<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1994
Commission File Number 1-6659
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Pennsylvania 23-1702594
-------------- --------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
762 Lancaster Avenue, Bryn Mawr, Pennsylvania 19010
---------------------------------------------- -------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (610)-527-8000
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X__ No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of June 30, 1994.
11,517,773
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
Property, plant and equipment, at cost $442,111 $433,302
Less accumulated depreciation 72,266 67,072
-------- --------
Net property, plant and equipment 369,845 366,230
Current assets
Cash (687) (868)
Accounts receivable, net 19,503 18,131
Inventory, materials and supplies 1,877 1,721
Prepayments and other current assets 2,274 532
-------- --------
Total current assets 22,967 19,516
Regulatory assets 49,694 51,229
Deferred charges and other assets, net 2,673 2,704
-------- --------
$445,179 $439,679
======== ========
Common stockholders' equity $138,111 $135,934
Preferred stock of subsidiary with
mandatory redemption 10,000 10,000
Long-term debt, excluding current portion 156,962 145,292
Commitments - -
Current liabilities
Current portion of long-term debt 884 4,884
Loans payable 70 819
Accounts payable 1,464 3,381
Accrued interest 3,399 3,439
Other accrued liabilities 9,035 9,269
Net reserves related to
discontinued operations 2,369 2,578
-------- --------
Total current liabilities 17,221 24,370
Deferred credits and other liabilities
Deferred income taxes and investment
credits 67,909 69,137
Customers' advances for construction 23,669 24,379
Other noncurrent liabilities 9,618 8,926
-------- --------
Total deferred credits and other
liabilities 101,196 102,442
Contributions in aid of construction 21,689 21,641
-------- --------
$445,179 $439,679
======== ========
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1994 1993
-------- -------
<S> <C> <C>
Earned revenues $51,579 $47,774
Costs and expenses
Operating expenses 24,057 21,938
Depreciation 5,165 4,901
Amortization (159) 283
Taxes other than income taxes 3,630 3,430
-------- --------
32,693 30,552
-------- --------
Operating income 18,886 17,222
Interest and debt expenses 6,394 6,812
Dividends on preferred stock 433 433
Allowance for funds used during
construction (43) (506)
-------- --------
Income before income taxes 12,102 10,483
Provision for income taxes 5,118 4,292
-------- --------
Net income $ 6,984 $ 6,191
======== ========
Net income per share $ .61 $ .59
======== ========
Average common and common equivalent
shares outstanding during the period 11,467 10,431
======== ========
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
1994 1993
-------- --------
<S> <C> <C>
Earned revenues $26,730 $25,048
Costs and expenses
Operating expenses 12,001 11,205
Depreciation 2,592 2,490
Amortization (28) 168
Taxes other than income taxes 1,728 1,657
-------- --------
16,293 15,520
-------- --------
Operating income 10,437 9,528
Interest and debt expenses 3,229 3,484
Dividends on preferred stock 217 217
Allowance for funds used during
construction (24) (284)
-------- --------
Income before income taxes 7,015 6,111
Provision for income taxes 2,980 2,507
-------- --------
Net income $ 4,035 $ 3,604
======== ========
Net income per share $ .35 $ .33
======== ========
Average common and common equivalent
shares outstanding during the period 11,461 10,905
======== ========
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,984 $ 6,191
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 5,006 5,184
Deferred taxes, net of taxes on customers'
advances 1,085 184
Net increase in receivables, inventory
and prepayments (3,270) (2,168)
Net decrease in payables and other
accrued liabilities (1,886) (2,357)
Net increase (decrease) in accrued interest (41) 138
Other (226) (215)
-------- --------
Net cash flows from operating activities 7,652 6,957
-------- --------
Cash flows from investing activities
Property, plant and equipment additions,
including allowance for funds used during
construction of $43 and $506 (8,539) (11,394)
Sale of subsidiaries and related assets - 871
Other 22 (15)
-------- --------
Net cash flows from investing activities (8,517) (10,538)
-------- --------
Cash flows from financing activities
Customers' advances and contributions in aid of
construction, net of income tax payments 926 796
Repayments of customers' advances (1,587) (2,387)
Net repayments of short-term debt (749) (159)
Proceeds of long-term debt 12,464 21,726
Repayments of long-term debt (4,850) (32,962)
Proceeds from issuing common stock 3,364 22,708
Repurchases of common stock (2,020) (54)
Dividends paid (6,151) (5,539)
Other (142) (101)
-------- --------
Net cash flows from financing activities 1,255 4,028
-------- --------
Net cash flows to discontinued operations (209) (319)
-------- --------
Net increase in cash 181 128
Cash deficit beginning of year (868) (712)
-------- --------
Cash deficit at end of period $ (687) $ (584)
======== ========
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
Note 1 Basis of Presentation
The accompanying consolidated balance sheet of Philadelphia
Suburban Corporation at June 30, 1994, the consolidated
statements of income for the six months and quarter ended June
30, 1994 and 1993, and the consolidated cash flow statements
for the six months ended June 30, 1994 and 1993 are unaudited,
but reflect all adjustments, consisting of only normal
recurring accruals, which are, in the opinion of management,
necessary to present fairly the consolidated financial position
at June 30, 1994, the consolidated results of operations, and
the consolidated cash flow for the periods presented. Because
they cover interim periods, the statements and related notes to
the financial statements do not include all disclosures and
notes normally provided in annual financial statements and,
therefore, should be read in conjunction with the Annual Report
on Form 10-K for the year ended December 31, 1993 and the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1994.
Note 2 Water Rates
In June 1994, the Pennsylvania Public Utility Commission
("PUC") approved a rate settlement that Philadelphia Suburban
Water Company (PSW) had reached with the parties (the Office of
Consumer Advocate, the PUC Office of Trial Staff and the Office
of Small Business Advocate) actively participating in
litigating the rate application PSW filed in December 1993.
This settlement is designed to increase annual water revenues
by $9,050 or approximately 9.05% effective June 17, 1994. As
a part of this settlement agreement, PSW agreed not to file for
a new general rate increase prior to April 1, 1995, absent
extraordinary circumstances.
The rate settlement specifically incorporated the recovery of
Postretirement Benefits Other than Pensions (PBOP's) computed
under Statement of Financial Accounting Standards No. 106
("SFAS 106"). The settlement agreement provides for the
current recovery of the annual PBOP costs computed under SFAS
106, as well as the amortization, over a period of 18.5 years,
of that portion of the regulatory asset related to the adoption
of SFAS 106. The balance of the regulatory asset related to
the adoption of SFAS 106 as of June 17, 1994, the date rate
recovery of these costs commenced, was $2,456.
5
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
Note 3 Regulatory Asset
In 1993, the Office of Consumer Advocate ("OCA") appealed two
PUC decisions to Pennsylvania Commonwealth Court in which the
PUC either allowed the utility to defer its incremental PBOP
costs by means of a regulatory asset or allowed current rate
recovery of these costs. In May 1994, Commonwealth Court
issued a decision in one case in which it found that the PUC
violated the rule against retroactive ratemaking when it
approved a utility's request to record a regulatory asset
related to SFAS 106 and, in the process, guaranteed future rate
recovery of these costs. The Court based its decision, in
part, on the fact that the utility had ample opportunity to
file a timely base rate request to include PBOP costs computed
under SFAS 106.
In a subsequent decision, involving another utility and the
PUC's approval of its rate recovery of PBOP costs computed
under SFAS 106, the same Court found that inclusion of the
amortization of the Accumulated Postretirement Benefit
Obligation in PBOP costs did not constitute retroactive
ratemaking and, in general, affirmed the PUC's authority to
allow rate recovery of PBOP costs computed under SFAS 106.
Litigants in both these cases have requested the Pennsylvania
Supreme Court to review these decisions.
Management believes that the facts and circumstances that the
Commonwealth Court relied upon in the first decision are
significantly different from those of the Company. Among those
differences is the fact that the Company did file timely rate
requests which incorporated recovery of its incremental PBOP
costs computed under SFAS 106 and has reached a rate
settlement which incorporates the rate recovery of the
regulatory asset related to the implementation of SFAS 106.
The Company does not consider the regulatory asset related
to the implementation of SFAS 106 impaired as a result
of the first Commonwealth Court decision.
Note 4 Discontinued Operations
Net reserves related to discontinued operations consist
primarily of reserves for future and contingent costs
associated with the discontinued operations. These costs,
which are recorded on the balance sheet net of related income
tax benefits, include administrative, legal and tax services,
contingent legal and lease obligations and certain employee
costs. During the quarter, $44 of payments specifically
associated with discontinued operations were charged to this
reserve.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Philadelphia Suburban Corporation (the Company or PSC) is composed
of two businesses, a regulated water utility (Philadelphia Suburban Water
Company or PSW), and a nonregulated data processing service bureau
(Utility & Municipal Services, Inc. or UMS). The operations of UMS are
not significant to the financial results of the Company and, therefore,
are not discussed separately. Corporate expenses include administrative
expenses of a general nature.
Financial Condition
During the first half of 1994, the Company made $8,539 of capital
expenditures related to routine capital improvements and replacements for
PSW and repaid $1,587 of customer advances for construction.
During the first six months, internally generated funds, available
working capital and funds available under the revolving credit agreement,
were sufficient to fund the cash requirements discussed above, and to pay
dividends. In addition, proceeds from the issuance of common stock,
primarily through the Company's Customer Stock Purchase Plan and the
Dividend Reinvestment Plan, net of repurchases of common stock amounted
to approximately $1,344. Effective with the September 1, 1994 payment,
the Company increased the quarterly dividend on common stock from $.27
per share to $.28 per share.
At June 30, 1994, the Company and PSW had $2,930 and $1,000
respectively, available under short-term lines of credit and PSW had
$5,900 available under its revolving credit agreement. In August 1994,
the Company increased its short-term lines of credit from $3,000 to
$9,000.
Traditionally, PSW has financed its ongoing construction program and
other financial requirements separately from PSC. PSW's ability to
finance its future construction program and pay dividends to the Company
depends on its ability to attract the necessary external financing and to
maintain or increase internally generated funds. Rate increases and
regulatory support will continue to be required to allow PSW to achieve
a level of earnings necessary to attract capital, to maintain
satisfactory debt coverage ratios and to provide shareholders an adequate
return on their investment.
Historically, PSW refinances amounts due under its revolving credit
agreement and its lines of credit through the issuance of long-term debt
and intends to issue long-term debt within the next three months.
Management believes that, with the improvement in the Company's and PSW's
capitalization ratios over the past two years, it will be able to
successfully issue long-term debt and obtain other external financing
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
that it may need. Further, Management believes that internally generated
funds along with existing credit facilities and the issuance of long-term
debt are adequate to meet the Company's financing requirements through
the balance of the year and beyond.
Results of Operations
Analysis of First Six Months of 1994 Compared to First Six Months of 1993
Revenues increased $3,805 or 8.0% primarily due to the 7.4% rate increase
granted PSW on June 1, 1993, a slight increase in customer consumption of
water and, to a lesser extent, the rate increase which became effective
on June 17, 1994.
Operating expenses increased by $2,119 or 9.7% primarily as a result of
higher costs resulting from the extreme cold weather experienced during
the winter months of 1994. The weather conditions caused significant
maintenance problems, including an abnormally high number of water main
breaks, and required additional treatment costs as raw water quality
deteriorated during these months. The additional costs associated with
the weather were approximately $800 or 38% of the total increase in
operating expenses. The balance of the increase in operating expenses
was due to increases in wages, electric rates, and cost of water
purchased.
Depreciation increased by $264 or 5.4% reflecting the impact of utility
plant placed in service since last year. Depreciation was approximately
2.3% of average utility plant in service in both the first half of 1994
and 1993.
Amortization decreased $442 primarily due to $411 of amortization of the
negative goodwill associated with the December 1992 acquisitions of two
water systems which has been recognized in conjunction with the rate
settlement retroactive to the first quarter of 1993.
Taxes other than income taxes increased by $200 or 5.8% primarily due to
increases in the bases on which the Pennsylvania Capital Stock Tax and
the Pennsylvania Public Utility Realty Tax Assessment are calculated and
due to increased payroll taxes associated with wage increases.
Interest expense decreased by $418 or 6.1% reflecting a reduction in the
average outstanding debt as a result of the proceeds the Company received
from the sale of common stock since early 1993 and due to a reduction in
overall interest rates on debt outstanding.
8
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Allowance for funds used during construction ("AFUDC") decreased $463
primarily due to a $10,200 decrease in the balance of construction work
in progress ("CWIP") on which AFUDC is applied. The majority of the
decrease in CWIP is associated with an $11,500 filtration plant which was
completed and placed in service in the fourth quarter of 1993. In
addition, the AFUDC rate has also declined as the Company is required to
use a rate equal to the average costs of borrowings under its revolving
credit facility while the balance of CWIP is less than the borrowing
level under this facility. The average cost of capital (i.e. the
weighted cost of long-term debt, preferred stock and common equity) is
used as the AFUDC rate for the amount the CWIP balance exceeds the
balance of the revolving credit facility. In prior periods the average
cost of capital was used as the AFUDC rate.
The Company's effective income tax rate was 42.3% in 1994 and 40.9% in
1993. The increase in the effective tax rate is due primarily to the
impact of the Omnibus Budget Reconciliation Act of 1993. Enacted during
the third quarter of 1993, the Act raised the statutory federal tax rate
from 34% to 35%.
Net income increased $793 or 12.8% primarily due to increased revenues,
partially offset by higher operating expenses. On a per share basis,
earnings increased $.02 or 2.6% reflecting the effect of a 9.9% increase
in the average number of shares outstanding. The increased number of
shares outstanding was primarily due to the 1.1 million shares issued in
a public offering in April 1993, the additional 421,928 shares issued
through the Company's stock purchase plans it maintains for customers and
existing shareholders since the first half of 1993, partially offset by
155,805 shares repurchased by the Company since the second quarter of
1993.
Analysis of Second Quarter of 1994 Compared to Second Quarter of 1993
Revenues for the quarter increased $1,682 or 6.7% primarily due to the
rate increases granted PSW in June 1993 and 1994, and a slight increase
in customers' consumption of water.
Operating expenses increased $796 or 7.1% primarily due to increased
maintenance costs associated with a higher number of water main breaks
that occurred during the quarter as compared to 1993, and increased
wages, electric rates and cost of water purchased.
Depreciation increased $102 or 4.1% reflecting the impact of utility
plant placed in service since the second quarter of 1993. Depreciation
was approximately 2.3% of average utility plant in service in the second
quarter of 1994 and 1993, respectively.
9
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Amortization decreased $196 primarily due to $163 of amortization of the
negative goodwill associated with the aforementioned December 1992
acquisition of two water systems.
Taxes other than income taxes increased $71 or 4.3% due to higher
Pennsylvania Capital Stock Tax resulting from an increase in common
stockholders' equity.
Interest expense decreased $255 or 7.3% reflecting a reduction in the
average outstanding debt and due to a reduction in overall interest rates
on debt outstanding.
Allowance for funds used during construction decreased $260 due to the
decrease in CWIP as a result of the $11,500 filtration plant being
completed and placed in service in the fourth quarter of 1993, and
decline in the AFUDC rate as discussed in the first six months analysis.
The Company's effective income tax rate was 42.5% in 1994 and 41.0% in
1993. The increase in the effective tax rate is due to the same reason
described for the first six months analysis.
Net income for the quarter increased by $431 or 12% principally due to
increased water revenues, partially offset by higher operating expenses.
Earnings per share, however, increased only $.02 per share or 6.5% due to
the higher number of average shares outstanding.
10
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
There are no pending legal proceedings to which the Registrant
or any of its subsidiaries is a party or to which any of their
properties is the subject that present a reasonable likelihood
of a material adverse impact on the Registrant. Reference is
made to Item 3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, which is included by a
reference herein.
Item 4. Results of Vote of Security Holders
The Annual Meeting of Shareholders of Philadelphia Suburban
Corporation (the "Company") was held on May 19, 1994 at the
headquarters of the Company, 762 Lancaster Avenue, Bryn Mawr,
Pennsylvania, pursuant to the Notice sent on or about April 1,
1994 to all shareholders of record at the close of business on
March 21, 1994. At that meeting, the following nominees were
elected as directors of the Company for terms expiring in 1997
and received the votes set forth after their names below:
<TABLE>
<CAPTION>
Name of
Nominee For Withheld
----------------- --------- --------
<S> <C> <C>
John H. Austin 9,449,992 301,751
John F. McCaughan 9,468,214 283,529
Harvey J. Wilson 9,458,985 292,758
</TABLE>
Since the Board of Directors is divided into three classes with
one class elected each year to hold office for a three-year
term, the term of office for the following directors continued
after the Annual Meeting: Mary C. Carroll; Claudio Elia; Joseph
C. Ladd; John W. Boyer, Jr.; Nicholas DeBenedictis; and G. Fred
DiBona.
11
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Part II. Other Information (continued)
Item 4., Continued
In addition to the election of directors, the following
proposals were presented at the Annual Meeting and received the
votes set forth below:
a. Proposal to Approve the 1994 Employee Stock Purchase Plan
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-votes
--------- ------- ----------- ---------
<S> <C> <C> <C>
7,562,179 528,919 96,651 1,563,994
</TABLE>
b. Proposal to Approve the 1994 Philadelphia Suburban
Corporation Equity Compensation Plan.
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-votes
--------- ------- ----------- ---------
<S> <C> <C> <C>
7,058,403 944,180 184,166 1,564,994
</TABLE>
c. A Shareholder Proposal to Elect All Directors Annually
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-votes
--------- ------- ----------- ---------
<S> <C> <C> <C>
2,229,321 5,738,054 219,374 1,564,994
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be executed on its behalf
by the undersigned thereunto duly authorized.
August 12, 1994
PHILADELPHIA SUBURBAN CORPORATION
------------------------------------
Registrant
Nicholas DeBenedictis
------------------------------------
Nicholas DeBenedictis
Chairman and President
Michael P. Graham
------------------------------------
Michael P. Graham
Senior Vice President - Finance
and Treasurer
13
