Capitalization

12 Months Ended

Dec. 31, 2016

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

The Company periodically 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. In July 2015, the Company registered an additional 700,000 common shares for potential issuance under the Investment Plan with the United States Securities and Exchange Commission, increasing the number of NJBPU-authorized shares to 3.0 million. The cumulative number of shares issued under the Investment Plan at December 31, 2016 is 2.3 million. For the years ended December 31, 2016, 2015 and 2014, the Company raised approximately $1.5 million, respectively, through the issuance of shares under the Investment Plan.

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, 2016, 2015 and 2014, 3,976, 4,795 and 5,082 shares, respectively, of Middlesex common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan and 68,144 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, 2016 and 2015, 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 2014, 4,293 shares (approximately $0.5 million) of the Company’s no par $7.00 Series Cumulative and Convertible Preferred Stock were converted into 51,516 shares of common stock.

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 with the New Jersey Environmental Infrastructure Trust (NJEIT) at a below market interest rate. The current interest rate on construction loan borrowings is zero percent (0%). When construction on the qualifying project is substantially complete, the NJEIT 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 NJEIT 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. The NJEIT generally schedules its long-term debt financings in May and November.

In March 2016, the NJBPU approved Middlesex’s request to borrow up to $16.0 million under the New Jersey SRF program to fund the 2016 RENEW Program, which is an ongoing initiative to eliminate all unlined water distribution mains in the Middlesex system. Middlesex closed on an $11.8 million zero percent (0%) SRF construction loan on June 28, 2016. Through December 31, 2016, Middlesex has drawn down $7.5 million and expects to draw down the remaining proceeds during the first quarter of 2017. The NJEIT notified the Company that it has scheduled this project to be included in the May 2017 long-term loan financing.

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.

In 2015, Tidewater completed the drawdown of a $15.0 million long-term debt transaction. The interest rate on $11.0 million of the loan is 4.45%. $4.0 million of the loan was initially set up as a market-based variable interest rate transaction, but which was switched to a fixed rate of 4.47% in January 2017. The proceeds were used to pay down short-term debt and for other general corporate purposes. The final maturity date of all borrowings under this loan agreement is April 2040.

Bond Series QQ, RR and SS are term bonds with single maturity dates subsequent to 2020. Principal repayments for all series of the Company’s long-term debt except for Bond Series X, Y, Z and AA extend beyond 2020. 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
	2017	$	6.2
	2018	$	6.6
	2019	$	6.6
	2020	$	6.4
	2021	$	6.4

The weighted average interest rate on all long-term debt at December 31, 2016 and 2015 was 3.88% and 3.87%, respectively. Except for the Amortizing Secured Notes ($42.5 million), all of the Company’s outstanding long-term debt has been issued through the New Jersey Economic Development Authority ($55.4 million), the NJEIT program ($34.8 million) and the Delaware SRF program ($9.7 million).

In both 2016 and 2015, the NJEIT 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, 2016. 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)
	2016					2015					2014
Basic:	Income			Shares		Income			Shares		Income			Shares
Net Income	$	22,742			16,270	$	20,028			16,175	$	18,445			16,052
Preferred Dividend		(144	)				(144	)				(151	)
Earnings Applicable to Common Stock	$	22,598			16,270	$	19,884			16,175	$	18,294			16,052
Basic EPS	$	1.39				$	1.23				$	1.14
Diluted:
Earnings Applicable to Common Stock	$	22,598			16,270	$	19,884			16,175	$	18,294			16,052
$7.00 Series Dividend		67			115		67			115		74			133
$8.00 Series Dividend		24			41		24			41		24			41
Adjusted Earnings Applicable to Common Stock	$	22,689			16,426	$	19,975			16,331	$	18,392			16,226
Diluted EPS	$	1.38				$	1.22				$	1.13

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,
	2016				2015
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Bonds	$	82,786	$	84,821	$	85,600	$	88,431

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 Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $59.7 million and $54.7 million at December 31, 2016 and December 31, 2015, respectively. Customer advances for construction have carrying amounts of $20.8 million and $20.5 million at December 31, 2016 and December 31, 2015, 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.