<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 September 30, 1998
Commission File Number 1-6659
PHILADELPHIA SUBURBAN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010
- -------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
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 September 30, 1998.
27,666,643
- ----------
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-----------------------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Property, plant and equipment, at cost $ 719,222 $ 656,011
Less accumulated depreciation 132,356 121,528
-----------------------------------
Net property, plant and equipment 586,866 534,483
-----------------------------------
Current assets:
Cash 1,391 680
Accounts receivable, net 28,131 23,534
Inventory, materials and supplies 1,830 1,847
Prepayments and other current assets 581 1,002
-----------------------------------
Total current assets 31,933 27,063
-----------------------------------
Regulatory assets 51,096 51,203
Deferred charges and other assets, net 5,854 5,723
-----------------------------------
$ 675,749 $ 618,472
===================================
Liabilities and Stockholders' Equity
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock at $.50 par value, authorized 40,000,000 shares,
outstanding 27,666,643 and 26,210,654 in 1998 and 1997 14,100 13,294
Capital in excess of par value 158,831 128,065
Retained earnings 64,690 56,136
Treasury stock, 533,767 and 376,510 shares in 1998 and 1997 (9,490) (5,970)
-----------------------------------
Total stockholders' equity 231,351 194,745
-----------------------------------
Long-term debt, excluding current portion 257,534 232,471
Commitments - -
Current liabilities:
Current portion of long-term debt and preferred stock of subsidiary 2,448 6,662
Loans payable 5,110 10,400
Accounts payable 5,713 10,259
Accrued interest 4,034 3,978
Accrued taxes 5,380 3,643
Other accrued liabilities 11,178 9,755
-----------------------------------
Total current liabilities 33,863 44,697
-----------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 87,253 83,129
Customers' advances for construction 26,304 25,810
Other 13,444 12,764
-----------------------------------
Total deferred credits and other liabilities 127,001 121,703
-----------------------------------
Contributions in aid of construction 26,000 24,856
-----------------------------------
$ 675,749 $ 618,472
===================================
</TABLE>
See notes to consolidated financial statements on page 6 of this report.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Earned revenues $113,273 $101,090
Costs and expenses
Operating expenses 42,402 40,829
Depreciation 11,297 10,681
Amortization 622 24
Taxes other than income taxes 7,765 6,407
-----------------------------
62,086 57,941
-----------------------------
Operating income 51,187 43,149
Interest expense 14,189 13,423
Dividends on preferred stock of subsidiary 15 279
Allowance for funds used during construction (577) (334)
-----------------------------
Income before income taxes 37,560 29,781
Provision for income taxes 15,251 12,074
-----------------------------
Net income 22,309 17,707
Dividends on preferred stock 146 146
-----------------------------
Net income available to common stock $22,163 $17,561
=============================
Basic net income per common share $ 0.81 $ 0.68
=============================
Diluted net income per common share $ 0.80 $ 0.67
=============================
Average common shares outstanding during the period:
Basic 27,314 25,825
=============================
Diluted 27,770 26,176
=============================
</TABLE>
See notes to consolidated financial statements on page 6 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
September 30,
------------------------
1998 1997
------------------------
<S> <C> <C>
Earned revenues $41,656 $36,754
Costs and expenses
Operating expenses 14,714 14,466
Depreciation 3,974 3,385
Amortization 208 11
Taxes other than income taxes 2,964 2,083
------------------------
21,860 19,945
------------------------
Operating income 19,796 16,809
Interest expense 4,765 4,463
Dividends on preferred stock of subsidiary - 92
Allowance for funds used during construction (205) (141)
------------------------
Income before income taxes 15,236 12,395
Provision for income taxes 6,166 5,023
------------------------
Net income 9,070 7,372
Dividends on preferred stock 48 49
------------------------
Net income available to common stock $9,022 $7,323
========================
Basic net income per common share $ 0.33 $ 0.28
========================
Diluted net income per common share $ 0.32 $ 0.28
========================
Average common shares outstanding during the period:
Basic 27,601 26,015
========================
Diluted 28,083 26,353
========================
</TABLE>
See notes to consolidated financial statements on page 6 of this report.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,309 $ 17,707
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 11,919 10,705
Deferred taxes, net of taxes on customers' advances 3,633 3,485
Net increase in receivables, inventory and prepayments (4,799) (1,220)
Net increase (decrease) in payables, accrued interest
and other accrued liabilities 784 (3,785)
Other (230) (703)
----------------------------
Net cash flows from operating activities 33,616 26,189
----------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $577 and $334 (37,725) (22,580)
Acquisitions of water systems (23,911) (1,090)
Other 141 (459)
----------------------------
Net cash flows used in investing activities (61,495) (24,129)
----------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 999 854
Repayments of customers' advances (1,119) (1,736)
Net proceeds (repayments) of short-term debt (5,290) 4,510
Proceeds from long-term debt 27,245 19,712
Repayments of long-term debt (2,400) (18,419)
Redemption of preferred stock of subsidiary (4,214) (1,428)
Proceeds from issuing common stock 30,505 8,528
Repurchase of common stock (3,334) (1,965)
Dividends paid on preferred stock (146) (146)
Dividends paid on common stock (13,609) (11,957)
Other (47) (82)
----------------------------
Net cash flows from (used in) financing activities 28,590 (2,129)
----------------------------
Net increase (decrease) in cash 711 (69)
Cash balance beginning of year 680 1,518
----------------------------
Cash balance at end of period $ 1,391 $ 1,449
============================
</TABLE>
See Acquisitions and Water Sale Agreements footnote for description
of non-cash investing and financing activities.
See notes to consolidated financial statements on page 6 of this report.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-----------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock, $.50 par value 14,100 13,294
Capital in excess of par value 158,831 128,065
Retained earnings 64,690 56,136
Treasury stock (9,490) (5,970)
-----------------------------------
Total stockholders' equity 231,351 194,745
-----------------------------------
Preferred stock of subsidiary with mandatory
redemption requirements - 4,214
Current portion of preferred stock of subsidiary - 4,214
-----------------------------------
- -
-----------------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
5.95% Series, due 2002* 1,600 2,000
6.30% Series, due 2002 10,000 10,000
5.80% Series, due 2003 10,000 -
6.83% Series, due 2003 10,000 10,000
7.47% Series, due 2003 10,000 10,000
7.06% Series, due 2004 10,000 10,000
6.82% Series, due 2005 10,000 10,000
6.99% Series, due 2006 10,000 10,000
6.75% Series, due 2007 10,000 10,000
6.14% Series, due 2008 10,000 -
9.89% Series, due 2008 5,000 5,000
7.15% Series, due 2008* 20,000 22,000
9.12% Series, due 2010 20,000 20,000
6.50% Series, due 2010* 3,200 3,200
9.17% Series, due 2011 5,000 5,000
9.93% Series, due 2013 5,000 5,000
6.89% Series, due 2015 12,000 12,000
9.97% Series, due 2018 5,000 5,000
9.17% Series, due 2021* 8,000 8,000
6.35% Series, due 2025 22,000 22,000
7.72% Series, due 2025 15,000 15,000
9.29% Series, due 2026 12,000 12,000
-----------------------------------
Total First Mortgage Bonds 223,800 206,200
Note payable to bank under revolving credit agreement, due January 2000 34,591 27,128
Installment note payable, 9%, due in equal annual payments through 2013 1,591 1,591
-----------------------------------
259,982 234,919
Current portion of long-term debt 2,448 2,448
-----------------------------------
Long-term debt, excluding current portion 257,534 232,471
-----------------------------------
Total capitalization $ 488,885 $ 427,216
===================================
</TABLE>
*Trust indentures relating to these First Mortgage Bonds require annual sinking
fund payments.
See notes to consolidated financial statements on page 6 of this report.
5
<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 and statement of
capitalization of Philadelphia Suburban Corporation ("PSC" or "the
Company") at September 30, 1998, the consolidated statements of income
for the nine months and quarter ended September 30, 1998 and 1997, and
the consolidated statements of cash flow for the nine months ended
September 30, 1998 and 1997 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 September 30, 1998, 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
consolidated 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, 1997 and the Quarterly Report on Form 10-Q
for the quarters ended March 31, 1998 and June 30, 1998.
Note 2 Merger with Consumers Water Company
On June 27, 1998, the Company entered into a definitive merger
agreement with Consumers Water Company ("Consumers"), which was amended
and restated by the parties effective as of August 5, 1998. The merger
is subject to several conditions, including the approval of the
shareholders of both companies and the various state regulatory
agencies. The special meetings of the shareholders of both companies to
vote on the merger proposal are scheduled for November 16, 1998. The
Company continues to actively pursue the regulatory approvals necessary
to close the transaction as early as possible. Because of the state
regulatory approval processes, it appears unlikely that all five states
will grant approval by the end of the year. The merger will be
accounted for as a pooling-of-interests under Accounting Principles
Board Opinion No. 16. Consumers is based in Portland, Maine and serves
approximately 223,000 customers in service territories covering parts
of Ohio, Illinois, Pennsylvania, New Jersey and Maine. The revenues of
Consumers for the nine months ended September 30, 1998 were $72,832,
excluding revenues from its former New Hampshire operations. As of
September 30, 1998, Consumers' total assets were $442,114.
Note 3 Acquisitions and Water Sale Agreements
In January 1998, Philadelphia Suburban Water Company ("PSW") purchased
the water utility assets of West Chester Area Municipal Authority
("West Chester") for $23,804 in cash. The West Chester service
territory covers 16 square miles and is contiguous to PSW's territory.
The annual revenues of the West Chester system approximate $4,500.
Revenues related to West Chester were $1,278 for the third quarter and
$3,274 since the date of acquisition.
In March 1998, PSW entered into a 25-year water sale agreement with
Warwick Township Water and Sewer Authority for the sale of water to
supplement its water supply. Warwick Township is located in Bucks
County and is near PSW's existing service territory. The agreement
stipulates sales of a minimum quantity of 460,000 gallons of water per
day to the year 2023. The water sales associated with this agreement
began in October 1998, upon completion of a water main connection from
Warwick Township to PSW's service territory.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
The annual revenues resulting from this water sale agreement are
expected to approximate $330.
In April 1998, PSW acquired the water system assets of the Brandywine
Hospital complex for $110 in cash and assumed approximately $110 in
liabilities. This water supply system is located adjacent to PSW's
service territory in Caln Township, Chester County. The annual revenues
of this system are expected to approximate $100.
In April 1998, PSW entered into an agreement with Bensalem Township,
Bucks County for PSW to provide water service to a new development
covering a one square mile area in the Township. The service territory
is located adjacent to PSW's existing service territory near a major
interstate highway interchange in suburban Philadelphia. The revenue
from this service territory, once developed, is anticipated to
approximate $200 annually.
In June 1998, PSW acquired the Flying Hills Water Company ("Flying
Hills") in a purchase transaction for 42,000 shares of the Company's
Common Stock. The Flying Hills system covers a one square mile service
territory in Cumru Township, Berks County near Reading, Pennsylvania
and is 16 miles from the nearest edge of PSW's system. The annual
revenues of this system approximate $200.
In June 1998, PSW entered into an agreement to purchase the water
system assets of the Greenhills Corporate Center for $535 in cash. This
water system covers a 0.15 square mile area in Cumru Township, Berks
County. PSW has received PUC approval for this acquisition and it is
expected to be completed in the fourth quarter of 1998. The annual
revenues of this system approximate $40.
The Company continues to actively explore other opportunities to expand
its water utility operations through acquisitions or otherwise.
Note 4 Water Rates
PSW is permitted by the Pennsylvania Public Utility Commission ("PUC")
to add a Distribution System Improvement Charge ("DSIC") to its water
bills reflecting the capital costs and depreciation related to certain
distribution system improvement projects completed and placed into
service between base rate filings. The PUC limits use of the DSIC to
periods when a company's return on equity is less than a certain
benchmark established by the PUC. As a result of the Company's recent
favorable results of operations, the DSIC has been discontinued for the
fourth quarter of 1998 and will likely remain discontinued in the first
quarter of 1999. Previously, the DSIC had been set at 0.67% of base
water rates during the third quarter of 1998 after having been zero
since PSW's last rate case settlement in October 1997.
7
<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)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements address, among other things, the Company's: use of cash;
projected capital expenditures; the proposed merger with Consumers Water
Company; liquidity; Year 2000 disclosure, including statements regarding
readiness, remediation, costs, risks and contingency plans; as well as
information contained elsewhere in this Report where statements are preceded by,
followed by or include the words "believes," "expects," "anticipates," "plans"
or similar expressions. These statements are based on a number of assumptions
concerning future events, and are subject to a number of uncertainties and other
factors, many of which are outside the Company's control. Actual results may
differ materially from such statements for a number of reasons, including the
effects of regulation, changes in capital requirements and funding, acquisitions
and the Year 2000 readiness of third parties with whom the Company deals. The
Company undertakes no obligation to update or revise forward-looking statements,
whether as a result of new information, future events or otherwise.
Philadelphia Suburban Corporation ("PSC" or "the Company"), a Pennsylvania
corporation, is the holding Company of Philadelphia Suburban Water Company
("PSW"), a regulated water utility. PSW provides water to approximately 300,000
customers in 96 municipalities within its 481 square-mile service territory.
PSW's service territory is located north and west of the City of Philadelphia.
In addition, PSW provides water service to approximately 6,600 customers through
an operating and maintenance contract with a municipal authority contiguous to
its service territory.
Financial Condition
-------------------
During the first nine months of 1998, the Company acquired the water utility
assets of West Chester Area Municipal Authority ("West Chester") for $23,804 in
cash, made $37,725 of capital expenditures in PSW's service territory related to
routine capital improvements and replacements, redeemed $4,214 of Preferred
Stock of subsidiary, repurchased $3,334 of its common stock and, repaid $1,119
of customer advances for construction.
During the first nine months, proceeds from the issuance of common stock, the
proceeds from two long-term debt issues, internally generated funds, available
working capital, funds available under the revolving credit agreement and lines
of credit were used to fund the cash requirements discussed above, and to pay
dividends. In January 1998, PSW issued First Mortgage Bonds of $10,000 6.14%
Series due 2008 and $10,000 5.8% Series due 2003 through its medium-term note
program. Proceeds from these issues were used to reduce the balance of PSW's
revolving credit facility. In February 1998, the Company issued 1.25 million
shares of common stock in a public offering for net proceeds of $25,840. The
proceeds of this offering were used to make a $19,000 equity contribution in PSW
and to repay short-term debt of the Company. PSW used the $19,000 equity
contribution from the Company to repay amounts outstanding under its revolving
credit facility. Effective with the September 1, 1998 payment, the Company has
increased the quarterly dividend on common stock from $.1625 per share to $.17
per share.
At September 30, 1998, the Company and PSW had $9,890 and $1,000 available,
respectively under short-term lines of credit and PSW had $15,409 available
under its $50,000 revolving credit agreement.
In connection with the merger agreement with Consumers, the Company will issue
approximately 11.8 million shares of common stock based on the exchange formula
defined in the merger agreement and the market price of the Company's Common
Stock as of October 30, 1998. The Company continues to actively pursue the
regulatory approvals necessary to close the transaction as early as possible.
Because of the state regulatory approval processes, it appears unlikely that all
five states will grant approval by the end of the year.
Management believes that internally generated funds along with existing credit
facilities and its ability to issue additional long-term debt are adequate to
meet the Company's financing requirements for the balance of the year and
beyond.
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)
Results of Operations
---------------------
Analysis of First Nine Months of 1998 Compared to First Nine Months of 1997
---------------------------------------------------------------------------
Revenues increased $12,183 or 12.1% as a result of the 7.3% rate increase
granted PSW in October 1997, the West Chester acquisition, and an increase in
water sales associated with the hot dry weather experienced during the summer of
1998.
Operating expenses increased by $1,573 or 3.9% due to the additional operating
costs associated with the West Chester acquisition, increased wages and
administrative expenses, and higher production costs resulting from the
increased volume of water sold in the third quarter. The increased operating
costs were partially offset by the effects of the mild winter which resulted in
fewer main breaks and reduced maintenance expenses, savings from reduced
electric costs as a result of the pilot program under the electric deregulation
program in Pennsylvania and continuing cost containment efforts.
Depreciation increased $616 or 5.8% reflecting utility plant placed in service
since the third quarter of 1997, including the assets from the West Chester
acquisition, and due to increases in depreciation rates resulting from a routine
annual service life study completed in the third quarter of 1998. Depreciation
was approximately 2.54% and 2.43% of average utility plant in service in the
first nine months of 1998 and 1997 respectively.
Amortization increased $598 primarily due to the amortization of the costs
associated with PSW's 1997 rate filing.
Taxes other than income taxes increased by $1,358 or 21.2% as a result of
increases in the Pennsylvania Public Utility Realty Tax ("PURTA") and local real
estate taxes. The increase in the PURTA tax is due to an anticipated additional
tax assessment to offset a state-wide deficit in the collection of this tax. In
addition, PURTA and local real estate taxes increased due to the acquisition of
West Chester and capital expenditures completed in the last year.
Interest expense increased $766 or 5.7% due to increased borrowings, partially
offset by lower interest rates. The increased borrowings were used to finance
the West Chester acquisition and PSW's ongoing capital projects.
Dividends on preferred stock of subsidiary decreased $264 due to the redemption
of the remaining shares with a par value of $4,214 in January 1998.
Allowance for funds used during construction ("AFUDC") increased by $243 or
72.8% due to an increase in the average balance of utility plant construction
work in progress.
The Company's effective income tax rate was 40.6 % for the first nine months of
1998 and 40.5% in 1997.
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)
Net income available to common stock increased by $4,602 or 26.2% primarily as a
result of the factors described above. On a diluted per share basis, earnings
increased $.13 or 19.4% reflecting the improvement in net income, partially
offset by the 5.8% increase in the average number of shares outstanding. The
increased number of average shares outstanding during the period is primarily a
result of the 1.25 million share stock offering in February 1998 and the
additional shares sold through the Dividend Reinvestment Plan and the employee
stock and incentive plan.
Analysis of Third Quarter of 1998 Compared to Third Quarter of 1997
-------------------------------------------------------------------
Revenues for the quarter increased $4,902 or 13.3% primarily as a result of the
7.3% rate increase granted PSW in October 1997, the West Chester acquisition and
an increase in water sales associated with the hot, dry weather experienced
during the summer of 1998.
Operating expenses increased $248 or 1.7% primarily due to the West Chester
acquisition, increased production costs resulting from the increased volume of
water sold and increased wages and administrative costs. The increased operating
costs were partially offset by a reduction in insurance expense and savings from
reduced electric costs as a result of the pilot program under the electric
deregulation program in Pennsylvania.
Depreciation increased $589 or 17.4% reflecting utility plant placed in service
since the third quarter of 1997, including the assets from the West Chester
acquisition and due to adjustments recorded in the third quarter of 1998
resulting from a routine service life study that was applied for the
year-to-date period. Depreciation was approximately 2.51% and 2.37% of average
utility plant in the third quarter of 1998 and 1997, respectively.
Amortization increased $197 primarily due to the costs associated with
the 1997 rate filing.
Taxes other than income taxes increased by $881 or 42.3% as a result of
increases in the Pennsylvania Public Utility Realty Tax ("PURTA") and local real
estate taxes. The increase in the PURTA tax is due to an anticipated additional
tax assessment to offset a state-wide deficit in the collection of this tax. In
addition, PURTA and local real estate taxes increased due to the acquisition of
West Chester and capital expenditures completed in the last year.
Interest expense increased $302 or 6.8% due to increased borrowings, partially
offset by lower interest rates. The increased borrowings were used to finance
the West Chester acquisition and PSW's ongoing capital projects.
Dividends on preferred stock of subsidiary decreased $92 due to the redemption
of the remaining shares with a par value of $4,214 in January 1998.
Allowance for funds used during construction ("AFUDC") increased by $64 due to
an increase in the average balance of utility plant construction work in
progress.
The Company's effective income tax rate was 40.5% in 1998 and 1997.
10
<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)
Net income available to common stock increased by $1,699 or 23.2% primarily as a
result of the factors described above. On a diluted per share basis, earnings
increased $.04 or 14.3% reflecting the improvement in net income, partially
offset by the 6.1% increase in the average number of shares outstanding. The
increased number of average shares outstanding during the period is primarily a
result of the 1.25 million share stock offering in February 1998 and the
additional shares sold through the Dividend Reinvestment Plan and the employee
stock and incentive plans.
Year 2000
---------
Overview
- --------
The Company is actively pursuing a Year 2000 Program (the "Program"). The
objective of the Program is to ensure that the Company's critical systems and
processes that impact the Company's ability to deliver water to its customers
will not experience significant interruptions that would interfere with such
water service or result in a material business impairment that would have an
adverse impact to the Company's operations, liquidity or financial condition as
a result of the Year 2000 issue. For purposes of the Program, the Year 2000
issue is defined as whether information technology accurately processes date and
time data from, into and between the twentieth and twenty-first centuries, and
the years 1999 and 2000 and leap year calculations. The Company's systems and
processes being reviewed include: (i) internal systems and processes, consisting
of software, databases, information technology hardware and imbedded
microprocessors; and (ii) relationships with third parties. The Program involves
a systematic approach to the Year 2000 issue consisting of the following steps:
(i) inventorying the component elements of the Company's systems and processes;
(ii) assessing whether there are Year 2000 issues with such systems and
processes; (iii) remediation of systems and processes that are identified as
having Year 2000 issues; (v) testing the remediation measures that are
implemented; and (vi) developing contingency plans. In addition to the Company's
Program, the PUC has instituted a formal proceeding for the purpose of
determining all matters concerning Year 2000 compliance of all jurisdictional
fixed utilities, which would include the Company's primary subsidiary, PSW. The
PUC is requiring that utilities affirmatively demonstrate that their mission-
critical systems will be Year 2000 compliant by March 31, 1999 or provide the
PUC with detailed contingency plans to ensure the uninterrupted continuation of
utility service throughout the transition from the twentieth to the twenty-first
century, including leap year. PSW has responded to the PUC's initial
questionnaire concerning Year 2000 compliance and intends to comply with the
PUC's requirements.
The Company's State of Readiness
- --------------------------------
Internal Systems and Processes - The Company is evaluating its systems and
processes based on a prioritization of the risks they pose to the overall
objectives of the Program. Therefore, different systems and processes are in
different phases of the overall Program. An inventory of all critical systems
and processes has been in progress and the Company intends to complete the
inventory in November 1998. An assessment of Year 2000 issues for the Company's
critical systems is being performed concurrently with the inventory and the
Company intends to complete the assessment process by December 1998. Remediation
of critical systems and processes identified to date as having Year 2000 issues
are either being implemented or planned. Testing of remediation measures will
begin as soon as practicable after the completion of the remediation. Based on
the assessment completed to date, the Company intends to complete the
remediation and testing of critical systems requiring remediation by March 1999
or to develop contingency plans for critical systems and processes that it may
not be able to verify as being compliant by March 1999.
11
<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)
Relationships with Third Parties - The Company's relationships with third
parties that may be affected by the Year 2000 issue may be classified into three
categories; customers; suppliers; and third party software vendors. Based on
1997 revenues, approximately 67% of the Company's revenues are from residential
customers, 23% from commercial customers (consisting primarily of apartments,
colleges, hospitals, small businesses and municipalities), and 6% from fire
protection services. It is not anticipated that water use by customers in these
categories will be significantly affected by the Year 2000 issue. The Company's
industrial customers represent approximately 4% of its total 1997 revenues and
the Company intends to contact its largest industrial customers to determine
whether they anticipate any adverse effect on their demand for water as a result
of the Year 2000 issue. No single customer accounted for more than one percent
of the Company's 1997 revenues. The Company has contacted its key suppliers to
determine their Year 2000 compliance status and the responses received to date
indicate that such suppliers are or intend to be Year 2000 compliant. Because of
the substantial electric power requirements of the Company's water treatment and
distribution systems, electric power supply may be the most critical supplier
relationship. To date, the Company's electric supplier, which is also subject
to the PUC's review, has indicated that it expects to be Year 2000 compliant
by October 31, 1999. Third party vendors of critical software systems have been
contacted regarding the compliance status of their software and either the
vendors have represented that their software packages are compliant or the
software is being remedied as part of the Company's Year 2000 Program.
The Costs to Address the Company's Year 2000 Issues
- ---------------------------------------------------
The Company estimates its cost to date for its Year 2000 Program to be
approximately $2,400, including the costs for a new customer billing system that
the Company is implementing to provide added capacity and capabilities. The
Company presently estimates that it will spend an additional amount of
approximately $2,000 to bring all of its critical systems into compliance.
The Risks of the Company's Year 2000 Issues
- -------------------------------------------
A material Year 2000 noncompliance could result in an interruption in, or
failure of, certain normal business activities or operations. Such noncompliance
could materially and adversely affect the Company's water service and results of
operations, liquidity and financial condition. Because of the uncertainty
inherent in the Year 2000 issue, due in part from the uncertainty of the Year
2000 readiness of third party suppliers, the Company is unable to determine at
this time whether the consequences of Year 2000 noncompliances will have a
material impact on the Company. The Company's Year 2000 Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
issue and, in particular, about the Year 2000 compliance and readiness of its
material vendors and suppliers. The Company believes that, with the completion
of its Program, the possibility of significant interruptions of normal
operations should be reduced.
The Company's Contingency Plans
- -------------------------------
The Company is evaluating contingency plans in the event that any critical
systems or processes cannot be verified as Year 2000 compliant by March 1999.
Contingency plans may also be developed for certain other critical systems,
notwithstanding a determination of their Year 2000 compliance, if such systems
would have a significant effect on the Company's ability to deliver water to its
customers. The Company intends to complete its contingency planning process by
March 1999.
Forward-looking Statements
- --------------------------
The statements in the Company's Year 2000 disclosure contain forward-looking
statements and should be read in conjunction with the Company's disclosure under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
<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)
Impact of Recent Accounting Pronouncements
------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company has adopted this statement effective
January 1, 1998 and has no components of other comprehensive income to report.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosure about
products and services, geographic areas and major customers. The Company will
adopt the disclosure prescribed by SFAS 131 in its 1998 Annual Report as
required.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). This statement revises employers' disclosures about
pension and other postretirement benefit plans but does not change the
measurement or recognition of costs associated with those plans. It standardizes
the disclosure requirements, eliminates unnecessary disclosures and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS 132 supersedes the
disclosure requirements of Statement of Financial Accounting Standards ("SFAS")
No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Company plans
to adopt this statement in its 1998 Annual Report as required.
13
<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)
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company intends to adopt
this statement in its 1999 Annual Report as required. The adoption of SOP 98-1
will not have a material impact on the Company's results from operations or
financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
plans to adopt this statement in 2000 as required. As of June 30, 1998, the
Company had no derivative instruments or hedging activities that upon the
adoption of SFAS 133 will have an impact on the Company's results from
operations or financial condition.
14
<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, 1997, which is included by a
reference herein.
Item 5. Other Information
-----------------
The Company has entered into an Amended and Restated Merger
Agreement and Plan of Merger by and among the Company,
Consumers Acquisition Company and Consumers Water Company
dated as of August 5, 1998. The Company has filed a copy of
the Agreement as an Exhibit to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1998. A Registration
Statement on Form S-4 in connection with the merger was filed
with the Securities and Exchange Commission on September 21,
1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Report on Form 8-K
None
15
<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.
November 12, 1998
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
Registrant
/s/ Nicholas DeBenedictis
------------------------------------
Nicholas DeBenedictis
Chairman and President
/s/ Michael P. Graham
------------------------------------
Michael P. Graham
Senior Vice President - Finance
and Treasurer
16
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------------------- --------
27 Financial Data Schedule 18
17
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of capitalization at September
30, 1998, and the consolidated statements of income and cash flow for the nine
months ended September 30, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 586,803
<OTHER-PROPERTY-AND-INVEST> 63
<TOTAL-CURRENT-ASSETS> 31,933
<TOTAL-DEFERRED-CHARGES> 5,854
<OTHER-ASSETS> 51,096
<TOTAL-ASSETS> 675,749
<COMMON> 4,610
<CAPITAL-SURPLUS-PAID-IN> 158,831
<RETAINED-EARNINGS> 64,690
<TOTAL-COMMON-STOCKHOLDERS-EQ> 228,131
0
3,220
<LONG-TERM-DEBT-NET> 257,534
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,110
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,448
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 179,306
<TOT-CAPITALIZATION-AND-LIAB> 675,749
<GROSS-OPERATING-REVENUE> 113,273
<INCOME-TAX-EXPENSE> 15,251
<OTHER-OPERATING-EXPENSES> 62,086
<TOTAL-OPERATING-EXPENSES> 77,337
<OPERATING-INCOME-LOSS> 35,936
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 35,936
<TOTAL-INTEREST-EXPENSE> 13,627
<NET-INCOME> 22,309
146
<EARNINGS-AVAILABLE-FOR-COMM> 22,163
<COMMON-STOCK-DIVIDENDS> 13,609
<TOTAL-INTEREST-ON-BONDS> 16,751
<CASH-FLOW-OPERATIONS> 33,616
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.80
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