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 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, 2015 is 2.3 million. For the years ended December 31, 2015, 2014 and 2013, the Company raised approximately $1.5 million, $1.5 million and $1.7 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, 2015, 2014 and 2013, 4,795, 5,082 and 5,432 shares, respectively, of common stock were granted and issued to the Company's outside directors under the Outside Director Stock Compensation Plan and 72,120 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, 2015, 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, 2015 and 2014, 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. 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 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. In 2013, 4,000 shares (approximately $0.5 million) of the Company's no par $8.00 Series Cumulative and Convertible Preferred Stock were converted into 54,856 shares of common stock.

Long-term Debt

In 2014, Tidewater completed a $15.0 million debt transaction. Tidewater drew down $8.0 million in 2014 and the remaining $7.0 million in 2015. $11.0 million of the loan is at a fixed interest rate of 4.45% and $4.0 million is at a market-based variable interest rate. The proceeds were used to pay down short-term debt and for other general corporate purposes. The interest rates on the variable portion of the loan can be fixed at Tidewater's discretion. The final maturity date of all borrowings under this loan agreement is April 2040.

In May 2014, Middlesex borrowed approximately $3.8 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey State Revolving Fund (SRF) loan program and issued first mortgage bonds designated as Series VV (approximately $2.8 million) and Series WW (approximately $0.9 million). The interest rate on the Series VV bond is zero and the interest rate on the Series WW bond ranges from 3.0% to 5.0% depending on the serial maturity date. The final maturity date for both bonds is August 1, 2033. Proceeds were used for the Middlesex 2014 RENEW project, which is part of a program to clean and cement all unlined mains in the Middlesex system.

In 2014, Tidewater borrowed $0.6 million, which represented the balance of a $1.1 million project specific loan with the Delaware SRF at an interest rate of 3.45% and final maturity of August 1, 2031.

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
2016	$	5.7
2017	$	6.0
2018	$	6.4
2019	$	6.4
2020	$	6.3

The weighted average interest rate on all long-term debt at both December 31, 2015 and 2014 was 3.87% and 3.99%, respectively. Except for the Amortizing Secured Notes ($45.4 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 ($30.2 million) and the Delaware SRF program ($9.3 million).

Restricted cash proceeds from New Jersey SRF loans are held in trusts until authorized for distribution. In addition, certain restricted cash proceeds from New Jersey SRF loans are held for debt service requirements.

In 2015 and 2013, the NJEIT de-obligated principal payments of $0.5 million and $0.1 million, respectively, on several series of SRF long-term debt. There were no de-obligated principal payments in 2014.

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, 2015. 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)
	2015					2014					2013
Basic:	Income			Shares		Income			Shares		Income			Shares
Net Income	$	20,028			16,175	$	18,445			16,052	$	16,633			15,868
Preferred Dividend		(144	)				(151	)				(190	)
Earnings Applicable to Common Stock	$	19,884			16,175	$	18,294			16,052	$	16,443			15,868
Basic EPS	$	1.23				$	1.14				$	1.04
Diluted:
Earnings Applicable to Common Stock	$	19,884			16,175	$	18,294			16,052	$	16,443			15,868
$7.00 Series Dividend		67			115		74			133		97			166
$8.00 Series Dividend		24			41		24			41		40			76
Adjusted Earnings Applicable to Common Stock	$	19,975			16,331	$	18,392			16,226	$	16,580			16,110
Diluted EPS	$	1.22				$	1.13				$	1.03

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 Bonds 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,
	2015				2014
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Bonds	$	85,143	$	87,972	$	88,628	$	90,115
State Revolving Notes	$	457	$	459	$	540	$	542

For other long-term debt for which there was 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 noted as “Amortizing Secured Note” and “State Revolving Trust Note” on the Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $54.7 million and $50.8 million at December 31, 2015 and 2014, respectively. Customer advances for construction have a carrying amount of $20.5 million and $22.0 million at December 31, 2015 and 2014, 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.