the Company’s outstanding long-term debt has been issued through the NJEDA ($61.4 million), the NJEIT program ($31.2 million) and the Delaware SRF program ($10.2 million).

Restricted cash includes proceeds from various New Jersey SRF loans. These funds are held in trusts and restricted for specific capital expenditures and debt service requirements. As discussed above, Series MM, NN, OO and PP proceeds can only be used for the applicable RENEW Programs. All other bond issuance balances in restricted cash are for debt service requirements.

In 2012 and 2011, the NJEIT deobligated principal payments of $0.3 million and $0.6 million, respectively, 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, 2012. 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)
	2012					2011					2010
Basic:	Income			Shares		Income			Shares		Income			Shares
Net Income	$	14,396			15,733	$	13,447			15,615	$	14,330			14,654
Preferred Dividend		(206	)				(206	)				(207	)
Earnings Applicable to Common Stock	$	14,190			15,733	$	13,241			15,615	$	14,123			14,654
Basic EPS	$	0.90				$	0.85				$	0.96
Diluted:
Earnings Applicable to Common Stock	$	14,190			15,733	$	13,241			15,615	$	14,123			14,654
$7.00 Series Dividend		97			166		97			166		97			166
$8.00 Series Dividend		56			96		56			96		56			96
Adjusted Earnings Applicable to Common Stock	$	14,343			15,995	$	13, 394			15,877	$	14,276			14,916
Diluted EPS	$	0.90				$	0.84				$	0.96

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 the Company’s long-term debt relating to Bonds and SRF Notes 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 and SRF Notes in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Company’s bonds were as follows:

	(Thousands of Dollars)
	At December 31,
	2012				2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Bonds	$	91,938	$	93,556	$	86,577	$	87,283
State Revolving Bonds	$	708	$	712	$	793	$	799

For other long-term debt for which there was no quoted market price, it was not practicable to estimate their fair value. The carrying amount of these instruments was $47.7 million and $49.3 million at December 31, 2012 and 2011, respectively. Customer advances for construction have a carrying amount of $22.0 million and $21.9 million at December 31, 2012 and 2011, 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.