<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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 Identification No.)
incorporation or organization)
762 Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)-527-8000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- --------------------------------
Common stock, par value $.50 per share New York Stock Exchange, Inc.
Philadelphia Stock Exchange Inc.
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark whether the registrant (1) has 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 filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 2, 1998. $526,051,571
For purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Part I of
this 10-K report, (b) all directors of registrant, and (c) each
shareholder that has informed registrant by March 2, 1998, that it has
sole or shared voting power of 5% or more of the outstanding common
stock of registrant.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 2, 1998. 27,500,608
Documents incorporated by reference
(1) Portions of registrant's 1997 Annual Report to Shareholders have
been incorporated by reference into Parts I and II of this Form 10-K
Report.
(2) Portions of the Proxy Statement, relative to the May 21, 1998
annual meeting of shareholders of registrant, to be filed within 120
days after the end of the fiscal year covered by this Form 10-K Report,
have been incorporated by reference into Part III of this Form 10-K
Report.
<PAGE>
PART I
Item 1. Business
Philadelphia Suburban Corporation ("PSC" or the "Registrant"), a
Pennsylvania corporation, was incorporated in 1968. The information appearing in
"Management's Discussion and Analysis" from the portions of PSC's 1997 Annual
Report to Shareholders filed as Exhibit 13.5 to this Form 10-K Report is
incorporated by reference herein.
The business of PSC is conducted almost entirely through its subsidiary
Philadelphia Suburban Water Company ("PSW"), a regulated public utility. PSW
supplies water to approximately 288,000 residential, commercial, industrial and
public customers. PSW's service territory covers 464 square miles, comprising a
large portion of the suburban area west and north of the City of Philadelphia.
This territory is primarily residential in nature and is completely metered for
water service, except for fire hydrant service. In addition, PSW provides water
service to approximately 6,400 customers through an operating and maintenance
contract with the Horsham Township Authority which is contiguous to its service
territory. Based on the 1990 census, PSW estimates that the total number of
persons currently served is approximately 950,000. Excluding the customers that
were added at the time of acquisitions in the last three years, customer
accounts have grown at an average rate of approximately 1.0% per annum for the
last three years. Including acquisitions, the customer base increased at an
annual compound growth rate of 4.9% over the last three years.
Operating revenues during the twelve months ended December 31, 1997 were
derived approximately as follows:
66.8% from residential customers
21.1% from commercial customers
3.9% from industrial customers
1.1% from public customers
6.3% from fire protection services
0.8% from sales to other water utilities and
miscellaneous customers
------
100.0%
======
During 1997, PSW made the following acquisitions and obtained related
service territory rights: in January, the water utility assets of Cherry Water
Company; in September, the water utility assets of Perkiomen Township Authority;
and in September, both the water and wastewater utility assets of the Peddler's
View Utility Company. The systems acquired in 1997 incorporate two square miles
of service area near PSW's existing territory. The total purchase price for the
three water systems and wastewater system acquired in 1997 was $1,226,000. The
annual revenues from these systems approximate $300,000, and revenues included
in the consolidated financial statements during the period owned by PSW were
$175,000.
Since December 1992, PSW has acquired 21 local water systems and two
small wastewater utilities. During 1996, PSW made the following acquisitions and
obtained related service territory rights: in October, the water utility assets
of Hatboro Borough Authority; in November, Utility Group Services Corporation
("UGS") which owned three water utilities and a wastewater utility; in December,
the water utility assets of Bristol Borough Water and Sewer Authority; and at
various times during 1996 the water utility assets of three smaller water
systems. In May 1995, PSW purchased the water utility assets of Media Borough
and, at various times during 1995, PSW acquired four smaller water systems.
During various times in 1994, 1993, and 1992 PSW acquired the water utility
assets of five water systems. Combined, the 18 water systems and one wastewater
system acquired since December 1992 and prior to 1997 added 134 square miles of
service territory near or adjacent to PSW's service territory and had revenues
of approximately $14,571,000 in 1997.
In addition, in January 1998, PSW purchased the water utility assets of
West Chester Area Municipal Authority ("West Chester") for $22,400,000 in cash,
subject to minor adjustment related to the final value of current assets
transferred and recent capital expenditures. The West Chester service territory
covers 16 square miles and is contiguous to PSW's territory. The annual revenues
2
<PAGE>
Item 1, Continued
of the West Chester system is approximately $4,500,000. PSW has also entered
into a letter of intent to acquire the Flying Hills Water Company ("Flying
Hills") in a purchase transaction for approximately 43,000 shares of the
Company's Common Stock. This transaction, which is subject to final negotiation
and the approval of the Pennsylvania Public Utility Commission, is expected to
be completed in the first quarter of 1998. The Flying Hills system covers a one
square mile area in Berks County near Reading, Pennsylvania and is within 16
miles of the existing PSW system. The annual revenues of the Flying Hills system
is approximately $200,000.
Selected operating statistics. Set forth below is a table showing certain
selected operating statistics for PSW for the past three years.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
Revenues from water sales (000's omitted)
Residential $ 87,783 $ 79,056 $ 78,082
Commercial 27,807 26,504 24,473
Industrial 5,126 4,823 4,533
Public 1,496 1,373 1,252
Fire protection 8,323 8,140 7,421
Other 995 438 617
Tax Surcharge (credit) -- (1) (505)
Distribution System Improvement Charge 1,104 -- --
--------- --------- -------
Total $ 132,634 $ 120,333 115,873
========= ========= =======
Water sales (million gallons)
Residential 19,142 17,228 17,610
Commercial 8,819 8,236 7,983
Industrial 2,302 1,768 1,919
Public 396 354 335
Fire protection - metered 73 84 51
Other 750 25 124
--------- --------- -------
Total 31,482 27,695 28,022
========= ========= =======
System delivery by source (million gallons)
Surface (including Upper Merion
reservoir) 29,470 27,278 26,904
Wells 6,378 5,136 4,830
Purchased 2,023 2,055 2,077
--------- --------- -------
Total 37,871 34,469 33,811
========= ========= =======
Number of metered customers (end of year)*
Residential 268,550 265,746 248,500
Commercial 13,512 13,422 12,019
Industrial 708 716 554
Public 823 797 775
Fire protection 3,911 3,449 3,006
Other 12 11 11
--------- --------- -------
Total 287,516 284,141 264,865
========= ========= =======
Average consumption per
customer in gallons 110,143 103,206 109,084
========= ========= =======
</TABLE>
* Excludes customers served under operating and maintenance contracts.
3
<PAGE>
Item 1, Continued
Water supplies and usage. PSW's principal supply of water is surface
water from the Schuylkill River, Delaware River, seven rural streams which are
tributaries of the Schuylkill and Delaware Rivers, and the Upper Merion
Reservoir, a former quarry now impounding groundwater. All of these are either
within or adjacent to PSW's service territory. PSW holds the appropriate water
rights and regulatory approvals to use these sources. PSW has five impounding
reservoirs and has six treatment and pumping facilities to provide storage and
treatment of these surface water supplies.
The Pennsylvania Department of Environmental Protection ("DEP") has
regulatory power with respect to sources of supply and the construction,
operation and safety practices for certain dams and other water containment
structures under the Pennsylvania Dam Safety and Encroachments Act. PSW's dams
are in compliance with these requirements in all material respects.
PSW's surface supplies are supplemented by 61 wells. PSW also has
interconnections with: the Chester Water Authority, which provides for a maximum
supply of up to 6.4 million gallons per day ("mgd"); and the Bucks County Water
and Sewer Authority, which provides for a supply of up to 7.0 mgd. Agreements
regarding these interconnections require PSW to purchase certain minimum amounts
of water.
PSW believes it possesses all the necessary permits to obtain its
supply of water from all of the sources described above. The minimum safe yield
of all sources of supply described above, based on low stream flows of record
with respect to surface supplies, is as follows:
Surface supplies 104.8 mgd
Upper Merion Reservoir 7.2
Wells 22.8
Purchased supplies 8.2
-----
Total 143.0 mgd
=====
During periods of normal precipitation, the water available is more
than the minimum shown above. Under normal operating conditions, PSW can deliver
a maximum of 167.0 mgd to its distribution system for short periods of time. The
average daily sendout for 1997, 1996 and 1995 was 103.8, 94.2 and 92.6 mgd,
respectively.
The maximum demand ever placed upon PSW's facilities for one month
occurred during July 1997, when sendout averaged 120.62 mgd. The peak day of
record occurred during July 1997 when water use reached 142.5 mgd.
Actual water usage (as measured by the water meters installed at each
service location) is less than the amount of water delivered into the system due
to leaks, PSW's operational use of water, fire hydrant usage and other similar
uses. Water consumption per customer is affected by local weather conditions
during the year. In general, during the late spring and summer, an increase in
rainfall reduces water consumption, while extended periods of dry weather
increases consumption. Also, an increase in the average temperature generally
causes an increase in water consumption.
Energy supplies. PSW does all of its pumping using electric power and
energy supplies have been sufficient to meet PSW's customer demand. In December
1996, the Governor of Pennsylvania signed into law the Electricity Generation
Customer Choice and Competition Act ("Electric Act") which provides for the
restructuring of the electric utility industry in Pennsylvania. The Electric Act
requires the unbundling of electric services into separate generation,
transmission and distribution services with open competition for generation. PSW
believes that the Electric Act will have little or no impact on its ability to
purchase the electric power it requires to operate its business.
4
<PAGE>
Item 1, Continued
Adequacy of water supplies. The Delaware River Basin, which is the
drainage area of the Delaware River from New York State to Delaware,
periodically experiences water shortages, particularly during the summer months.
To the extent that the reservoirs in the upper part of the Basin are affected by
a lack of precipitation, the Delaware River Basin Commission (the "DRBC") may
impose either voluntary or mandatory water use restrictions on portions or all
of the Basin. The Commonwealth of Pennsylvania (the "Commonwealth") also has the
authority to impose similar restrictions on a county-by-county basis.
PSW's raw water supplies have been adequate to meet customer demand for
the past five years principally because of its five impounding reservoirs.
However, PSW's customers may be required to comply with the Commonwealth and
DRBC water use restrictions, even if PSW's supplies are adequate.
In October 1997, the DRBC issued a drought warning for the Delaware
River Basin which includes PSW's service territory. The DRBC lifted the drought
warning in January 1998. Under a drought warning, the DRBC asks for voluntary
restrictions on water use, particularly non-essential uses of water. In
September 1995, the Governor of the Commonwealth declared a drought emergency in
the counties served by PSW. The drought emergency imposed a mandatory ban on all
nonessential water usage by PSW's customers. The drought emergency was lifted by
the end of 1995. Because these actions were issued at the end of the summer
months, when nonessential and recreational use of water has traditionally
declined, the restrictions did not have a significant impact on PSW revenues.
Throughout the drought warning and drought emergency described above, PSW
maintained adequate storage levels of treated water and had sufficient
quantities of raw water. No other drought restrictions were imposed by the
Commonwealth or DRBC in the preceding five years.
Regulation by the Pennsylvania Public Utility Commission. PSW is
subject to regulation by the Pennsylvania Public Utility Commission ("PUC")
which has jurisdiction with respect to rates, service, accounting procedures,
issuance of securities, acquisitions and other matters.
Under applicable Pennsylvania statutes, PSW has rights granted under
its Articles of Incorporation and by certificates of public convenience from the
PUC authorizing it to conduct its present operations in the manner in which such
operations are now conducted and in the territory in which it now renders
service, to exercise the right of eminent domain and to maintain its mains in
the streets and highways of such territory. Such rights are generally
nonexclusive, although it has been the practice of the PUC to allow only one
water company to actually provide service to a given area. Consequently, PSW has
been subject to competition only with respect to potential customers who also
may have access to the service of another water supplier, wells, or where other
water service opportunities exist (including non-utility companies with riparian
rights or access to an adequate supply from a neighboring facility).
In 1993, the PUC initiated a rulemaking procedure intended to
facilitate the development of practical standards by which water mains should be
extended to "bona fide service applicants", typically existing homes or
businesses in need of a reliable public water supply. In December 1995, the PUC
issued a final rulemaking, reflecting the position that the primary costs of
such extensions should be supported by anticipated revenues and borne by the
utility. Generally, construction costs beyond those supported by anticipated
revenues must be borne by the applicant. The formula used to determine a
utility's investment requires that revenues from the bona fide service applicant
offset the interest, depreciation and incremental operating expense associated
with the investment. Under the rule, PSW is required to invest $4,000 per bona
fide service applicant in a main extension prior to requiring any customer
contribution.
In 1996, the PUC approved a mechanism, the Distribution System
Improvement Charge ("DSIC"), which allows Pennsylvania water utilities to add a
surcharge to their water bills to offset the additional depreciation and capital
costs associated with certain non-revenue producing, non-expense reducing
capital expenditures related to replacing and rehabilitating distribution
systems. The DSIC mechanism is intended to eliminate many of the disincentives
faced by water utilities in rehabilitating their distribution systems. These
disincentives, often referred to as regulatory lag, are due to the rate making
process which, prior to the establishment of the DSIC mechanism, required water
utilities to absorb all of the depreciation and capital costs of these projects
between base rate increases without the benefit of additional revenues. The DSIC
may be adjusted quarterly based on additional qualified capital expenditures
made in the previous quarter, but may never exceed 5% of the base rates in
effect. The DSIC is reset to zero when new base rates that reflect the costs of
those additions become effective.
5
<PAGE>
Item 1, Continued
Water Quality & Environmental Issues. PSW is subject to regulation of
water quality by the U.S. Environmental Protection Agency ("EPA") under the
Federal Safe Drinking Water Act (the "SDWA") and by the Pennsylvania Department
of Environmental Protection ("DEP") under the Pennsylvania Safe Drinking Water
Act. The SDWA provides for the establishment of minimum water quality standards,
as well as governmental authority to specify the type of treatment process to be
used for public drinking water. PSW is presently in compliance with all current
standards and treatment requirements promulgated to date.
The EPA has an ongoing directive to issue additional regulations under
the SDWA. The directive was clarified in 1986 when Congress amended the SDWA to
require, among other revisions, disinfection of all drinking water, additional
maximum contaminant level ("MCL") specifications, and filtration of all surface
water supplies. PSW has already installed the necessary equipment to provide for
the disinfection of the drinking water throughout the system and is monitoring
for the additional specified contaminants. All PSW's surface water supplies are
filtered.
On August 6, 1996, the President signed into law the reauthorization of
the SDWA. The new Act places a greater emphasis on the cost/benefit of
regulating additional substances by requiring definitive research on the impact
of such regulations. The reauthorized SDWA focuses regulations on contaminants
known to be of public health concern based on occurrence, health risks and cost
benefit considerations. The new Act eliminated the previous requirement of the
1986 SDWA Amendments that had required the EPA to promulgate MCL's for many
chemicals not previously regulated and mandated further MCL's every three years.
The new Act also specifies that the EPA shall study radon, arsenic and sulfates
and propose respective rulemakings in 1999, 2000 and 2001 if these chemicals are
deemed to be a threat to public health. The reauthorized SDWA is not expected to
have a material impact on PSW's operations or financial condition. PSW may, in
the future, have to change its method of treating drinking water at certain of
its sources of supply if additional regulations become effective.
In 1991, EPA promulgated final regulations for lead and copper (the
"Lead and Copper Rule"). Under the Lead and Copper Rule, large water utilities
are required to conduct corrosion control studies and to sample certain
high-risk customer homes to determine the extent of treatment techniques that
may be required. PSW conducted the two required rounds of sampling in 1992 and
again in 1997. The results of both studies did not exceed the EPA action levels
for either lead or copper. Additional sampling will be required in the future.
PSW has developed a corrosion control program for its surface sources of supply
and does not foresee the need to make any major additional treatment changes or
capital expenditures as a result of the Lead and Copper Rule.
On January 1, 1993, federal regulations ("Phase II") became effective
for certain volatile organics, herbicides, pesticides and inorganic parameters.
All required Phase II monitoring was completed in 1995. In the few cases where
Phase II contaminants were detected, concentrations were below MCL's. Future
monitoring will be required, but no major treatment modifications are
anticipated as a result of these regulations.
In May 1996, the EPA issued the first rule of a three-rule package
addressing Disinfection By-Products ("DBP") and monitoring of disease-causing
micro-organisms. DBP's are chemicals formed during the drinking water treatment
process. The first rule is an Information Collection Rule ("ICR") designed to
collect data to be used in developing further rules. As required, PSW began
sampling under the requirements of the ICR in July 1997 and expects to complete
the ICR phase in December 1998. Studies by the EPA on the data collected may
result in new treatment standards and processes.
PSW is also subject to other environmental statutes administered by the
EPA and DEP. These include the Federal Clean Water Act ("FCWA") and the Resource
Conservation and Recovery Act ("RCRA"). Under the FCWA, the Company must obtain
National Pollutant Discharge Elimination System ("NPDES") permits for discharges
from its water treatment stations. PSW currently maintains five NPDES permits
relating to its water treatment plants, which are subject to renewal every five
years. PSW presently meets all NPDES requirements. Although management
recognizes that permit renewal may become more difficult if more stringent
guidelines are imposed, no significant obstacles to permit renewal are presently
foreseen.
6
<PAGE>
Item 1, Continued
Under RCRA, PSW is subject to specific regulations regarding the solid
waste generated from the water treatment process. The DEP promulgated a "Final
Rulemaking" for solid waste (Residual Waste Management) in July 1992. PSW has
retained engineering consultants to assist with the extensive monitoring, record
keeping and reporting required under these regulations. A preliminary
application for permitting has been filed, and formal permitting by DEP of PSW's
three residual waste disposal sites is expected to be issued in 1998 in
accordance with regulatory requirements.
In 1996, PSW acquired the Little Washington Wastewater Company ("LWW"),
a 317 customer wastewater system and in 1997, LWW acquired the wastewater system
of Peddler's View Utility Company, which serves 196 customers. Both systems are
located within the service territory of PSW, are subject to regulation by the
EPA and DEP, and are subject to environmental statutes, including FCWA and RCRA.
Both systems currently maintain permits for their wastewater treatment stations
in accordance with FCWA and are presently in compliance with all standards and
treatment requirements promulgated to date.
Where PSW is required to make certain capital investments in order to
maintain its compliance with any of the various regulations discussed above, it
is management's belief that all such expenditures would be fully recoverable in
PSW's rates. However, under current law, such capital investments would have to
be financed prior to their inclusion in PSW's rate structure, and the resulting
rate increases would not necessarily be timely.
Employee Relations
As of December 31, 1997, the Registrant employed a total of 531
persons. Hourly employees of PSW are represented by the International
Brotherhood of Firemen and Oilers, Local No. 473. The contract with the union
was renewed on December 1, 1997 for a four-year period. Management considers its
employee relations to be good.
Item 2. Properties.
The Registrant believes that the facilities used in the operation of
its business are in good condition in terms of suitability, adequacy and
utilization.
The property of PSW consists of a waterworks system devoted to the
collection, storage, treatment and distribution of water in its service
territory. Management considers that its properties are maintained in good
operating condition and in accordance with current standards of good waterworks
practice. The following table summarizes the principal physical properties owned
by PSW:
No. of Square Feet
Location Buildings Description Floor Area
- -------- --------- ----------- ----------
Pennsylvania 6 Office & Warehouse 174,185
Pennsylvania 17 Pumping stations and
treatment buildings 180,000
Pennsylvania 23 Well stations App. 600 ea.
Pennsylvania 38 Well stations App. 150 ea.
Pennsylvania 49 Booster stations App. 1,100 ea.
In addition, PSW also owns 68 storage facilities for treated water
throughout its service territory with a combined capacity of 160.81 million
gallons and five surface water impounding reservoirs. The water utility also
owns approximately 3,469 miles of transmission and distribution mains, has
287,516 active metered services and 13,519 fire hydrants.
7
<PAGE>
Item 2, Continued
PSW's properties referred to herein, with certain minor exceptions
which do not materially interfere with their use, are owned by PSW and are
subject to the lien of an Indenture of Mortgage dated as of January 1, 1941, as
supplemented. In the case of properties acquired through the exercise of the
power of eminent domain and certain properties acquired through purchase, it has
title only for water supply purposes.
The Registrant's corporate offices are leased from PSW and located in
Bryn Mawr, Pennsylvania.
Item 3. Legal Proceedings
There are various legal proceedings in which the Company is involved.
Although the results of legal proceedings cannot be predicted with certainty,
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
Information with respect to the executive officers of the Company is
contained in Item 10 hereof and is hereby incorporated by reference herein.
8
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's common stock is traded on the New York Stock Exchange and
the Philadelphia Stock Exchange. As of March 2, 1998, there were approximately
14,170 holders of record of the Company's common stock.
The following selected quarterly financial data of the Company is in
thousands of dollars, except for per share amounts:
<TABLE>
<CAPTION>
Total
1997 First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earned revenues $ 31,021 $ 33,315 $ 36,754 $ 35,081 $ 136,171
Operating expenses 13,068 13,295 14,466 15,070 55,899
Net income available to common
stock 4,460 5,778 7,323 5,432 22,993
Basic net income per common share 0.17 0.23 0.28 0.21 0.89
Diluted net income per common share 0.17 0.22 0.28 0.21 0.88
Dividend paid per common share 0.152 0.152 0.159 0.159 0.622
Price range of common stock
- high 15.47 15.10 18.00 22.18 22.18
- low 11.72 11.44 14.07 15.10 11.44
1996
- ------------------------------------------------------------------------------------------------------------------------------
Earned revenues $ 29,290 30,683 $ 30,831 $ 31,699 $ 122,503
Operating expenses 13,070 12,614 11,757 14,174 51,615
Income, continuing operations 3,968 5,281 5,847 4,661 19,757
Basic income per share, continuing
operations 0.16 0.21 0.24 0.18 0.79
Diluted income per share, continuing
operations 0.16 0.21 0.23 0.18 0.78
Income, discontinued operations -- -- 365 600 965
Basic and diluted income per share,
discontinued operations -- -- 0.02 0.02 0.04
Net income available to common
stock 3,968 5,281 6,212 5,261 20,722
Basic net income per common share 0.16 0.21 0.26 0.20 0.83
Diluted net income per common share 0.16 0.21 0.25 0.20 0.82
Dividend paid per common share 0.145 0.145 0.152 0.152 0.594
Price range of common stock
- high 11.57 12.57 12.94 14.91 14.91
- low 10.26 11.25 11.63 12.38 10.26
</TABLE>
All per share data as presented has been adjusted for the 1997 common
stock split effected in the form of a stock distribution. High and low prices of
the Company's common stock are as reported on the New York Stock Exchange
Composite Tape.
9
<PAGE>
Item 5, Continued
Following is a recent history, adjusted for the 1997 4-for-3 common stock split
in the form of a stock distribution, of income from continuing operations and
common dividends of the Company:
- --------------------------------------------------------------------------------
Basic
income per
share from Dividend
Cash dividend continuing payout
per common share operations ratio
- --------------------------------------------------------------------------------
1993 $0.54 $0.64 84%
1994 0.55 0.68 81%
1995 0.57 0.75 76%
1996 0.59 0.79 75%
1997 0.62 0.89 70%
- --------------------------------------------------------------------------------
Dividends have averaged approximately 77% of income from continuing
operations during this period. During 1997, the Board of Directors increased the
dividend rate by 7%. As a result, beginning with the dividend payable in March
1998, the annual dividend rate increased to $.65 per share.
Item 6. Selected Financial Data
The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of the Company's 1997 Annual Report to
Shareholders filed as Exhibit 13.5 to this Form 10-K Report is incorporated by
reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information appearing in the section captioned "Management's
Discussion and Analysis" from the portions of the Company's 1997 Annual Report
to Shareholders filed as Exhibit 13.5 to this Form 10-K Report is incorporated
by reference herein.
Item 8. Financial Statements and Supplementary Data
Information appearing under the captions "Consolidated Statements of
Income", "Consolidated Balance Sheets", "Consolidated Cash Flow Statements"
"Consolidated Statements of Capitalization" and "Notes to Consolidated Financial
Statements" from the portions of the Company's 1997 Annual Report to
Shareholders filed as Exhibit 13.5 to this Form 10-K Report is incorporated by
reference herein. Also, the information appearing in the section captioned
"Reports on Financial Statements" from the portions of the Company's 1997 Annual
Report to Shareholders filed as Exhibit 13.5 to this Form 10-K Report is
incorporated by reference herein.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
10
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
The information appearing in the section captioned "Information
Regarding Nominees and Directors" of the Proxy Statement relating to the May 21,
1998, annual meeting of shareholders of the Company, to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K Report, is
incorporated herein by reference.
Executive Officers of the Registrant
The following table and the notes thereto set forth information with
respect to the executive officers of the Registrant, including their names,
ages, positions with the Registrant and business experience during the last five
years:
Position with the Registrant
Name Age and date of election (1)
- ---- --- ------------------------
Nicholas DeBenedictis 52 President and Chairman (May 1993 to
present); President and Chief Executive
Officer (July 1992 to May 1993); Chairman
and Chief Executive Officer, Philadelphia
Suburban Water Company (July 1992 to
Present); President, Philadelphia
Suburban Water Company (February 1995 to
present) (2)
Richard R. Riegler 51 Senior Vice President - Operations,
Philadelphia Suburban Water Company
(April 1989 to present) (3)
Roy H. Stahl 45 Senior Vice President and General Counsel
(April 1991 to present) (4)
Michael P. Graham 49 Senior Vice President - Finance and
Treasurer (March 1993 to present) (5)
Morrison Coulter 61 Senior Vice President - Production,
Philadelphia Suburban Water Company
(February 1996 to present); Vice
President - Production, Philadelphia
Suburban Water Company (April 1989 to
February 1996) (6)
(1) In addition to the capacities indicated, the individuals named in the above
table hold other offices or directorships with subsidiaries of the
Registrant. Officers serve at the discretion of the Board of Directors.
(2) Mr. DeBenedictis was Secretary of the Pennsylvania Department of
Environmental Resources from 1983 to 1986. From December 1986 to April
1989, he was President of the Greater Philadelphia Chamber of Commerce. Mr.
DeBenedictis was Senior Vice President for Corporate and Public Affairs of
Philadelphia Electric Company from April 1989 to June 1992.
(3) Mr. Riegler was Chief Engineer of Philadelphia Suburban Water Company from
1982 to 1984. He then served as Vice President and Chief Engineer from 1984
to 1986 and Vice President of Operations from 1986 to 1989.
(4) From January 1984 to August 1985, Mr. Stahl was Corporate Counsel, from
August 1985 to May 1988 he was Vice President - Administration and
Corporate Counsel of the Registrant, and from May 1988 to April 1991 he was
Vice President and General Counsel of the Registrant.
11
<PAGE>
Item 10, Continued
(5) Mr. Graham was Controller of the Company from 1984 to September 1990, and
from September 1990 to May 1991 he was Chief Financial Officer and
Treasurer. From May 1991 to March 1993, Mr. Graham was Vice President -
Finance and Treasurer.
(6) Mr. Coulter was Superintendent of Pumping Facilities from 1971 to 1982.
From 1982 to 1987 he served as Manager - Electrical/Mechanical Department
and from 1987 to 1989 he was Assistant Vice President - Production.
Item 11. Executive Compensation
The information appearing in the sections captioned "Executive
Compensation" of the Proxy Statement relating to the May 21, 1998, annual
meeting of shareholders of the Company, to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K Report, is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing in the sections captioned "Ownership of
Common Stock" of the Proxy Statement relating to the May 21, 1998, annual
meeting of shareholders of the Company, to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K Report, is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information appearing in the sections captioned "Certain
Relationships and Related Transactions" of the Proxy Statement relating to the
May 21 1998, annual meeting of shareholders of the Company, to be filed within
120 days after the end of the fiscal year covered by this Form 10-K Report, is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements. The following is a list of the consolidated financial
statements of the Company and its subsidiaries and supplementary data
incorporated by reference in Item 8 hereof:
Management's Report
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - 1997, 1996 and 1995
Consolidated Statements of Cash Flow - 1997, 1996, and 1995
Consolidated Statements of Capitalization - December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules. The financial statement schedules, or
supplemental schedules, filed as part of this annual report on Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
Reports on Form 8-K.
Current Report on Form 8-K filed on December 3, 1997, responding to Item 5,
Other Events. (Related to the Company's announcement of a dividend increase and
the Company's plans for a four-for-three stock split in the form of a stock
distribution to all shareholders of record on December 15, 1997).
Current Report on Form 8-K filed January 29, 1998, responding to Item 5, Other
Events. (Related to the filing of the Company's audited consolidated balance
sheets and statements of capitalization as of December 31, 1997 and 1996, its
consolidated statements of income and cash flow for each of the years in the
three-year period ended December 31, 1997, its Management's Discussion and
Analysis of
12
<PAGE>
Item 14, Continued
Financial Condition and Results of Operations related to its fiscal year ended
December 31, 1997, and its Summary of Selected Financial Data for each of the
years in the five-year period ended December 31, 1997.)
Current Report on Form 8-K filed February 6, 1998, responding to Item 5, Other
Events. (Related to the Company's Board of Directors adopting a new Shareholder
Rights Plan (the "New Plan") on February 3, 1998 that was effective March 1,
1998. The New Plan, which expires March 1, 2008, is substantially the same as
the former Shareholder Rights Plan that expired on March 1, 1998 except that the
beneficial ownership threshold that would trigger the exercisability of the
rights issued to purchase Company Common Stock was reduced from 25% of the
outstanding Common Stock to 20% of the outstanding Common Stock.)
Exhibits, Including Those Incorporated by Reference. The following is a list of
exhibits filed as part of this annual report on Form 10-K. Where so indicated by
footnote, exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses. The page numbers listed refer to
page numbers where such exhibits are located using the sequential numbering
system specified by Rules 0-3 and 403.
13
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
3.1 Amended and Restated Articles of Incorporation, as
amended (1) (Exhibit 3.1) --
3.2 By-Laws, as amended (17) (Exhibit 3.2) --
3.3 Amendment to Amended and Restated Articles of
Incorporation, as amended, to increase the number of
authorized shares to 41,770,819 and to provide that
40,000,000 of such shares be shares of Common Stock (17)
(Exhibit 3.3) --
3.4 Amendment to Amended and Restated Articles of
Incorporation, as amended, designating the Series B
Preferred Stock (17) (Exhibit 3.4) --
3.5 Amendment to Section 3.03 and addition of Section 3.17
to Bylaws (19) (Exhibits 1 and 2) --
3.6 Amendment to Amended and Restated Articles of
Incorporation, designating the terms of the Series A
Junior Participating Preferred Shares 21
4.1 Indenture of Mortgage dated as of January 1, 1941
between Philadelphia Suburban Water Company and The
Pennsylvania Company for Insurance on Lives and Granting
Annuities(now First Pennsylvania Bank, N.A.), as
Trustee, with supplements thereto through the Twentieth
Supplemental Indenture dated as of August 1, 1983 (2)
(Exhibits 4.1 through 4.16) --
4.2 Revolving Credit Agreement between Philadelphia Suburban
Water Company and Mellon Bank (East) National
Association dated as of February 16, 1990 (3) (Exhibit
4.3) --
4.3 First Amendment to Revolving Credit Agreement between
Philadelphia Suburban Water Company and Mellon Bank N.A.
dated as of September 1, 1992 (1) (Exhibit 4.3) --
4.4 Preferred Stock Agreement between Philadelphia Suburban
Water Company and Provident Life and Accident Insurance
Company dated as of January 1, 1991 (3) (Exhibit 4.4) --
4.5 Indenture dated as of July 1, 1988 between Philadelphia
Suburban Corporation and the Philadelphia National Bank,
as Trustee. (4) (Exhibit 4) --
4.6 Form of Rights Agreement, dated as of February 19, 1988,
between Philadelphia Suburban Corporation and Mellon
Bank (East) National Association, as amended by
Amendment No. 1. (5) (Exhibit 1) --
4.7 Agreement to furnish copies of other long-term debt
instruments (1) (Exhibit 4.7) --
4.8 Twenty-first Supplemental Indenture dated as of August
1, 1985 (6) (Exhibit 4.2) --
4.9 Twenty-second Supplemental Indenture dated as of April
1, 1986 (7) (Exhibit 4.3) --
14
<PAGE>
EXHIBIT INDEX, Continued
Exhibit No. Page No.
- ----------- --------
4.10 Twenty-third Supplemental Indenture dated as of April 1,
1987 (8) (Exhibit 4.4) --
4.11 Twenty-fourth Supplemental Indenture dated as of June 1,
1988 (9) (Exhibit 4.5) --
4.12 Twenty-fifth Supplemental Indenture dated as of January
1, 1990 (10)(Exhibit 4.6) --
4.13 Twenty-sixth Supplemental Indenture dated as of November
1, 1991 (11) (Exhibit 4.12) --
4.14 Twenty-seventh Supplemental Indenture dated as of June
1, 1992 (1) (Exhibit 4.14) --
4.15 Twenty-eighth Supplemental Indenture dated as of April
1, 1993 (12) (Exhibit 4.15) --
4.16 Revolving Credit Agreement between Philadelphia Suburban
Water Company and Mellon Bank, N.A., PNC Bank National
Association, First Union National Bank, N.A. and
CoreStates Bank, N.A. dated as of March 17, 1994 (12)
(Exhibit 4.16) --
4.17 Twenty-Ninth Supplemental Indenture dated as of March
30, 1995 (14) (Exhibit 4.17) --
4.18 Thirtieth Supplemental Indenture dated as of August 15,
1995 (15) (Exhibit 4.18) --
4.19 First Amendment to Revolving Credit Agreement dated as
of May 22, 1995, between hiladelphia Suburban Water
Company and Mellon Bank, N.A., PNC Bank National
Association, First Fidelity National Bank, N.A.,
Meridian Bank, N.A. dated as of March 17, 1994 (17)
(Exhibit 4.19) --
4.20 Second Amendment to Revolving Credit Agreement dated as
of July 21, 1995, between Philadelphia Suburban Water
Company and Mellon Bank, N.A., PNC Bank National
Association, First Fidelity National Bank, N.A.,
Meridian Bank, N.A. dated as of March 17, 1994 (17)
(Exhibit 4.20) --
4.21 Third Amendment to Revolving Credit Agreement dated as
of December 20, 1996, between hiladelphia Suburban Water
Company and Mellon Bank, N.A., PNC Bank National
Association, First Union National Bank, N.A., CoreStates
Bank, N.A. dated as of March 17, 1994 (17) (Exhibit
4.21) --
4.22 Thirty-First Supplemental Indenture dated as of July 1,
1997 (18) (Exhibit 4.22) --
4.23 Fourth Amendment to Revolving Credit Agreement dated as
of January 15, 1998, between Philadelphia Suburban
Water Company and Mellon Bank, N.A., PNC Bank National
Association, First Union National Bank, N.A., and
CoreStates Bank, N.A. dated as of March 17, 1994 26
4.24 Rights Agreement, dated as of March 1, 1998 between
Philadelphia Suburban Corporation and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (20)
(Exhibit 1) --
15
<PAGE>
EXHIBIT INDEX, Continued
Exhibit No. Page No.
- ----------- --------
10.1 1982 Stock Option Plan, as amended and restated
effective May 21, 1992* (1) (Exhibit 10.1) --
10.2 1988 Stock Option Plan, as amended and restated
effective May 21, 1992* (1) (Exhibit 10.2) --
10.3 Executive Incentive Award Plan, as amended March 21,
1989 and February 6, 1990* (10) (Exhibit 10.3) --
10.4 Excess Benefit Plan for Salaried Employees, effective
December 1, 1989* (10) (Exhibit 10.4) --
10.5 Supplemental Executive Retirement Plan, effective
December 1, 1989* (10) (Exhibit 10.5) --
10.6 Supplemental Executive Retirement Plan, effective March
15, 1992* (1) (Exhibit 10.6) --
10.7 1993 Incentive Compensation Plan* (1) (Exhibit 10.7) --
10.8 Employment letter agreement with Mr. Nicholas
DeBenedictis* (1) (Exhibit 10.8) --
10.9 1994 Incentive Compensation Program* (12) (Exhibit 10.9) --
10.10 1994 Equity Compensation Plan, as amended by Amendment
1994-1* (16) (Exhibit 10.10) --
10.11 1995 Incentive Compensation Plan* (13) (Exhibit 10.11) --
10.12 Placement Agency Agreement between Philadelphia
Suburban Water Company and PaineWebber Incorporated
dated as of March 30, 1995 (14) (Exhibit 10.12) --
10.13 Bond Purchase Agreement among the Delaware County
Industrial Development Authority, Philadelphia Suburban
Water Company and Legg Mason Wood Walker, Incorporated
dated August 24, 1995 (15) (Exhibit 10.13) --
10.14 Construction and Financing Agreement between the
Delaware County Industrial Development Authority and
Philadelphia Suburban Water Company dated as of August
15, 1995 (15) (Exhibit 10.14) --
10.15 1996 Annual Cash Incentive Compensation Plan* (16)
(Exhibit 13.4) --
10.16 Amendment 1994-2 to 1994 Equity Compensation Plan, as
amended* (17) (Exhibit 10.16) --
10.17 1997 Annual Cash Incentive Compensation Plan* (17)
(Exhibit 10.17) --
10.18 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Nicholas
DeBenedictis, dated as of January 1, 1997* (17) (Exhibit
10.18) --
10.19 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Roy H. Stahl,
dated as of January 1, 1997* (17) (Exhibit 10.19) --
10.20 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Michael P.
Graham, dated as of January 1, 1997* (17) (Exhibit
10.20) --
16
<PAGE>
EXHIBIT INDEX, Continued
Exhibit No. Page No.
- ----------- --------
10.21 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Richard R.
Riegler, dated as of January 1, 1997* (17) (Exhibit
10.21) --
10.22 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Morrison
Coulter, dated as of January 1, 1997* (17) (Exhibit
10.22) --
10.23 Philadelphia Suburban Corporation Amended and Restated
Executive Deferral Plan* (17) (Exhibit 10.23) --
10.24 Philadelphia Suburban Corporation Deferred
Compensation Plan Master Trust Agreement with PNC Bank,
National Association, dated as of December 31, 1996*
(17) (Exhibit 10.24) --
10.25 First Amendment to Supplemental Executive Retirement
Plan* (17) (Exhibit 10.25) --
10.26 Placement Agency Agreement between Philadelphia
Suburban Water Company and A.G. Edwards and Sons, Inc.,
Janney Montgomery Scott Inc., HSBC Securities, Inc., and
PaineWebber Incorporated (18) (Exhibit 10.26)
10.27 1998 Annual Cash Incentive Compensation Plan* 41
13.1 Selected portions of Annual Report to Shareholders for
the year ended December 31, 1993 incorporated by
reference in Annual Report on Form 10-K for the year
ended December 31, 1993 (12) (Exhibit 13.1) --
13.2 Selected portions of Annual Report to Shareholders for
the year ended December 31, 1994 incorporated by
reference in Annual Report on Form 10-K for the year
ended December 31, 1994 (13) (Exhibit 13.2) --
13.3 Selected portions of Annual Report to Shareholders for
the year ended December 31, 1995 incorporated by
reference in Annual Report on Form 10-K for the year
ended December 31, 1995 (16) (Exhibit 13.3) --
13.4 Selected portions of Annual Report to Shareholders for
the year ended December 31, 1996 incorporated by
reference in Annual Report on Form 10-K for the year
ended December 31, 1996 --
13.5 Selected portions of Annual Report to Shareholders
for the year ended December 31, 1997 incorporated by
reference in Annual Report on Form 10-K for the year
ended December 31, 1997 46
21. Subsidiaries of Philadelphia Suburban Corporation 84
23. Consent of Independent Auditors 85
24. Power of Attorney (set forth as a part of this report) 19
27. Financial Data Schedule 86
17
<PAGE>
- Notes -
Documents Incorporated by Reference
(1) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1992.
(2) Indenture of Mortgage dated as of January 1, 1941 with supplements
thereto through the Twentieth Supplemental Indenture dated as of
August 1, 1983 were filed as an Exhibit to Annual Report on Form 10-K
for the year ended December 31, 1983.
(3) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990.
(4) Filed as Exhibit 4 to the Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on June 14, 1988.
(5) Filed as Exhibit 1 to the Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on March 1, 1988, with
respect to the New York Stock Exchange, and on November 9, 1988, with
respect to the Philadelphia Stock Exchange.
(6) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1985.
(7) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986.
(8) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987.
(9) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988.
(10) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1989.
(11) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991.
(12) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993.
(13) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1994.
(14) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995.
(15) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.
(16) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1995.
(17) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1996.
(18) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
(19) Filed as an Exhibit to Form 8-K filed August 7, 1997.
(20) Filed as Exhibit 1 to the Registration Statement on Form 8-A filed on
March 17, 1998.
* Indicates management contract or compensatory plan or arrangement.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHILADELPHIA SUBURBAN CORPORATION
By Nicholas DeBenedictis
-----------------------------
Nicholas DeBenedictis
President and Chairman
Date: March 20, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Nicholas
DeBenedictis, President and Chairman of Philadelphia Suburban Corporation,
Michael P. Graham, Senior Vice President - Finance and Treasurer of Philadelphia
Suburban Corporation, and each of them, his or her true and lawful
attorneys-in-fact, in his or her name, place and stead to execute and cause to
be filed with the Securities and Exchange Commission any and all amendments to
this report.
19
<PAGE>
John H. Austin, Jr. John W. Boyer, Jr.
- ----------------------------- ------------------------------
John H. Austin, Jr. John W. Boyer, Jr.
Director Director
Mary C. Carroll Nicholas DeBenedictis
- ----------------------------- ------------------------------
Mary C. Carroll Nicholas DeBenedictis
Director President and Chairman
(principal executive officer)
and Director
G. Fred DiBona, Jr. Richard H. Glanton
- ----------------------------- ------------------------------
G. Fred DiBona, Jr. Richard H. Glanton
Director Director
Michael P. Graham
- ----------------------------- ------------------------------
Michael P. Graham Alan Hirsig
Senior Vice President-Finance and Director
Treasurer (principal financial and
accounting officer)
John F. McCaughan Richard L. Smoot
- ----------------------------- ------------------------------
John F. McCaughan Richard L. Smoot
Director Director
- -----------------------------
Harvey J. Wilson
Director
20
<PAGE>
EXHIBIT 3.6
Part A Article IV of the Amended and Restated Articles of Incorporation of
Philadelphia Suburban Corporation is hereby amended and restated as set forth
below:
Series A Preferred Shares. The first series of the Series Preferred
Stock, par value $1.00 per share, shall consist of 100,000 shares and shall be
designated as Series A Junior Participating Preferred Shares (the "Series A
Preferred Shares").
A. Special Terms of the Series A Preferred Shares
Section 1. Dividends and Distributions.
(a) The rate of dividends payable per share of Series A
Preferred Shares on the first day of January, April, July and October in each
year or such other quarterly payment date as shall be specified by the Board of
Directors (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of the Series A Preferred
Shares, shall be (rounded to the nearest cent) equal to the greater of (i)
$10.00 or (ii) subject to the provision for adjustment hereinafter set forth,
1,000 times the aggregate per share amount of all cash dividends, and 1,000
times the aggregate per share amount (payable in cash, based upon the fair
market value at the time the non-cash dividend or other distribution is declared
or paid as determined in good faith by the Board of Directors) of all non-cash
dividends or other distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, $.50 par value per
share, of the Corporation since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of the Series A
Preferred Shares. Dividends on the Series A Preferred Shares shall be paid out
of funds legally available for such purpose. In the event the Corporation shall
at any time after March 1, 1998 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amounts
to which holders of Series A Preferred Shares were entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
<PAGE>
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
Section 2. Voting Rights. In addition to any other voting
rights required by law, the holders of Series A Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the shareholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of Series A Preferred
Shares were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred
Shares shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become entitled to
the extent hereinafter provided to vote noncumulatively at all elections of
directors of the Corporation, and to receive notice of all shareholders'
meetings to be held for such purpose. At such meetings, to the extent that
directors are being elected, the holders of such Series A Preferred Shares
voting as a class shall be entitled solely to elect two members of the Board of
Directors of the Corporation; and all other directors of the Corporation shall
be elected by the other shareholders of the Corporation entitled to vote in the
election of directors. Such voting rights of the holders of such Series A
Preferred Shares shall continue until all accumulated and unpaid dividends
thereon shall have been paid or funds sufficient therefor set aside, whereupon
all such voting rights of the holders of shares of such series shall cease,
subject to being again revived from time to time upon the reoccurrence of the
conditions above described as giving rise thereto.
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total number
of shares of all the Series A Preferred Shares having the right to elect
directors in such circumstances shall, call a special meeting of holders of such
<PAGE>
Series A Preferred Shares for the election of directors. In the case of such a
written request, such special meeting shall be held within 90 days after the
delivery of such request, and, in either case, at the place and upon the notice
provided by law and in the By-laws of the Corporation; provided, that the
Corporation shall not be required to call such a special meeting if such request
is received less than 120 days before the date fixed for the next ensuing annual
or special meeting of shareholders of the Corporation. Upon the mailing of the
notice of such special meeting to the holders of such Series A Preferred Shares,
or, if no such meeting be held, then upon the mailing of the notice of the next
annual or special meeting of shareholders for the election of directors, the
number of directors of the Corporation shall, ipso facto, be increased to the
extent, but only to the extent, necessary to provide sufficient vacancies to
enable the holders of such Series A Preferred Shares to elect the two directors
hereinabove provided for, and all such vacancies shall be filled only by vote of
the holders of such Series A Preferred Shares as hereinabove provided. Whenever
the number of directors of the Corporation shall have been increased, the number
as so increased may thereafter be further increased or decreased in such manner
as may be permitted by the By-laws and without the vote of the holders of Series
A Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are
entitled hereunder to voting rights, any vacancy in the Board of Directors
caused by the death or resignation of any director elected by the holders of
Series A Preferred Shares, shall, until the next meeting of shareholders for the
election of directors, in each case be filled by the remaining director elected
by the holders of Series A Preferred Shares having the right to elect directors
in such circumstances.
Upon termination of the voting rights of the holders of any
series of Series A Preferred Shares the terms of office of all persons who shall
have been elected directors of the Corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued Series
Preferred Stock and may be reissued as part of a new series of Series Preferred
Stock to be created by resolution or resolutions of the Board of Directors.
<PAGE>
Section 4. Liquidation, Dissolution or Winding Up. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $100.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 5. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the Series
A Preferred Shares shall at the same time be similarly exchanged or changed in
an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Shares shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
<PAGE>
Section 6. No Redemption. The Series A Preferred Shares shall
not be redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank
junior to all other series of the Corporation's Series Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 8. Fractional Shares. Series A Preferred Shares may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Shares.
<PAGE>
Exhibit 4.23
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT ("Fourth Amendment"),
dated as of January 15, 1998, among Philadelphia Suburban Water Company, a
Pennsylvania corporation (the "Borrower"), the Banks signatory hereto (the
"Banks"), and Mellon Bank, N.A., in its capacity as agent for the Banks
hereunder (hereafter the "Agent").
W I T N E S S E T H
WHEREAS, the Borrower, the Agent and the Banks are parties to a
Revolving Credit Agreement dated as of March 17, 1994, as amended by a First
Amendment to Revolving Credit Agreement dated as of May 22, 1995, and as further
amended by a letter agreement dated July 21, 1995, and as further amended by a
Third Amendment to Revolving Credit Agreement dated as of December 20, 1996 (as
amended, modified and/or extended, the "Loan Agreement"), pursuant to which the
Banks agreed to make available to the Borrower certain credit facilities upon
the terms and conditions specified in the Loan Agreement; and
WHEREAS, the parties wish to amend certain terms and conditions of the
Loan Agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and mutual agreements
herein contained, the parties hereto, intending to be legally bound hereby,
agree to amend the Loan Agreement as herein stated.
1. Effect of Prior Agreements.
This Fourth Amendment is intended to amend the Loan Agreement
as it has been in effect to the date hereof and as it shall be amended on and
after the date hereof. All capitalized terms used herein as defined terms shall
have the meanings ascribed to them in the Loan Agreement unless herein provided
to the contrary.
2. Amendments.
(a) The definition of "Revolving Credit Commitment Termination
Date" in Article I of the Loan Agreement is hereby amended in its entirety to
read as follows:
"Revolving Credit Commitment Termination Date" means
the earlier of (A) January 1, 2000, (B) the date on which the
Revolving Credit Commitments are terminated in whole pursuant
to Section 2.03(a) hereof, or (C) the date the Revolving
Credit Commitments are terminated pursuant to Article VIII
hereof.
<PAGE>
(b) Section 2.01 of the Loan Agreement is hereby amended in its
entirety to read as follows:
2.01 The Revolving Credit Commitment. The maximum
aggregate amount the Banks shall be obligated to lend to the
Borrower at any given time under this Agreement shall be Fifty
Million Dollars ($50,000,000), as such amount may have been
reduced under Section 2.03 hereof (the "Revolving Credit
Commitment").
(c) Schedule 1.01(a) is hereby replaced with Third Replacement
Schedule 1.01(a) attached hereto and made a part hereof. Any and all references
to Schedule 1.01(a) shall be deemed to refer to Third Replacement Schedule
1.01(a).
3. Conditions. To induce the Agent and Banks to enter into this Fourth
Amendment and to extend the Loans contemplated herein, the Borrower shall
perform the following conditions to the Agent's and the Banks' satisfaction
prior to the Banks' acting in reliance hereon:
(a) The Borrower shall execute and deliver to the Banks this
Fourth Amendment, a Fourth Allonge to Revolving Credit Note in favor of each of
the Banks (the "Fourth Allonges") and all other documents as the Banks may
require; and
(b) The Borrower shall deliver all other documents and
certificates reasonably requested by the Agent.
4. Representations and Warranties. The Borrower hereby represents and
warrants that:
(a) The representations and warranties contained in the Loan
Agreement and in each certificate, document or financial statement furnished by
the Borrower delivered therewith or in connection with any other Loan Document
are true and correct in all material respects on and as of the date hereof as
though made on and as of the date hereof.
(b) No Event of Default, and to the Borrower's knowledge no
event which with the passage of time or the giving of notice or both could
become an Event of Default, exists on the date hereof, and no offsets or
defenses exist against the Borrower's obligations under the Loan Agreement or
the documents delivered in connection therewith.
(c) This Fourth Amendment and the Fourth Allonges have been
duly authorized, executed and delivered so as to constitute the legal, valid and
binding obligations of the Borrower, enforceable in accordance with their terms,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and general principles of equity.
<PAGE>
(d) The execution, delivery and performance of this Fourth
Amendment and the Fourth Allonges will not violate any applicable provision of
law or judgment, order or regulation of any court or of any public or
governmental agency or authority nor conflict with or constitute a breach of or
a default under any instrument to which the Borrower is a party or by which the
Borrower or the Borrower's properties are bound nor result in the creation of
any lien, charge or encumbrance upon any assets of the Borrower.
(e) No approval, consent or authorization of, or registration,
declaration or filing with, any governmental or public body or authority is
required in connection with the valid execution, delivery and performance by the
Borrower of this Fourth Amendment and the Fourth Allonges.
5. Reaffirmation. The Borrower hereby affirms and reaffirms to the
Agent and the Banks all of the terms, covenants, and conditions contained in the
Loan Agreement including, without limitation, those contained in Article VI of
the Loan Agreement and agrees to abide thereby until all of the obligations to
the Banks are satisfied and/or discharged in their entirety.
6. Miscellaneous.
(a) All terms, conditions, provisions and covenants in the
Loan Agreement, the Notes, as amended by the Fourth Allonges, and all other Loan
Documents delivered to the Agent and the Banks in connection therewith shall
remain unaltered and in full force and effect except as modified or amended
hereby and are hereby ratified and confirmed.
(b) This Fourth Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
(c) This Fourth Amendment shall inure to the benefit of, and
be binding upon, the parties hereto and their respective successors and
permitted assigns.
(d) This Fourth Amendment may be executed in one or more
counterparts, and by different parties on different counterparts, each of which
shall be deemed an original, all of which together shall constitute one and the
same instrument, and in making proof of this Fourth Amendment it shall be
necessary only to produce one counterpart.
(e) This Fourth Amendment shall have effect as of its date.
(f) To the extent an Event of Default exists on the date
hereof, any and all undertakings of the Agent and the Banks under or pursuant to
this Fourth Amendment shall not be deemed a waiver by the Agent or the Banks of
any such Event of Default or any of the Agent's or the Banks' rights and
remedies under the Loan Agreement and/or applicable law; and the Banks hereby
reserve any and all such rights and remedies.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment as of the day and year first above written.
ATTEST: PHILADELPHIA SUBURBAN WATER
COMPANY
By: Patricia M. Mycek By Michael P. Graham
------------------------- -------------------------------
Name: Patricia M. Mycek Name: Michael P. Graham
Title: Secretary Title: Senior Vice President
- Finance & Treasurer
Address: 762 Lancaster Avenue
Bryn Mawr, PA 19010
Tel. No: (610) 645-1087
Telecopy: (610) 645-1061
MELLON BANK, N.A.
By: Anthony R. Caringi
------------------------------
Name: Anthony R. Caringi
Title: Vice President
Address: Plymouth Meeting
Executive Campus
610 West Germantown Pike
Suite 200
Plymouth Meeting, PA 19462
Tel. No: (610) 941-4182
Telecopy: (610) 941-4136
PNC BANK, NATIONAL ASSOCIATION
By: Frank Pugliese
------------------------------
Name: Frank Pugliese
Title: Banking Officer
Address: Valley Forge Regional
Banking Center, Suite 200
1000 West Lakes Drive
Berwyn, PA 19312
Tel. No: (610) 725-5731
Telecopy: (610) 725-5799
<PAGE>
FIRST UNION NATIONAL BANK, (formerly
known as First Union National Bank of
North Carolina) (successor to First
Fidelity Bank, National Association)
By: Michael J. Kolosowsky
------------------------------------
Name: Michael J. Kolosowsky
Title: Vice President
Address: One First Union Center
301 South College Street
Charlotte, NC 28288
Tel. No: (704) 383-0510
Telecopy: (704) 383-6670
CORESTATES BANK, N.A. (successor to
Meridian Bank)
By: Anthony D. Braxton
------------------------------------
Name: Anthony D. Braxton
Title: Vice President
Address: FC 1-8-11-28
1339 Chestnut Street
P.O. Box 7618
Philadelphia, PA 19101-7618
Tel. No: (215) 786-4353
Telecopy: (215) 786-7721
<PAGE>
THIRD REPLACEMENT SCHEDULE 1.01(a)
Name and Address Amount of Commitment
of Bank for Revolving Credit Loans Percentage
---------------- -------------------------- ----------
1. Mellon Bank, N.A. $31,666,666.67 63 1/3%
Plymouth Meeting
Executive Campus
610 West Germantown Pike
Suite 200
Plymouth Meeting, PA 19462
Attn: Anthony R. Caringi
Vice President
Tel: (610) 941-4182
Fax: (610) 941-4136
Mellon Bank, N.A.
Attn: Loan Administration,
Flossie Bowers
Mellon Independence Center
199-5220
701 Market Street
Philadelphia, PA 19106
Tel: (215) 553-3414
Fax: (215) 553-4789 or
(215) 553-1016
2. PNC Bank, National Association $6,666,666.66 13 1/3%
Valley Forge Regional Banking
Center, Suite 200
1000 West Lakes Drive
Berwyn, PA 19312
Attn: Frank Pugliese
Banking Officer
Tel: (610) 725-5731
Fax: (610) 725-5799
3. First Union National Bank of $6,666,666.67 13 1/3%
North Carolina
One First Union Center
301 South College Street
Charlotte, NC 28288
Attn: Michael J. Kolosowsky
Vice President
Tel: (704) 383-0510
Fax: (704) 383-6670
4. CoreStates Bank, N.A. $5,000,000.00 10 %
FC 1-8-11-28
1339 Chestnut Street
P.O. Box 7618
Philadelphia, PA 19101-7618
--------------
TOTAL REVOLVING CREDIT
COMMITMENTS: $50,000,000.00 100 %
============== ===
<PAGE>
FOURTH ALLONGE TO REVOLVING CREDIT NOTE
ENDORSEMENT SEPARATE FROM INSTRUMENT
BORROWER: Philadelphia Suburban Water Company
PAYEE: Mellon Bank, N.A.
DATE OF NOTE: March 17, 1994
DUE DATE (AS AMENDED): January 1, 2000
ORIGINAL PRINCIPAL
AMOUNT: $12,666,666.67
PRINCIPAL AMOUNT
(AS AMENDED): $31,666,666.67
This Allonge shall be and remain attached to and shall
constitute an integral part of the above-described Revolving Credit Note from
and after the date hereof.
The Revolving Credit Note is hereby amended by increasing the
maximum principal amount permitted to be borrowed thereunder to $31,666,666.67.
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, has caused this Fourth Allonge to be executed by its duly authorized
officer as of the 15th day of January, 1998.
Attest: PHILADELPHIA SUBURBAN WATER COMPANY
By: Patricia M. Mycek By: Michael P. Graham
--------------------- ---------------------
Michael P. Graham
Senior Vice President -
Finance and Treasurer
<PAGE>
STATE OF Pennsylvania : SS.
COUNTY OF Montgomery :
On the 15th day of January, 1998, before me, the subscriber, a Notary
Public in and for the State and County aforesaid, personally appeared Michael P.
Graham, who acknowledged himself to be the Senior Vice President - Finance and
Treasurer of Philadelphia Suburban Water Company, a Pennsylvania corporation,
and that he as such officer being authorized to do so, executed and delivered
the foregoing instrument for the purposes therein contained by signing the name
of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Suzanne Falcone
---------------
Notary Public
My Commission expires:
August 27, 2001
<PAGE>
FOURTH ALLONGE TO REVOLVING CREDIT NOTE
ENDORSEMENT SEPARATE FROM INSTRUMENT
BORROWER: Philadelphia Suburban Water Company
PAYEE: First Union National Bank, formerly known as First
Union National Bank of North Carolina (successor to
First Fidelity Bank, National Association)
DATE OF NOTE: March 17, 1994 `
DUE DATE (AS AMENDED): January 1, 2000
ORIGINAL PRINCIPAL
AMOUNT: $2,666,666.67
PRINCIPAL AMOUNT
(AS AMENDED): $6,666,666.67
This Allonge shall be and remain attached to and shall
constitute an integral part of the above-described Revolving Credit Note from
and after the date hereof.
The Revolving Credit Note is hereby amended by increasing the
maximum principal amount permitted to be borrowed thereunder to $6,666,666.67.
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, has caused this Fourth Allonge to be executed by its duly authorized
officer as of the 15th day of January, 1998.
Attest: PHILADELPHIA SUBURBAN WATER
COMPANY
By: Patricia M. Mycek By: Michael P. Graham
---------------------- -----------------------
Michael P. Graham
Senior Vice President -
Finance and Treasurer
<PAGE>
STATE OF Pennsylvania : SS..
COUNTY OF Montgomery :
On the 15th day of January, 1998, before me, the subscriber, a Notary
Public in and for the State and County aforesaid, personally appeared Michael P.
Graham, who acknowledged himself to be the Senior Vice President - Finance and
Treasurer of Philadelphia Suburban Water Company, a Pennsylvania corporation,
and that he as such officer being authorized to do so, executed and delivered
the foregoing instrument for the purposes therein contained by signing the name
of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Suzanne Falcone
---------------
Notary Public
My Commission expires:
August 27, 2001
<PAGE>
FOURTH ALLONGE TO REVOLVING CREDIT NOTE
ENDORSEMENT SEPARATE FROM INSTRUMENT
BORROWER: Philadelphia Suburban Water Company
PAYEE: CoreStates Bank, N.A. (successor to Meridian Bank)
DATE OF NOTE: March 17, 1994
DUE DATE (AS AMENDED): January 1, 2000
ORIGINAL PRINCIPAL
AMOUNT: $3,000,000.00
PRINCIPAL AMOUNT
(AS AMENDED): $5,000,000.00
This Allonge shall be and remain attached to and shall
constitute an integral part of the above-described Revolving Credit Note from
and after the date hereof.
The Revolving Credit Note is hereby amended by increasing the
maximum principal amount permitted to be borrowed thereunder to $5,000,000.00.
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, has caused this Fourth Allonge to be executed by its duly authorized
officer as of the 15th day of January, 1998.
Attest: PHILADELPHIA SUBURBAN WATER
COMPANY
By: Patricia M. Mycek By: Michael P. Graham
------------------- -------------------------------
Michael P. Graham
Senior Vice President -
Finance and Treasurer
<PAGE>
STATE OF Pennsylvania : SS..
COUNTY OF Montgomery :
On the 15th day of January, 1998, before me, the subscriber, a Notary
Public in and for the State and County aforesaid, personally appeared Michael P.
Graham, who acknowledged himself to be the Senior Vice President - Finance and
Treasurer of Philadelphia Suburban Water Company, a Pennsylvania corporation,
and that he as such officer being authorized to do so, executed and delivered
the foregoing instrument for the purposes therein contained by signing the name
of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Suzanne Falcone
---------------
Notary Public
My Commission expires:
August 27, 2001
<PAGE>
FOURTH ALLONGE TO REVOLVING CREDIT NOTE
ENDORSEMENT SEPARATE FROM INSTRUMENT
BORROWER: Philadelphia Suburban Water Company
PAYEE: PNC Bank, National Association
DATE OF NOTE: March 17, 1994
DUE DATE (AS AMENDED): January 1, 2000
ORIGINAL PRINCIPAL
AMOUNT: $4,000,000.00
PRINCIPAL AMOUNT
(AS AMENDED): $6,666,666.66
This Allonge shall be and remain attached to and shall
constitute an integral part of the above-described Revolving Credit Note from
and after the date hereof.
The Revolving Credit Note is hereby amended by increasing the
maximum principal amount permitted to be borrowed thereunder to $6,666,666.66.
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, has caused this Fourth Allonge to be executed by its duly authorized
officer as of the 15th day of January, 1998.
Attest: PHILADELPHIA SUBURBAN WATER COMPANY
By: Patricia M. Mycek By: Michael P. Graham
-------------------- -------------------------------
Michael P. Graham
Senior Vice President -
Finance and Treasurer
<PAGE>
STATE OF Pennsylvania : SS..
COUNTY OF Montgomery :
On the 15th day of January, 1998, before me, the subscriber, a Notary
Public in and for the State and County aforesaid, personally appeared Michael P.
Graham, who acknowledged himself to be the Senior Vice President - Finance and
Treasurer of Philadelphia Suburban Water Company, a Pennsylvania corporation,
and that he as such officer being authorized to do so, executed and delivered
the foregoing instrument for the purposes therein contained by signing the name
of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Suzanne Falcone
---------------
Notary Public
My Commission expires:
August 27, 2001
<PAGE>
PHILADELPHIA SUBURBAN WATER COMPANY
Secretary's Certificate
I, the undersigned, Corporate Secretary of PHILADELPHIA SUBURBAN WATER
COMPANY (the "Company"), a corporation organized under the laws of the
Commonwealth of Pennsylvania, DO HEREBY CERTIFY that by Unanimous Consent of the
Board of Directors of said Company dated January 7, 1998, the resolution
attached to this Secretary's Certificate as Exhibit A was unanimously adopted
and has not been modified or rescinded and is now in full force and effect; and
that the same is not in contravention or in conflict with the By-laws or
Articles of Incorporation of said Company and is in accord therewith and
pursuant thereto.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said
Company this 19th January, 1998.
Patricia M. Mycek
--------------------
Patricia M. Mycek
Secretary
[CORPORATE SEAL]
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION
PHILADELPHIA SUBURBAN WATER COMPANY
1998 ANNUAL CASH INCENTIVE COMPENSATION PLAN
BACKGROUND
o During the first quarter of 1989, the Company and its compensation
consultant conducted a feasibility study to determine whether the
Company should implement an incentive compensation plan. The study was
prompted by the positive experience of other investor-owned water
companies and PSC's experience with incentive compensation.
o The study included interviews with PSWC and PSC executives and an
analysis of competitive compensation levels. Based on the results, the
compensation consultant recommended that the Company's objectives and
competitive practice supported the adoption of an annual incentive plan
(the "Plan"). The Company has had a cash incentive compensation plan in
place since 1990 and management and the Board of Directors feel it has
had a positive effect on the Company's operations, aiding employees,
shareholders (higher earnings) and customers (better service and
controlling expenses).
o The Plan has two components - a Management Incentive Program and an
Employee Recognition ("Chairman's Award") Program.
o The Plan is designed to provide an appropriate incentive to the
officers and managers of the Company. The 1998 Management Incentive
Program will cover all officers and managers of Philadelphia Suburban
Corporation, and its subsidiaries.
MANAGEMENT INCENTIVE PROGRAM
o Performance Measures
-- Annual incentive bonus awards are calculated by multiplying an
individual's Target Bonus by a Company Rating factor based on
the Company's performance and an Individual Rating factor
based on the individual employee's performance.
The approach of having a plan tied to the Company's income
performance is appropriate as the participants' assume some of
the same risks and rewards as the shareholders who are
investing in the Company and making its capital construction
and acquisition programs possible. Customers also benefit from
<PAGE>
the Company's employees' objectives being met as improvements
in performance are accomplished by controlling costs,
improving efficiencies and enhancing customer service. For
these reasons, future rate relief should be lessened and less
frequent, which directly benefits all customers.
-- The Company's actual after-tax net income from continuing
operations relative to the annual budget will be the primary
measure for the Company's performance. Each year a "Target Net
Income" level will be established. For purposes of the Plan,
the Target Net Income may differ from the budgeted net income
level. For 1998, the Target Net Income will exclude the impact
of adverse PUC or court rulings on FAS 106, the effect of any
unbudgeted extraordinary gains or losses, changes in
accounting principles, changes in tax rates and any gains or
losses related to the discontinued operations.
-- Based on a review of historic performance, the minimum or
threshold level of performance is set at 90 percent of the
Target Net Income. That is, no bonus awards will be made if
actual net income is less than 90 percent of the Target Net
Income for the year. No additional bonus will be earned for
results exceeding 110 percent of the Target Net Income.
-- Each individual's performance and achievement of his or her
objectives will also be evaluated and factored into the bonus
calculation. Performance objectives for each participant are
established at the beginning of the year and are primarily
directed toward controlling costs, improving efficiencies and
productivity and enhancing customer service. Each objective
has specific performance measures that are used to determine
the level of achievement for each objective.
o Participation
-- Participation in the Management Incentive Program will be
determined each year. Each participant will be assigned a
"Target Bonus Percentage" ranging from 5 to 50 percent of
salary depending on duties and responsibilities.
-- Actual bonuses may range from 0, if the Company's financial
results fall below the minimum threshold or the participant
<PAGE>
does not make sufficient progress toward achieving his or her
objectives (i.e. performance measure points totaling less than
70 points), to 187.5 percent if performance -- both Company
and individual -- is rated at the maximum.
o Company Performance
-- Company performance will be measured on the following
schedule:
Percent of Company
1996 Plan Rating
--------- ------
Threshold.............. greater than 90% 0%
90 50
92 65
95 80
96 85
97 90
98 94
99 97
Plan................... 100 100
105 110
greater than 110 125
-- The actual Company Rating should be calculated by
interpolation between the points shown in the table above.
-- Regardless of the Company rating resulting from this Schedule,
the Executive Compensation and Employee Benefits Committee
retains the authority to determine the final Company Rating
for purposes of this Plan.
o Individual Performance
-- Individual performance will be measured on the following
scale:
Performance Measure Individual
Points Rating
------------------- ----------
0 - 69 0%
70 70%
80 80%
90 90%
100 100%
110 110%
-- In addition, up to 40 additional points and additional
percentage points may be awarded to a participant at the
<PAGE>
discretion of the Chief Executive Officer for exemplary
performance. Individual Performance points for the Chief
Executive Officer are determined by the Executive Compensation
and Employee Benefits Committee.
Sample Calculations
o Example 1
Salary $70,000
Target Bonus 10 percent ($7,000)
Company Rating 100 percent
Individual Rating 90 percent
Calculation:
Company Individual
Target Bonus x Rating x Rating = Bonus Earned
------------ ------ ---------- ------------
$7,000 x 100% x 90% = $6,300
======
o Example 2
-- Using the same salary and target bonus, but assuming Company
performance was less than 90 percent of Target Net Income,
there would be no bonus earned.
Calculation:
$7,000 x 0 x 90% = 0
o Example 3
-- Similarly, if individual Performance is rated below 70 points,
no bonus would be earned regardless of the Company Rating.
Calculation:
$7,000 x 100% x 0 = 0
<PAGE>
EMPLOYEE RECOGNITION ("CHAIRMAN'S AWARD") PROGRAM
o In addition to the Management Incentive Program, the Company maintains
an Employee Recognition Program known as the Chairman's Award program
to reward employees not eligible for the management bonus plan for
superior performance or a special action, or heroic deed, or for a
project that positively impacts the performance or image of the
Company.
o Awards will be made from an annual pool, not to exceed $175,000 (which
represents approximately 2% of the base payroll for the non-union
employees who do not participate in the Management Incentive Program),
established at the beginning of the year. Unused funds will not be
carried over to the next year. If financial performance warrants,
management may request permission from the Executive Compensation and
Employee Benefits Committee for special awards under the program.
o Awards will be made throughout the year and through the first quarter
of the following year with payment as close to the timing of the event
being rewarded as possible.
o Department Heads may nominate individuals in their unit to the
applicable Vice President and document the reasons for the
recommendations. The applicable Vice President will review the
nominations and forward their recommendations to the Chief Executive
Officer.
o The Chief Executive Officer will determine the individuals to actually
receive a bonus and the amount.
<PAGE>
EXHIBIT 13.5
SELECTED PORTION OF ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
This report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements regarding the Company's
development, growth and expansion plans and the sufficiency of the Company's
liquidity and capital. These statements are based on assumptions made by
management regarding future circumstances over which the Company may have little
or no control. Actual results may differ materially from these forward-looking
statements for a number of reasons, including (i) the effects of regulation,
(ii) changes in capital requirements and funding, and (iii) acquisitions.
Following are selected five-year financial statistics for the Company:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earned revenues $136,171 $122,503 $117,044 $108,636 $101,244
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 39,061 $ 33,749 $ 30,931 $ 27,209 $ 24,261
- --------------------------------------------------------------------------------------------------------------
Operating Statistics
Earned revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 41.1% 42.1% 44.2% 46.3% 45.4%
Depreciation and amortization 10.7% 10.9% 9.9% 9.5% 10.8%
Taxes other than income taxes 6.5% 6.8% 6.6% 6.6% 6.8%
Interest expense* 13.4% 12.9% 13.2% 12.7% 13.8%
Allowance for funds used during
construction (0.4)% (0.2)% (0.3)% (0.1)% (0.8)%
- --------------------------------------------------------------------------------------------------------------
Total costs and expenses 71.3% 72.5% 73.6% 75.0% 76.0%
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 28.7% 27.5% 26.4% 25.0% 24.0%
==============================================================================================================
Effective tax rates 40.6% 41.4% 41.7% 42.5% 43.0%
==============================================================================================================
Income from continuing operations
as a percentage of average
stockholders' equity 12.4% 11.7% 12.0% 11.2% 11.4%
==============================================================================================================
</TABLE>
*Includes dividends on preferred stock of PSW with mandatory redemption
requirements.
<PAGE>
Following are selected five-year operating and sales statistics for PSW:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daily sendout
(Million gallons Maximum 142.5 109.5 121.8 110.4 120.7
per day) Average 103.8 94.2 92.6 89.8 89.1
====================================================================================
Metered Residential 268,550 265,746 248,500 234,624 232,684
customers Commercial 13,512 13,422 12,019 11,071 11,014
Industrial 708 716 554 539 538
Other 4,746 4,257 3,792 3,299 2,959
------------------------------------------------------------------------------------
Total 287,516 284,141 264,865 249,533 247,195
Consumption ====================================================================================
per customer
in gallons Average 110,143 103,206 109,084 109,001 110,368
====================================================================================
Revenues from Residential $ 88,542 $ 79,056 $ 77,744 $ 69,483 $ 66,656
water sales Commercial 28,048 26,504 24,368 23,431 20,506
Industrial 5,170 4,823 4,512 4,737 4,207
Other 10,874 9,950 9,249 9,151 8,092
------------------------------------------------------------------------------------
Total $ 132,634 $ 120,333 $ 115,873 $ 106,802 $ 99,461
====================================================================================
</TABLE>
General Information
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 service to
approximately 288,000 customers in 93 municipalities within its 464 square mile
service territory. In addition, PSW provides water service to approximately
6,000 customers through an operating and maintenance contract to a municipal
authority located contiguous to its service territory. PSW's service territory
is located in Pennsylvania, north and west of the City of Philadelphia.
Results of Operations
Income from continuing operations of the Company has grown at an annual
compound rate of approximately 16.9% during the five-year period ended December
31, 1997. During this same period, revenues and total expenses, other than
income taxes, have grown at compound rates of 7.9% and 5.4%, respectively.
Earned Revenues
The growth in revenues over the past five years is a result of
increases in the customer base and in water rates. The number of customers
increased at an annual compound rate of 3.3% in the past five years primarily as
a result of acquisitions of local water systems. Acquisitions made during the
five year periods ended December 31, 1997, 1996 and 1995 have provided water
revenues of approximately $11,460, $8,210 and $5,550 in 1997, 1996 and 1995,
respectively. Excluding the effect of acquisitions, the customer base increased
at a five-year annual compound rate of .8%. Water rates have increased at an
annual compound growth rate of 4.5% over the five-year period.
<PAGE>
Rates charged by PSW for water service are subject to the approval of
the Pennsylvania Public Utility Commission ("PUC"). PSW continuously reviews the
necessity of filing applications with the PUC for increases in rates charged for
water service. Among the factors considered by management in determining the
need to apply for increased rates are: the amount of utility plant additions and
replacements made since the previous rate decision; changes in the cost of
capital and the capital structure of PSW; and increases in operating expenses
(including wages, fringe benefits, electric and chemical expenses), depreciation
and taxes experienced since the previous rate decision. Based on these
assessments, PSW periodically files requests with the PUC to increase its rates.
Typically, the PUC will suspend the rate request for up to nine months during
which time evidentiary hearings on the merits of the request are held. The
positions of PSW as well as the PUC staff, the Office of Consumer Advocate
("OCA") and other interested parties are presented and evaluated during these
hearings.
In 1996, the PUC approved a mechanism, the Distribution System
Improvement Charge ("DSIC"), which allows Pennsylvania water utilities to add a
surcharge to their water bills to offset the additional depreciation and capital
costs associated with certain non-revenue producing, non-expense reducing
capital expenditures related to replacing and rehabilitating distribution
systems. The DSIC mechanism is intended to eliminate many of the disincentives
faced by water utilities in rehabilitating their distribution systems. These
disincentives, often referred to as regulatory lag, are due to the rate making
process which, prior to the establishment of the DSIC mechanism, required water
utilities to absorb all of the depreciation and capital costs of these projects
between base rate increases without the benefit of additional revenues.
The DSIC may be adjusted quarterly based on additional qualified
capital expenditures made in the previous quarter but may never exceed 5% of the
base rates in effect. The DSIC is reset to zero when new base rates that reflect
the costs of those additions become effective. PSW began charging a DSIC of .5%
in the first quarter of 1997. Based on subsequent qualified capital expenditures
the DSIC was increased to 1.0% in the second quarter, 1.4% in the third quarter
and 1.82% for the portion of the fourth quarter prior to the effective date of
the new base rate increase. Total revenues associated with the DSIC in 1997 were
$1,104.
In April 1997, PSW filed an application with the PUC to increase its
rates by 13.2%. The request was suspended to allow the PUC Staff, the OCA and
other interested parties a period of additional discovery and to hold hearings
on the merits of this request. Prior to the commencement of hearings, PSW
reached a settlement with the OCA and the other interested parties. The
settlement, which was subsequently approved by the PUC, provided for a 7.3%
increase over the rates that were in effect at the time of the filing. Since
rates in effect at the time of the filing included a DSIC of 1% or $1,300 on an
annual basis, the settlement resulted in a total base rate increase of 8.3% or
$10,600 on an annual basis. The new base rates were effective on October 24,
1997. As part of the settlement, PSW has agreed not to file its next base rate
increase request prior to April 1999, absent extraordinary circumstances. As a
result of the rate settlement, the DSIC was reset to zero.
In the years prior to 1997, rates were increased 5.3%, 9.1% and 7.4% in
1995, 1994, and 1993, respectively. In recent years, the most significant factor
in determining the need for a rate increase and the actual rate increases
granted has been the amount of utility plant additions that PSW has made,
including acquisitions, and the costs of the capital used to finance these
additions.
In addition to increases in base rates, the PUC has adjusted rates by
means of a surcharge or credit to reflect changes in the tax laws, which were
not reflected in the base rates approved by the PUC. These adjustments are
eliminated when the tax changes are reflected in base rates. During 1995 and
1994, rates were reduced by various credits as a result of reductions in
Pennsylvania taxes. These credits resulted in revenue reductions of $504 in 1995
and $97 in 1994.
"Sendout" represents the quantity of treated water delivered to the
distribution system and is used by management as an indicator of customer
demand. Consumption per customer is the sendout that was used by metered
customers and is based on the actual bills rendered during the year adjusted for
the estimated unbilled customer usage. Water consumption tends to be impacted by
weather conditions, particularly during the late spring and summer months when
<PAGE>
nonessential and recreational use of water is at its highest. Consequently, a
higher proportion of annual operating revenues is realized in the second and
third quarters. It is difficult to establish an exact correlation between the
weather and water consumption, since conservation and even day-to-day variations
in weather patterns can have a significant effect. Conservation efforts,
construction codes which require the use of low flow plumbing fixtures as well
as mandated water use restrictions in response to drought conditions also may
have an effect on water consumption.
Over the past five years, sendout has increased primarily as a result
of PSW's growth in customers. The average annual consumption per customer
increased in 1997 by 6.7% and declined by 5.4% in 1996 but has only varied
slightly in the previous three years. The increase in the average consumption
per customer in 1997 is attributable to the relatively hot, dry summer weather
experienced in 1997, particularly in comparison to 1996 when average consumption
per customer declined due to rainfalls that were well above average and
temperatures that were cooler than normal during the spring and summer months.
Operating Expenses
Operating expenses for 1997, 1996 and 1995, totaled $55,899, $51,615
and $51,702, respectively. Most elements of operating expense are subject to the
effects of inflation, as well as the effects of changes in the number of
customers served, in water consumption and the degree of treatment required due
to variations in the quality of the raw water. The principal elements of
operating costs are labor, electricity, chemicals and maintenance expenses.
Electricity and chemical expenses vary in relationship to water consumption and
raw water quality. Maintenance expenses are sensitive to extreme cold weather,
which can cause water mains to rupture.
Operating expenses increased in 1997 over 1996 by $4,284 or 8.3%
primarily as a result of the operating expenses of the water systems acquired in
1997 and 1996 of $1,883, higher production costs resulting from the increased
volume of water sold of $740, and increased wage and administrative expenses,
partially offset by lower maintenance expenses. Administrative costs increased
as a result of increases in insurance costs, and in the bad debt reserve which
is related to the increase in revenues. Maintenance expenses declined due to
fewer main breaks as a result of the effects of the relatively mild 1997 winter.
Operating expenses decreased slightly in 1996 over 1995 primarily as a
result of reductions in pension, employee medical insurance premiums and general
liability insurance costs offset in part by the additional operating expenses
associated with the acquisitions made in 1996 and 1995. Pension expense declined
as a result of the investment returns in the previous two years on the pension
assets. Medical insurance costs declined as a result of favorable claims
experience with the carriers and the movement of a majority of employees from
indemnity health plans to managed care plans.
For the past three years, corporate costs were less than 1% of the
Company's operating expenses. Such expenses include those unallocated general
and administrative expenses associated with maintaining a publicly-held company.
Depreciation and Amortization
Depreciation expense was $14,311, $13,068 and $11,572 in 1997, 1996 and
1995, respectively, and has increased principally as a result of the significant
capital expenditures made to expand and improve the water utility facilities,
and as a result of acquisitions of water systems. Depreciation expense was
approximately 2.3% of the average utility plant in service for 1997 and 1996,
respectively. Amortization was a charge of $269 in 1997, $265 in 1996 and a
credit of $15 in 1995. The increase in 1997 is due to the amortization of
additional debt issuance expenses and amortization of the costs of PSW's 1997
rate filing, offset in part by the completion of amortization of the costs of
PSW's 1995 rate filing. Expenses associated with filing rate cases are deferred
<PAGE>
and amortized over approximately 18 months. The increase in 1996 over 1995 is
due to the amortization of the costs of PSW's 1995 rate filing as well as the
amortization of additional debt issuance expenses.
Taxes Other than Income Taxes
Taxes other than income taxes increased by approximately 8% in both
1997 and 1996 over the previous year. The majority of the increase in both years
is associated with increases in the base on which the Pennsylvania Public
Utility Realty Tax (PURTA), local real estate taxes and the Capital Stock Tax
are calculated and to an increase in the PURTA tax rate. The increase in the
taxable base for the PURTA and local real estate taxes is due to the capital
expenditures, and the acquisitions completed in the last three years. The
increase in the Capital Stock Tax is due to the increases in the Company's
common equity over the past three years.
Interest Expense
Interest expense was $17,890, $15,311, and $14,852 in 1997, 1996 and
1995, respectively, and has increased in 1997 and 1996 primarily as a result of
higher levels of borrowing offset in part by a reduction in interest rates. The
level of debt increased in order to finance acquisitions and other capital
expenditures made since 1995.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") was $522,
$264 and $305 in 1997, 1996 and 1995, respectively, and has varied over the
years as a result of changes in the average balance of utility plant
construction work in progress ("CWIP"), to which AFUDC is applied, and to
changes in the AFUDC rate.
The average balance of CWIP to which AFUDC is applied was $8,641,
$4,441 and $4,848 in 1997, 1996 and 1995, respectively. The increase in 1997 in
the average balance of CWIP was due to the increased level of capital
expenditures in 1997 as compared to 1996. The decrease in 1996 is due to a
$4,945 operations center that was under construction during 1995 and placed in
service in December 1995. AFUDC is not applied to projects after they are placed
in service, but is applied to an ever-increasing base during the period they are
under construction.
The AFUDC rate has varied due to changes in the interest rate on PSW's
revolving credit facility. The average AFUDC rate was 6.1%, 6.1% and 6.3% in
1997, 1996 and 1995, respectively.
Income Taxes
The Company's effective income tax rate was 40.6% in 1997 as compared
to 41.4% in 1996 and 41.7% in 1995. The changes in the effective tax rates in
1997 and 1996 are due to differences between tax deductible expenses and book
expenses.
Discontinued Operations
In 1993, the Company completed the sale of the last of the nonregulated
businesses that the Board of Directors authorized in 1990 and 1991. These
businesses are accounted for as discontinued operations. In connection with the
decision to sell these businesses, the Company established reserves to cover
future costs and contingencies that the Company could be required to pay.
In 1996 and 1995, the Company reversed $965 and $370, net of related
income taxes, of the reserves. The reversals were made as a result of: the
receipt of contingent sales proceeds from two of the businesses that were sold;
the passage of time, which reduced certain potential lease obligations; and the
assessment of current information on asserted and unasserted legal claims
<PAGE>
related to these businesses. In 1997, the Company received additional sale
proceeds of $250 from one of the businesses sold and included the amount in
Earned Revenues. The balance of the reserves for discontinued operations of
$1,009 at December 31, 1997 consists primarily of reserves for future and
contingent costs including potential lease, legal and insurance costs associated
with these businesses.
Summary
Operating income in 1997, 1996 and 1995 was $56,799, $49,290 and
$46,109, respectively, and income from continuing operations was $23,188,
$19,778 and $18,030, respectively, for the same periods. Diluted income per
share from continuing operations in 1997, 1996 and 1995 was $.88, $.78 and $.75,
respectively. The increases in the per share income in 1997 and 1996 over the
previous years were due to the aforementioned improvements in profits offset in
part by a 4.0% and 5.6% increase in the average number of common shares
outstanding during 1997 and 1996, respectively.
Although the Company has experienced increased income in the recent
past, continued adequate rate increases reflecting increased operating costs and
new capital investments are important to the future realization of improved
profitability.
Fourth Quarter Results
Net income available to common stock for the fourth quarter of 1997
increased over the same period in 1996 by $171 to $5,432 primarily as a result
of a $3,382 increase in revenues offset in part by an increase in operating
expenses, depreciation, amortization, taxes other than income, interest expense
and preferred dividends, and to the absence, in 1997, of the reversal of
reserves for discontinued operations. The increase in revenues was primarily a
result of the acquisitions made during the past two years, the rate increase,
which took effect October 24, 1997 and an increase in water sales. Operating
expenses increased primarily due to costs associated with the acquisitions and
the increased water sales. Depreciation increased due to utility plant additions
and the acquisitions made since the fourth quarter of 1996. Amortization
increased due to the amortization of the costs associated with the 1997 rate
request filing. Taxes other than income taxes increased primarily because of the
increase in the base on which the PURTA and Capital Stock Tax are computed and
to an increase in the PURTA tax rate. Interest increased in the fourth quarter
primarily as a result of higher borrowing levels.
Effects of Inflation
As a regulated enterprise, PSW's rates are established to provide
recovery of costs and a return on its investment. Recovery of the effects of
inflation through higher water rates is dependent upon receiving adequate and
timely rate increases. However, rate increases are not retroactive and often lag
increases in costs caused by inflation. During periods of moderate to low
inflation, as has been experienced for the past several years, the effects of
inflation on PSW's operating results are not significant.
Year 2000
Except for its customer information system, the Company's management
information systems are year 2000 compliant in all material respects. The
Company is currently installing a new customer information system which, in
addition to being year 2000 compliant, will offer additional functionality and
will be scalable to meet future customer growth. The installation of the new
customer information system will be completed in 1998 and the cost of this
system, including installation and conversion from the existing system, is
currently estimated at approximately $3,140.
<PAGE>
Electric Deregulation
During 1997, the total costs for electric power purchased by the
Company amounted to $8,575. In December 1996, the Governor of Pennsylvania
signed into law the Electricity Generation Customer Choice and Competition Act
("Electric Act") which provides for the restructuring of the electric utility
industry in Pennsylvania. The Electric Act requires the unbundling of electric
services into separate generation, transmission and distribution services with
open competition for generation. Beginning in November 1997, approximately 18%
of PSW's electricity requirements were selected to be included in the State's
pilot implementation program. Prior to the pilot program, PSW had purchased all
of its electricity from PECO Energy Company ("PECO"). For electric accounts in
the pilot program, the electricity will be purchased from HorizonOne Electric, a
PECO affiliate. The total electric costs for the twelve-month period prior to
the pilot program for the accounts selected were approximately $1,020. The
Company estimates that the electric rates during participation in the pilot
program will be approximately 10% to 12% lower than the former rates. Since
electric usage is dependent on water demand, the exact savings related to the
pilot program cannot be determined at this time. A recent ruling by the PUC
provides that after completion of the pilot program on December 31, 1998, 66% of
PECO's electric accounts, including the accounts in the pilot program and others
to be selected in a lottery, will be permitted to choose the electricity
generator of their choice. The Electric Act will be completely phased in on
January 1, 2001 at which point all electric accounts will be allowed to select
their electric supplier. The PUC ruling is subject to appeal by PECO and others.
Financial Condition
Cash Flow and Capital Expenditures
Net operating cash flow, dividends paid on common stock and capital
expenditures, including allowances for funds used during construction, for the
five years ended December 31, 1997 were as follows:
- --------------------------------------------------------------------------------
Net Operating Common Capital
Cash Flow Dividends Expenditures
- --------------------------------------------------------------------------------
1993 $ 27,049 $ 11,629 $ 27,958
1994 29,730 12,637 27,379
1995 32,954 13,546 33,182
1996 37,422 14,795 31,389
1997 41,843 16,129 38,960
- --------------------------------------------------------------------------------
$ 168,998 $ 68,736 $ 158,868
================================================================================
Included in capital expenditures are: $11,650 for the construction of a
surface water treatment plant; $15,189 for the modernization of existing
treatment plants; $20,084 for new water mains and customer service lines;
$30,101 for the rehabilitation of existing water mains; $9,835 to rehabilitate
hydrants and customer service lines; $19,238 for water meters and $4,945 for the
construction of a divisional operations center. During this five year period,
PSW received $7,702 of advances and contributions in aid of construction to
finance new water mains. In addition to its capital program, PSW has made
sinking fund contributions aggregating $3,536, retired $71,700 of debt and
$5,786 of preferred stock, and has refunded $9,639 of customer advances for
construction. PSW has also expended $71,634 related to the acquisition of 19
water systems and 2 small wastewater utilities since 1993.
Since net operating cash flow to PSW plus advances and contributions in
aid of construction have not been sufficient to fully fund its cash
requirements, PSW issued approximately $141,000 of First Mortgage Bonds, and
received $32,495 of equity investments from the Company during the past five
years.
<PAGE>
The Company has funded its investment in PSW with the proceeds from the
sale of stock and the sale of its discontinued operations. In April 1993, the
Company sold 2,200,000 shares of common stock in a public offering for net
proceeds of $18,331. The Company has also sold 3,901,636 original issue shares
of common stock for net proceeds of $41,423 since 1993 through three programs
that allowed existing shareholders and customers of PSW to purchase shares of
common stock directly from the Company as described in the following table:
<TABLE>
<CAPTION>
Customer Optional
Stock Dividend Stock
Purchase Reinvestment Purchase
Program Program Program Total
- -------------------------------------------------------------------------------------------
Net proceeds:
<S> <C> <C> <C> <C>
1993 $ 5,465 $ 1,491 $ 583 $ 7,539
1994 3,541 2,047 603 6,191
1995 4,680 2,324 842 7,846
1996 7,953 3,111 1,216 12,280
1997 3,122 3,650 795 7,567
- ------------------------------------------------------------------------------------------
$24,761 $ 12,623 $ 4,039 $ 41,423
==========================================================================================
Shares issued:
1993 597,880 173,408 63,715 835,003
1994 401,380 234,040 66,216 701,636
1995 510,911 265,820 91,337 868,068
1996 644,151 266,129 97,353 1,007,633
1997 201,092 237,437 50,767 489,296
- ------------------------------------------------------------------------------------------
2,355,414 1,176,834 369,388 3,901,636
==========================================================================================
</TABLE>
In December 1997, the Company adopted a Dividend Reinvestment and
Direct Stock Purchase Plan ("Plan") that replaced the Customer Stock Purchase
Plan and the Dividend Reinvestment and Optional Stock Purchase Plan. Under the
direct stock purchase portion of the Plan, shares are sold throughout the year,
instead of during quarterly subscription periods, and the shares are obtained by
the Company's transfer agent in the open market instead of original issue shares
of stock. The dividend reinvestment portion of the Plan continues to offer a 5%
discount on the purchase of original issue shares of common stock with
reinvested dividends. As of the December 1997 dividend payment, holders of 23%
of the common shares outstanding participated in the dividend reinvestment
portion of the Plan.
In August 1997, the Board of Directors approved a resolution
authorizing the Company to purchase 500,000 shares of its common stock in the
open market or through privately negotiated transactions. A similar resolution
was approved in 1993. Management has used this authority, from time to time, to
offset the dilutive effect on earnings per share resulting from the original
issue shares issued through the plans previously discussed. During 1997, 1996
and 1995, the Company purchased 152,000, 4,339 and 78,912 shares at a net cost
of $2,284, $52 and $733, respectively. (For comparative purposes, the numbers of
shares in the previous sentence have been adjusted to give effect to the 1997
4-for-3 common stock split in the form of a stock distribution). As of December
31, 1997, the remaining number of shares the Company may purchase under the
Board of Director's authorization is 628,145. Funding for future stock
purchases, if any, is not expected to have a material impact on the Company's
financial position.
<PAGE>
PSW's planned 1998 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $55,000 of which $33,400 is for DSIC qualified projects. PSW has increased
its capital spending for infrastructure rehabilitation in response to the DSIC.
Should the DSIC be discontinued for any reason, which is not anticipated, PSW
would likely reduce its capital program significantly. The 1998 capital program,
along with the January 1998 acquisition of the water utility assets of the West
Chester Area Municipal Authority, $2,448 of sinking fund obligations and $4,214
of preferred stock redemptions is expected to be financed through
internally-generated funds, the revolving credit facility, equity investments
from the Company, and issuance of new long-term debt.
In January 1998, the Company registered 1,100,000 of shares of common
stock for sale in a public offering that it expects to complete in February
1998. Based on the market price of the Company's common stock in late January
1998, the Company anticipates proceeds of $25,239, net of expenses, from this
offering, $28,706 if the underwriters' option to sell an additional 150,000
shares is exercised. The proceeds of this offering will be used to make a
$19,000 equity contribution to PSW and to repay short-term debt.
PSW continues to hold acquisition discussions with several water
systems that are near or adjacent to PSW's service territory. The cash needed
for acquisitions is expected to be funded initially with short-term debt with
subsequent repayment from the proceeds of long-term debt or equity investments
from the Company.
Future utility construction in the period 1999 through 2002, including
recurring programs, such as the ongoing replacement of water meters, the
rehabilitation of water mains and additional transmission mains to meet customer
demands, exclusive of the costs of new mains financed by advances and
contributions in aid of construction, is estimated to require aggregate
expenditures of approximately $200,000, the majority of which will be DSIC
qualified projects to rehabilitate the distribution system. The Company
anticipates that approximately 50% of these expenditures will require external
financing including the additional issuance of Common Stock through the
Company's dividend reinvestment plan and possible future public equity
offerings. The Company expects to refinance $20,238 of debt maturities during
this period as they become due with new issues of long-term debt. The estimates
discussed above do not include any amounts for possible future acquisitions of
water systems or the financing necessary to support them.
PSW's ability to finance its future construction programs, as well as
its acquisition activities, depends on its ability to attract the necessary
external financing and maintain or increase internally-generated funds. Rate
orders permitting compensatory rates of return on invested capital and timely
rate adjustments will be required to allow PSW to achieve an adequate level of
earnings to enable it to secure the capital it will need and to maintain
satisfactory debt coverage ratios.
<PAGE>
Capitalization
The following table summarizes PSC's capitalization during the past
five years:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt* 54.2% 55.3% 53.5% 49.9% 50.7%
Preferred stock * 1.7% 2.1% 2.0% 3.3% 3.4%
Common stockholders' equity 44.1% 42.6% 44.5% 46.8% 45.9%
- -----------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
=========================================================================================
</TABLE>
*includes current portion
The changes in the capitalization ratios result from the issuance of
common stock over the past five years, particularly in 1993, and the issuance of
debt by PSW to finance its acquisitions and capital program. It is the Company's
and PSW's goal to maintain an equity ratio adequate to support PSW's current
Standard and Poors debt rating of "A" and the expected issuance of common stock
in an underwritten public offering in February 1998 will increase its common
equity ratio.
Impact of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which introduces new methods for calculating earnings per share.
The Company adopted this Statement, as required, in December 1997. The adoption
of this Statement required the Company to restate earnings per share reported in
prior periods.
In June 1997, the 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 plans to adopt this Statement on January 1, 1998, as
required.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). This Statement 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 establishes standards for related disclosure
about products and services, geographic areas and major customers. The Company
plans to adopt this statement on January 1, 1998, as required. The adoption of
this Statement will not affect results from operations, financial conditions or
long-term liquidity.
<PAGE>
Dividends on Common Stock
Following is a recent history, adjusted for the 1997 4-for-3 common
stock split in the form of a stock distribution, of the Company's income from
continuing operations and dividends:
- --------------------------------------------------------------------------------
Basic
income per
share from Dividend
Cash dividend continuing payout
per common share operations ratio
- --------------------------------------------------------------------------------
1993 $0.54 $0.64 84%
1994 0.55 0.68 81%
1995 0.57 0.75 76%
1996 0.59 0.79 75%
1997 0.62 0.89 70%
- --------------------------------------------------------------------------------
Dividends have averaged approximately 77% of income from continuing
operations during this period. During 1997, the Board of Directors increased the
dividend rate by 7%. As a result, beginning with the dividend payable in March
1998, the annual dividend rate increased to $.65 per share.
<PAGE>
MANAGEMENT'S REPORT
The consolidated financial statements and related information for the
years ended December 31, 1997, 1996 and 1995 were prepared by management in
accordance with generally accepted accounting principles and include
management's best estimates and judgments, as required. Financial information
included in other sections of this annual report is consistent with that in the
consolidated financial statements.
The Company has an internal accounting control structure designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly authorized and recorded in accordance with established policies and
procedures. The internal control structure is supported by the selection and
training of qualified personnel, the delegation of management authority and
responsibility and dissemination of policies and procedures.
The Company's independent auditors, KPMG Peat Marwick LLP, provide an
independent review of management's reporting of results of operations and
financial condition. KPMG has audited the financial statements by conducting
tests as they deemed appropriate and their report follows.
The Board of Directors through the Audit Committee selects the
Company's independent auditors and reviews the scope and results of their
audits. The Audit Committee also reviews the adequacy of the Company's internal
control structure and other significant matters. The Audit Committee is
comprised of four outside Directors who meet periodically with management and
the independent auditors. The Audit Committee held two meetings in 1997.
Nicholas DeBenedictis Michael P. Graham
Chairman & Senior Vice President - Finance
President & Treasurer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Philadelphia Suburban Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Philadelphia Suburban Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, and cash flow for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Philadelphia
Suburban Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
January 28, 1998
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earned revenues $136,171 $122,503 $117,044
Costs and expenses:
Operating expenses 55,899 51,615 51,702
Depreciation 14,311 13,068 11,572
Amortization 269 265 (15)
Taxes other than income taxes 8,893 8,265 7,676
------- ------- -------
79,372 73,213 70,935
Operating income 56,799 49,290 46,109
Interest expense 17,890 15,311 14,852
Dividends on preferred stock of subsidiary 370 494 631
Allowance for funds used during construction (522) (264) (305)
------- ------- -------
Income from continuing operations before income
taxes 39,061 33,749 30,931
Provision for income taxes 15,873 13,971 12,901
------- ------- -------
Income from continuing operations 23,188 19,778 18,030
Reversal of reserve for discontinued operations,
net of income tax of $520 and $200, in
1996 and 1995 -- 965 370
------- ------- -------
Net income 23,188 20,743 18,400
Dividends on preferred stock 195 21 --
------- ------- -------
Net income available to common stock $ 22,993 $ 20,722 $ 18,400
======== ======== ========
Basic net income per common share:
Continuing operations $ 0.89 $ 0.79 $ 0.75
Discontinued operations -- 0.04 0.02
------- ------- -------
Total $ 0.89 $ 0.83 $ 0.77
======== ======== ========
Diluted net income per common share:
Continuing operations $ 0.88 $ 0.78 $ 0.75
Discontinued operations -- 0.04 0.02
------- ------- -------
Total $ 0.88 $ 0.82 $ 0.77
======== ======= =======
Average common shares outstanding during the period 25,908 24,966 23,803
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
------
Property, plant and equipment, at cost $656,011 $612,812
Less accumulated depreciation 121,528 109,874
-------- --------
Net property, plant and equipment 534,483 502,938
Current assets:
Cash 680 1,518
Accounts receivable, net 23,534 21,914
Inventory, materials and supplies 1,847 1,943
Prepayments and other current assets 1,002 660
------- -------
Total curent assets 27,063 26,035
Regulatory assets 51,203 48,491
Deferred charges and other assets, net 5,723 5,480
------- --------
$618,472 $582,944
======== ========
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 26,210,654
and 25,598,105 in 1997 and 1996 13,294 9,731
Capital in excess of par value 128,065 121,439
Retained earnings 56,136 49,272
Treasury stock, 376,510 and 262,230 shares
in 1997 and 1996 (5,970) (3,647)
------- -------
Total stockholders' equity 194,745 180,015
------- -------
Preferred stock of subsidiary with mandatory
redemption requirements -- 4,214
Long-term debt, excluding current portion 232,471 217,518
Commitments -- --
Current liabilities:
Current portion of long-term debt and preferred
stock of subsidiary 6,662 13,873
Loans payable 10,400 5,560
Accounts payable 10,259 9,659
Accrued interest 3,978 3,660
Accrued taxes 3,643 3,363
Other accrued liabilities 9,755 8,924
------- -------
Total current liabilities 44,697 45,039
------- -------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 83,129 75,949
Customers' advances for construction 25,810 23,524
Other 12,764 12,826
------- -------
Total deferred credits and other liabilities 121,703 112,299
------- -------
Contributions in aid of construction 24,856 23,859
------- -------
$618,472 $582,944
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock, %.50 par value 13,294 9,731
Capital in excess of par value 128,065 121,439
Retained earnings 56,136 49,272
Treasury stock (5,970) (3,647)
------- -------
Total stockholders' equity 194,745 180,015
------- -------
Preferred stock of subsidiary with mandatory
redemption requirements 4,214 5,643
Current portion of preferred stock of subsidiary 4,214 1,429
------- -------
-- 4,214
------- -------
Long-term debt:
First Mortgage Bonds secured by utility plant:
8.44% Series, due 1997 -- 12,000
5.95% Series, due 2002* 2,000 2,400
6.30% Series, due 2002 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 --
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 --
9.89% Series, due 2008 5,000 5,000
7.15% Series, due 2008* 22,000 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 206,200 188,600
Note payable to bank under revolving credit
agreement, due March 1998 27,128 39,727
Installment note payable, 9%, due in equal annual
payments through 2013 1,591 1,635
------- -------
234,919 229,962
Current portion of long-term debt 2,448 12,444
------- -------
Long-term debt, excluding current portion 232,471 217,518
------- -------
Total capitalization $427,216 $401,747
======== =======
</TABLE>
* Trust indentures relating to these First Mortgage Bonds require annual
sinking fund payments.
See accompanying notes to consolidated financial statements.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands of dollars)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $23,188 $19,778 $18,030
Adjustments to reconcile income from
continuing operations to net cash
flows from operating activities:
Depreciation and amortization 14,580 13,333 11,557
Deferred taxes, net of taxes on
customers' advances 3,797 2,628 2,573
Net increase in receivables,
inventory and prepayments (1,396) (517) (2,037)
Net increase in payables, accrued interest
and other accrued liabilities 2,354 1,748 4,604
Other (680) 452 (1,773)
------- ------- -------
Net cash flows from operating activities 41,843 37,422 32,954
------- ------- -------
Cash flows from investing activities:
Property, plant and equipment additions,
including allowance for funds used during
construction of $522, $264 and $305 (38,960) (31,389) (33,182)
Acquisitions of water and wastewater systems (1,226) (42,122) (26,351)
Other (535) 24 (91)
------- ------- -------
Net cash flows used in investing activities (40,721) (73,487) (59,624)
------- ------- -------
Cash flows from financing activites:
Customers' advances and contributions in aid of
construction 953 470 1,600
Repayments of customers' advances (2,408) (2,142) (2,104)
Net proceeds (repayments) of short-term debt 4,840 (895) 2,405
Proceeds from long-term debt 29,665 64,256 57,906
Repayments of long-term debt including
premium on early retirement (25,042) (24,094) (23,585)
Redemption of preferred stock of subsidiary (1,428) (1,500) (2,857)
Proceeds from issuing common stock 10,695 14,651 9,060
Repurchase of common stock (2,829) (760) (733)
Dividends paid on preferred stock (195) (4) --
Dividends paid on common stock (16,129) (14,795) (13,546)
Other (82) (167) (154)
------- ------- -------
Net cash flows from (used in) financing activities (1,960) 35,020 27,992
------- ------- -------
Net cash flows from (used in) discontinued operations -- 176 (178)
------- ------- -------
Net increase (decrease) in cash (838) (869) 1,144
Cash balance beginning of year 1,518 2,387 1,243
------- ------- -------
Cash balance end of year $ 680 $ 1,518 $ 2,387
======== ======= =======
</TABLE>
See Acquisitions footnote for description of non-cash investing and financing
activities.
See accompanying notes to consolidated financial statements.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Summary of Significant Accounting Policies
Nature of Operations
The business of Philadelphia Suburban Corporation (the "Company") is
conducted primarily through its subsidiary Philadelphia Suburban Water Company
("PSW"). PSW is a regulated public utility which supplies water to approximately
288,000 customers. The customers are residential, commercial and industrial in
nature, and no single customer accounted for more than one percent of PSW's
sales. The service territory of PSW covers a 464 square mile area located west
and north of the City of Philadelphia. In addition, PSW provides water service
to approximately 6,000 customers through an operating and maintenance contract
with a municipal authority contiguous to its service territory. PSW is subject
to regulation by the Pennsylvania Public Utility Commission ("PUC") which has
jurisdiction with respect to rates, service, accounting procedures, issuance of
securities, acquisitions and other matters.
Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All material
intercompany accounts and transactions have been eliminated.
Recognition of Revenues
Revenues include amounts billed to customers on a cycle basis and
unbilled amounts based on estimated usage from the latest billing to the end of
the accounting period.
Non-utility revenues are recognized when services are performed.
Net Income per Common Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" in the fourth quarter of 1997. SFAS No.
128 requires the Company to use methods for calculating earnings per share that
differ from methods used in prior periods and requires the Company to restate
net income per share reported in prior periods. The adoption of this statement
had no effect on the results of operations, financial conditions, or long-term
liquidity.
Property, Plant and Equipment and Depreciation
Property, plant and equipment consist primarily of utility plant. The
cost of additions includes contracted cost, direct labor and fringe benefits,
materials, overheads and, for certain utility plant, allowance for funds used
during construction. Water systems acquired are recorded at estimated original
cost of utility plant when first devoted to utility service and the applicable
depreciation is recorded to accumulated depreciation. The difference between the
estimated original cost, less applicable depreciation, and the purchase price is
recorded as an acquisition adjustment within utility plant. At December 31,
1997, utility plant includes a credit acquisition adjustment of $6,719, which is
being amortized over 20 years. Consistent with PSW's rate settlements, $449 was
amortized during 1997, $526 was amortized during 1996 and $529 was amortized
during 1995.
Utility expenditures for maintenance and repairs, including minor
renewals and betterments, are charged to operating expenses in accordance with
the Uniform System of Accounts prescribed by the PUC. The cost of new units of
5
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
property and betterments are capitalized. When units of utility
property are replaced, retired or abandoned, the recorded value thereof is
credited to the asset account and such value, together with the net cost of
removal, is charged to accumulated depreciation.
The straight-line remaining life method is used to compute depreciation
on utility plant. The straight-line method is used with respect to
transportation and mechanical equipment, office equipment and laboratory
equipment.
In accordance with the requirements of SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of", the long-lived assets of the Company, which consist primarily of Utility
Plant in Service and a regulatory asset, have been reviewed for impairment.
There has been no change in circumstances or events that have occurred that
require adjustments to the carrying values of these assets.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") is a
non-cash credit which represents the estimated cost of funds used to finance the
construction of utility plant. AFUDC is applied to construction projects
requiring more than one month to complete. No AFUDC is applied to projects
funded by customer advances for construction or contributions in aid of
construction. AFUDC includes the net cost of borrowed funds and a rate of return
on other funds when used, and is recovered through water rates as the utility
plant is depreciated. There was no AFUDC related to equity funds in any of the
years presented.
Deferred Charges and Other Assets
Deferred bond and preferred stock issuance expenses are amortized by
the straight-line method over the life of the related issues.
Call premiums related to the early redemption of long-term debt, along
with the unamortized balance of the related issuance expense, are deferred and
amortized over the life of the long-term debt used to fund the redemption.
Expenses associated with filing for rate increases are deferred and
amortized over approximately 18 months. Other costs, for which PSW has received
or expects to receive prospective rate recovery, are deferred and amortized over
the period of rate recovery.
Income Taxes
The Company accounts for certain income and expense items in different
time periods for financial reporting than for tax reporting purposes. Deferred
income taxes are provided on the temporary differences between the tax basis of
the assets and liabilities and the amounts at which they are carried in the
financial statements. These deferred income taxes are based on the enacted tax
rates expected to be in effect when such temporary differences are projected to
reverse.
Customers' Advances for Construction
Water mains or, in some instances, cash advances to reimburse PSW its
costs to construct water mains, are contributed to PSW by customers, real estate
developers and builders in order to extend water service to their properties.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The value of these contributions is recorded as Customers' Advances for
Construction. PSW makes refunds on these advances over a specific period of time
based on operating revenues related to the main or as new customers are
connected to and take service from the main. After all refunds are made, any
remaining balance is transferred to Contributions in Aid of Construction.
Contributions in Aid of Construction
Contributions in aid of construction include direct non-refundable
contributions and the portion of customers' advances for construction that
become non-refundable.
Inventories, Materials and Supplies
Inventories are stated at cost, not in excess of market value. Cost is
determined using the first-in, first-out method.
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", electing the provision of the statement allowing it to continue
its practice of not recognizing compensation expense related to granting of
stock options to the extent that the option price of the underlying stock was
equal to, or greater than, the market price on the date of option grant.
Disclosure of the impact on the results of operations, had the Company elected
to recognize compensation expense, is provided in the Employee Stock and
Incentive Plans footnote as required by the Statement.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year's presentation.
Acquisitions
During 1997, PSW made the following acquisitions: in January, the
franchise rights and the water utility assets of Cherry Water Company; in
September, the franchise rights and water utility assets of Perkiomen Township
and in September, the franchise rights and both the water and wastewater utility
assets of the Peddler's View Utility Company. The systems acquired in 1997
incorporate two square miles of service area near PSW's existing territory. The
total purchase price for the three water systems and wastewater system acquired
in 1997 was $1,226. The annual revenues from these systems approximate $300, and
revenues included in the consolidated financial statements during the period
owned by PSW were $175.
During 1996, PSW made the following acquisitions: in October the
franchise rights and the water utility assets of Hatboro Borough Authority; in
November, Utility Group Services Corporation ("UGS") which owned three water
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
utilities and a wastewater utility; in December, the franchise rights and the
water utility assets of Bristol Borough Water and Sewer Authority and at various
times during 1996 the franchise rights and the water utility assets of three
smaller water systems. The total purchase price for the eight water systems and
wastewater system acquired in 1996 was $47,889, including the issuance of $3,220
of the Company's preferred stock and the assumption of $2,547 in liabilities.
These systems have a combined service territory of 64 square miles. Revenues
included in the consolidated financial statements related to the systems
acquired in 1996 were $5,902 in 1997 and $466 in 1996.
In May 1995, PSW purchased the franchise rights and the water utility
assets of Media Borough ("Media"). The Media system covers a 23 square mile
service area contiguous to PSW's service territory. In addition, PSW purchased
the franchise rights and the water utility assets of four smaller water systems
in 1995 that cover a combined service territory of four square miles. PSW paid
$26,351 for the water systems acquired in 1995. These systems serve customers
within or contiguous to the boundaries of PSW's existing service territory.
Revenues included in the consolidated financial statements related to the water
supply systems acquired in 1995 were $4,954 in 1997, $4,470 in 1996 and $2,820
in 1995.
In addition, in January 1998, PSW purchased the franchise rights and
the water utility assets of West Chester Area Municipal Authority ("West
Chester") for $22,400 in cash, subject to minor adjustment related to the final
value of current assets transferred and recent capital expenditures. 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.
PSW has also entered into a letter of intent to acquire the Flying Hills Water
Company ("Flying Hills") in a purchase transaction for approximately 45,000
shares of the Company's Common Stock. This transaction, which is subject to
final negotiation and the approval of the PUC, is expected to be completed in
the first quarter of 1998. The Flying Hills system covers a one square mile area
in Berks County near Reading, Pennsylvania and is 16 miles from the nearest edge
of PSW's system. The annual revenues of the Flying Hills system approximate
$200.
Property, Plant and Equipment
December 31,
------------------------
1997 1996
------------------------
Utility plant and equipment $641,303 $604,298
Utility construction work in progress 12,426 6,232
Non-utility plant and equipment 2,282 2,282
------------------------
Total property, plant and equipment $656,011 $612,812
========================
Depreciation is computed based on estimated useful lives of 5 to 110
years for utility plant and 3 to 10 years for both utility transportation and
mechanical equipment and all non-utility plant and equipment.
8
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Accounts Receivable
December 31,
-----------------
1997 1996
-----------------
Billed water revenue $ 9,230 $ 9,760
Unbilled water revenue 13,949 11,764
Other 855 690
-----------------
24,034 22,214
Less allowance for doubtful accounts 500 300
-----------------
Net accounts receivable $23,534 $21,914
=================
All of the Company's customers are located in southeastern
Pennsylvania. No single customer accounted for more than one percent of the
Company's sales in 1997 or 1996 and no account receivable from any customer
exceeded one percent of the Company's total stockholders' equity.
Regulatory Asset
The regulatory asset represents costs which have been prudently
incurred and are expected to be fully recovered in future rates. The two
components of this asset are deferred income taxes and postretirement benefits
other than pensions. Items giving rise to deferred state income taxes, as well
as a portion of deferred Federal income taxes related to certain differences
between tax and book depreciation expense, are recognized in the rate setting
process on a cash or flow-through basis and will be recovered as they reverse.
The portion of the asset related to postretirement benefits other than pensions
represents costs that were deferred during the period that the accrual method of
accounting for these benefits was adopted in 1993 and the recognition of the
accrual method in the Company's rates in 1994. Amortization of the amount
deferred for postretirement benefits other than pensions began in 1994 and is
currently being recovered in rates.
December 31,
-------------------
1997 1996
-------------------
Income taxes $49,229 $46,381
Postretirement benefits other than pensions 1,974 2,110
-------------------
$51,203 $48,491
===================
9
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Income Taxes
Total income tax expense is allocated as follows:
Years Ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Income from continuing operations $ 15,873 $13,971 $12,901
Common stockholders' equity related
to stock option activity which
reduces taxable income (401) (126) (44)
Discontinued operations - 520 200
---------------------------------
$ 15,472 $14,365 $13,057
=================================
Income tax expense attributable to income from continuing operations
consists of:
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
Current:
Federal $ 8,742 $ 8,084 $ 7,688
State 2,800 2,600 2,514
-----------------------------------
11,542 10,684 10,202
-----------------------------------
Deferred:
Federal 4,004 3,002 2,565
State 327 285 134
-----------------------------------
4,331 3,287 2,699
-----------------------------------
Total tax expense $15,873 $13,971 $12,901
===================================
The significant components of deferred income tax expense are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Excess of tax over financial statement depreciation $ 3,308 $ 2,458 $ 2,323
Amortization of deferred investment tax credits (105) (115) (151)
Current year investment tax credits deferred 35 40 90
Differences in basis of fixed assets due to variations
in tax and book accounting methods that reverse
through depreciation 860 770 819
Customers' advances for construction, net 556 196 (443)
Other, net (323) (62) 61
----------------------------------
Total deferred income tax expense $ 4,331 $ 3,287 $ 2,699
==================================
</TABLE>
The statutory Federal tax rate is 35% and the Pennsylvania Corporate
Net Income Tax rate is 9.99% for all years presented.
10
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The reasons for the differences between amounts computed by applying
the statutory Federal income tax rate to income from continuing operations
before Federal tax and the actual Federal tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Computed Federal tax expense at statutory rate $12,508 $10,795 $9,899
Increase (decrease) in tax expense for items to be
recovered in future rates:
Depreciation expense 70 179 132
Losses on asset disposals (2) (12) (35)
Amortization of deferred investment tax credits (105) (115) (151)
Preferred stock dividend 197 180 221
Other, net 78 59 187
--------------------------------
Actual Federal tax expense $12,746 $11,086 $10,253
================================
</TABLE>
The tax effects of temporary differences between book and tax
accounting that give rise to the deferred tax assets and deferred tax
liabilities are as follows:
December 31,
---------------------
1997 1996
---------------------
Deferred tax assets:
Customers' advances for construction $ 9,198 $ 9,753
Costs expensed for book not deducted
for tax, principally accrued expenses
and bad debt reserves 2,393 2,638
Other 642 389
---------------------
Total gross deferred tax assets 12,233 12,780
---------------------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and differences in the basis
of fixed assets due to variation in tax
and book accounting 71,888 65,666
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences 18,937 17,801
Deferred investment tax credit 4,218 4,288
Other 319 974
----------------------
Total gross deferred tax liabilities 95,362 88,729
----------------------
Net deferred tax liability $83,129 $75,949
======================
The Company made income tax payments, which include amounts related to
discontinued operations, of $11,346, $10,199 and $9,730 in 1997, 1996 and 1995,
respectively. The Company's Federal income tax returns for all years through
1993 have been closed.
11
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Commitments
PSW maintains agreements with the Chester Water Authority and the Bucks
County Water and Sewer Authority for the purchase of water to supplement its
water supply, particularly during periods of peak demand. The agreements
stipulate purchases of minimum quantities of water to the year 2017. The
estimated annual commitments related to such purchases total approximately
$2,852 through 2002. PSW purchased approximately $2,978, $2,889 and $2,839 of
water under these agreements during the years ended December 31, 1997, 1996 and
1995, respectively.
PSW leases motor vehicles and other equipment under operating leases
that are noncancelable and expire on various dates through 2002. During the next
five years, $2,698 of future minimum lease payments are due: $1,026 in 1998,
$834 in 1999, $504 in 2000, $315 in 2001 and $8 in 2002. PSW leases parcels of
land on which its Media treatment plant and other facilities are situated and
adjacent parcels that are used for watershed protection. The operating lease is
noncancelable, expires in 2045 and contains certain renewal provisions. The
lease is subject to an adjustment every five years based on changes in the
Consumer Price Index. During each of the next five years, $292 of lease payments
for land are due.
Rent expense was $1,297, $1,332 and $1,067 for the years ended December
31, 1997, 1996 and 1995, respectively.
Long-term Debt and Loans Payable
The Consolidated Statements of Capitalization provides a listing of
long-term debt and loans outstanding as of December 31, 1997 and 1996. The
supplemental indentures with respect to certain issues of the First Mortgage
Bonds restrict the ability of PSW to declare dividends, in cash or property, or
repurchase or otherwise acquire PSW's stock. As of December 31, 1997,
approximately $120,000 of retained earnings were free of these restrictions.
Certain supplemental indentures also prohibit PSW from making loans to or
purchasing the stock of the Company.
Excluding amounts due under PSW's revolving credit agreement, the
Company's sinking fund payments and debt maturities for the next five years are
as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sinking fund payments $ 2,448 $ 2,452 $ 2,457 $ 2,462 $ 2,867
Maturities - - - - 10,000
----------------------------------------------------------------------
Total $ 2,448 $ 2,452 $ 2,457 $ 2,462 $12,867
======================================================================
</TABLE>
In July 1997, PSW established a two-year $150,000 medium-term note
program providing for the issuance of long-term debt with maturities ranging
between one and 35 years at fixed rates of interest, as determined at the time
of issuance. This program replaced a similar program that expired in March 1997.
The notes issued under this program are secured by the Thirty-First Supplement
to the trust indenture relating to PSW's First Mortgage Bonds. During 1997,
issuances through these programs were as follows: $10,000 in March 1997, 7.06%
Series due 2004; $10,000 in July 1997, 6.75% Series due 2007; $10,000 in October
1997, 6.3% Series due 2002. During 1996, issuances through these programs were
as follows: $10,000 in April 1996, 6.99% Series due 2006; $10,000 in July 1996,
7.47% Series due 2003; and $10,000 in November 1996, 6.83% Series due 2003. The
proceeds from these issuances were used to fund acquisitions, the retirement of
the First Mortgage Bonds noted below and for PSW's ongoing capital program.
12
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In January 1998, PSW issued $10,000 6.14% Series due 2008 and $10,000
5.8% Series due 2003 through the medium-term note program. Proceeds from these
issues were used to reduce the balance of PSW's revolving credit facility.
In January 1996, PSW retired $5,000 of First Mortgage Bonds, 7.875%
Series due 1997, at a premium of .331% or $17 and $4,150 of First Mortgage
Bonds, 8.4% Series due 2002, at a premium of 2.1% or $87. In April 1996, PSW
retired $10,000 of First Mortgage Bonds, 10.65% Series due 2006, at a premium of
5.04% or $504. The unamortized bond issuance expenses related to the retirements
in 1996 were $25. The premiums paid on the early retirement of debt, along with
the related unamortized bond issuance expense, are capitalized and amortized, in
accordance with the Uniform System of Accounts prescribed by the PUC, over the
life of the long-term debt used to fund the redemption.
In February 1994, PSW entered into a revolving credit agreement with
four banks. In January 1998, PSW extended its revolving credit agreement, that
was due to expire in March 1998, until January 2000 and increased the available
borrowings under this facility from $30,000 to $50,000. Accordingly, amounts
borrowed under this facility as of December 31, 1997 have been classified as
long-term debt. The agreement was also amended in prior years to temporarily
increase the available borrowings under this facility. Interest under this
facility is based, at PSW's option, on the prime rate, an adjusted federal funds
rate, an adjusted certificate of deposit rate corresponding to the interest
period selected, an adjusted Euro-Rate corresponding to the interest period
selected or at rates offered by the banks. This agreement restricts the total
amount of short-term borrowings of PSW. A commitment fee of 1/8 of 1% is charged
on the unused portion of the loan. The average cost of borrowing under this
facility was 6.08% and 6.02%, and the average borrowing was $36,746 and $14,326,
during 1997 and 1996, respectively. The maximum amount outstanding at the end of
any one month was $48,743 in 1997 and $39,727 in 1996.
At December 31, 1997 and 1996, the Company and PSW had combined
short-term lines of credit of $16,000. Funds borrowed under these lines are
classified as loans payable and are used to provide working capital. The average
borrowing under the lines was $8,009 and $5,123 during 1997 and 1996,
respectively. The maximum amount outstanding at the end of any one month was
$11,090 in 1997 and $6,820 in 1996. Interest under the lines is based at the
Company's option, depending on the line, on the prime rate, an adjusted
Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The
average cost of borrowings under all lines during 1997 and 1996 was 6.1%.
The total amount of interest paid on all borrowings, net of amounts
capitalized, was $17,616, $15,503 and $14,923 in 1997, 1996 and 1995,
respectively. The proforma weighted cost of long-term debt at December 31, 1997
and 1996 was 7.5% and 7.7%, respectively.
13
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Preferred Stock of Subsidiary with Mandatory Redemption Requirements
PSW is authorized to issue up to 1,000,000 shares of preferred stock,
with stated par value, in one or more series. In 1991, PSW issued 100,000 shares
of 8.66% Series 1 Cumulative Preferred Stock, at par value of $100 per share in
a private placement. Dividends on this issue are payable quarterly and are
cumulative. PSW may not pay dividends on its common stock unless provision has
been made for payment of the preferred dividends. As of December 31, 1997, all
preferred dividends have been provided for. These shares are subject to
mandatory annual redemption equal to the par value of 14,285 shares plus accrued
dividends. In addition, PSW has exercised its right to call 14,285 shares per
year starting in 1995, up to a maximum of 15,000 shares over the life of the
issue, at par. The balance may be called, beginning in 1998, at a specified
price above par.
In December 1997, PSW provided notice to the holder of the preferred
stock of its intention to call all the remaining shares in January 1998. As
required by the share purchase agreement, 14,285 shares were redeemed at par
value and a 4% premium or $111 was paid on the remaining 27,860 shares
outstanding. Accordingly, $4,214 has been classified as the current portion of
preferred stock as of December 31, 1997.
Fair Value of Financial Instruments
The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as of the dates
presented. The carrying amount and estimated fair value of the Company's
long-term debt as of December 31, 1997 is $234,919 and $254,998, respectively.
The fair value of long-term debt has been determined by discounting the future
cash flows using current market interest rates for similar financial instruments
of the same duration.
The Company's customers' advances for construction and related tax
deposits have carrying values of $25,810 and $6,092, respectively at December
31, 1997. 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. Portions of these
non-interest bearing instruments are payable annually through 2018 and amounts
not paid by the contract expiration dates become non-refundable. The fair value
of these amounts would, however, be less than their carrying value due to the
non-interest bearing feature.
Stockholders' Equity
At December 31, 1997, the Company had 1,770,819 shares of Series
Preferred Stock with a $1.00 par value authorized, of which 100,000 shares are
designated as Series A Preferred Stock. During 1996, the Company designated
32,200 shares as Series B Preferred Stock, $1.00 par value. The Series A
Preferred Stock, as well as the undesignated shares of Series Preferred Stock,
remains unissued. In 1996, the Company issued all of the 6.05% Series B
Preferred Stock in connection with the acquisition of UGS. The Series B
Preferred Stock is recorded on the balance sheet at its liquidation value of
$100 per share. The dividends, payment of which commenced December 1, 1996, are
cumulative and payable quarterly. PSC may not pay dividends on common stock
unless provision has been made for payment of the preferred dividends. Under the
provisions of this issue, the holders may redeem the shares, in whole or in
part, at the liquidation value beginning December 1, 1998 and the Company may
redeem up to 20% of this issue each year beginning December 1, 2001 and, at the
holders' option, this redemption may be made in cash or through the issuance of
debt with a five year maturity at an interest rate of 6.05%. As of December 31,
1997, all dividends have been provided for.
14
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In December 1997, the Company's Board of Directors declared a 4-for-3
common stock split effected in the form of a 33.3% stock distribution for all
common shares outstanding, to shareholders of record on December 15, 1997.
Common shares outstanding do not include shares held by the Company in treasury.
The new shares were distributed on January 12, 1998. The Company's par value of
$.50 per share remained unchanged and $3,276 was transferred from Capital in
Excess of Par Value to Common Stock to record the split. All share and per share
data for all periods presented have been restated to give effect to the stock
split.
At December 31, 1997, the Company had 40,000,000 shares of common stock
authorized; par value $.50. Shares outstanding at December 31, 1997, 1996 and
1995 were 26,210,654, 25,598,105 and 24,377,496, respectively. Treasury shares
held at December 31, 1997, 1996 and 1995 were 376,510, 262,230 and 259,125,
respectively.
The following table summarizes the activity of common stockholders'
equity:
<TABLE>
<CAPTION>
Capital in
Common Treasury excess of Retained
stock stock par value earnings Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 5,979 $ (3,239) $ 102,564 $ 38,491 $ 143,795
Net income -- -- -- 18,400 18,400
Dividends -- -- -- (13,546) (13,546)
Sale of stock 217 392 7,621 -- 8,230
Repurchase of stock -- (733) -- -- (733)
Equity Compensation Plan 1 -- 31 -- 32
Exercise of stock options 27 -- 771 -- 798
--------------------------------------------------------------------------
Balance at December 31, 1995 6,224 (3,580) 110,987 43,345 156,976
--------------------------------------------------------------------------
Net income -- -- -- 20,722 20,722
Dividends -- -- -- (14,795) (14,795)
Stock split 3,140 -- (3,140) -- --
Sale of stock 298 693 11,546 -- 12,537
Repurchase of stock -- (760) -- -- (760)
Equity Compensation Plan 1 -- 38 -- 39
Exercise of stock options 68 -- 2,008 -- 2,076
--------------------------------------------------------------------------
Balance at December 31, 1996 9,731 (3,647) 121,439 49,272 176,795
--------------------------------------------------------------------------
Net income -- -- -- 22,993 22,993
Dividends -- -- -- (16,129) (16,129)
Stock split 3,276 -- (3,276) -- --
Sale of stock 178 506 7,128 -- 7,812
Repurchase of stock -- (2,829) -- -- (2,829)
Equity Compensation Plan 1 -- 50 -- 51
Exercise of stock options 108 -- 2,724 -- 2,832
--------------------------------------------------------------------------
Balance at December 31, 1997 $ 13,294 $ (5,970) $ 128,065 $ 56,136 $ 191,525
==========================================================================
</TABLE>
In January 1998, the Company registered 1,100,000 shares of common
stock for sale in a public offering that it expects to complete in February
1998. Based on the market price of the Company's common stock in late January
15
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
1998, the Company anticipates proceeds of $25,239, net of expenses, from this
offering, $28,706 if the underwriters' option to sell an additional 150,000
shares is exercised. The proceeds of this offering will be used to make a
$19,000 equity contribution to PSW, that PSW will use to reduce the balance of
its revolving credit loan, and to repay short-term debt of the Company.
The Company has adopted a Dividend Reinvestment and Direct Stock
Purchase Plan in early 1998 that replaced the Customer Stock Purchase Program
for PSW's customers, and the Dividend Reinvestment and Optional Stock Purchase
Program for existing shareholders. Under the new plan, reinvested dividends will
continue to be used to purchase original issue shares of common stock at a five
percent discount from the current market value. Under the direct stock purchase
program, shares may be purchased by investors throughout the year, instead of
during limited subscription periods, at market price and the shares will be
purchased by the Company's transfer agent in the open-market at least weekly and
will not be original issue shares of stock. The Plans that were replaced
exclusively used original issue shares and 489,296, 1,007,633 and 868,068
original issue shares of common stock were sold providing the Company with
$7,567, $12,280 and $7,846 of additional capital, after expenses, during 1997,
1996 and 1995, respectively.
In August 1997, the Board of Directors approved a resolution
authorizing the Company to purchase, from time to time, up to 500,000 shares of
its common stock in the open market or through privately negotiated
transactions. The remaining number of shares authorized for purchase was
adjusted as a result of the 4-for-3 stock split so that the total number of
shares authorized for purchase as of December 31, 1997 was 669,612. In 1993, the
Board of Directors approved a similar authorization. During 1997, 1996 and 1995,
152,000, 4,339 and 78,912 shares have been purchased at a net cost of $2,284,
$52 and $733, respectively. For comparative purposes the number of shares
purchased is presented as if they were adjusted for the effect of the 1997 and
1996 stock splits. As of December 31, 1997, 628,145 shares remain available for
purchase by the Company.
Net Income per Common Share and Equity per Common Share
In December 1997, the Company adopted SFAS No. 128, "Earnings per
Share" which prescribes two methods for calculating net income per common share:
Basic and Diluted methods. These calculations differ from those used in prior
periods and as a result all prior period earnings per share data have been
restated to reflect the adoption of SFAS No. 128 as well as the 1997 4-for-3
stock split. Basic net income per share is based on the weighted average number
of common shares outstanding. Diluted net income per share is based on the
weighted average number of common shares outstanding and potentially dilutive
shares. The dilutive effect of employee stock options is included in the
computation of Diluted net income per share. The adoption of this statement had
no effect on the results of operations, financial conditions, or long-term
liquidity. The following table summarizes the shares used in computing Basic and
Diluted net income per share:
Years ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Average common shares outstanding during
the period for Basic computation 25,908 24,966 23,803
Dilutive effect of employee stock options 365 296 113
---------------------------------
Average common shares outstanding during
the period for Diluted computation 26,273 25,262 23,916
=================================
16
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Equity per common share was $7.31 and $6.91 at December 31, 1997 and
1996 respectively. These amounts were computed by dividing common stockholders'
equity by the number of shares of common stock outstanding at the end of each
year.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan (the "Current Plan") designed
to protect the Company's shareholders in the event of an unsolicited unfair
offer to acquire the Company. Each outstanding common share is entitled to one
Right which is evidenced by the common share certificate. In the event that any
person acquires 25% or more of the outstanding common shares or commences a
tender or exchange offer which, if consummated, would result in a person or
corporation owning at least 30% of the outstanding common shares of the Company,
the Rights will begin to trade independently from the common shares and, if
certain circumstances occur, including the acquisition by a person of 25% or
more of the outstanding common shares, each Right would then entitle its holder
to purchase a number of common shares of the Company at a substantial discount.
If the Company is involved in a merger or other business combination at any time
after the Rights become exercisable, the Rights will entitle the holder to
acquire a certain number of shares of common stock of the acquiring company at a
substantial discount. The Rights are redeemable by the Company at a redemption
price of $.02 per Right at any time before the Rights become exercisable. The
Rights will expire on March 1, 1998, unless previously redeemed.
At the meeting of the Board of Directors scheduled for February 3,
1998, management is expected to recommend that the Board of Directors adopt a
new Shareholder Rights Plan (the "New Plan") to replace the Current Plan. The
New Plan, which would expire on March 1, 2008, would be substantially the same
as the Current Plan except that the beneficial ownership threshold that would
trigger the exercisability of the rights issued to purchase Company Common Stock
would be reduced from 25% of the outstanding Common Stock to approximately 20%
of the outstanding Common Stock.
Employee Stock and Incentive Plans
Under the 1994 Equity Compensation Plan ("1994 Plan"), as amended, the
Company may grant qualified and non-qualified stock options to officers, key
employees and consultants. Officers and key employees may also be granted
dividend equivalents and restricted stock. Restricted stock may also be granted
to non-employee members of the Board of Directors ("Board"). In May 1996, the
Shareholders authorized an increase to the number of shares from 900,000 shares
to 1,900,000 shares of common stock for issuance under the 1994 plan, with the
maximum number of restricted stock grants limited to 50,000 shares. Awards under
this plan are made by the Board of Directors or a committee of the Board.
Options under the 1994 plan, as well as the earlier 1988 Stock Option
Plan were issued at the market price of the stock on the day of the grant.
Options are exercisable in installments ranging from 20% to 33% annually,
starting one year from the date of the grant and expire 10 years from the date
of the grant.
17
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes stock option transactions for the two
plans:
Years Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
Options granted 263,333 254,000 241,000
Options terminated (33,405) (38,136) -
Options exercised (292,492) (240,201) (106,624)
------------------------------------
Net change (62,564) (24,337) 134,376
====================================
Balance of shares under option 968,137 1,030,701 1,055,038
====================================
Options exercised during 1997 ranged in price from $6.47 per share to
$11.19 per share. The shares under option at December 31, 1997 are exercisable
at prices ranging from $6.59 to $15.14 per share. At December 31, 1997, 439,527
shares were exercisable, and 932,008 options under the 1994 Plan were still
available for grant.
Under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company elects to continue to apply the provisions of APB Opinion No. 25 and to
provide the proforma disclosure provisions of this statement. Accordingly, no
compensation cost has been recognized in the financial statements for stock
options that have been granted. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income available to common stock and Basic and Diluted
net income per share would have been reduced to the proforma amounts indicated
below:
Years Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
Net income available to common stock:
As reported $ 22,993 $20,722 $18,400
Proforma 22,229 20,337 18,048
Basic net income per share:
As reported $ 0.89 0.83 $ 0.77
Proforma 0.86 0.81 0.76
Diluted net income per share:
As reported $ 0.88 $ 0.82 $ 0.77
Proforma 0.85 0.81 0.75
18
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The per share weighted-average fair value at the date of grant for
stock options granted during 1997, 1996 and 1995 was $2.90, 1.52 and $1.46 per
option, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
1997 1996 1995
------------------------------------
Expected life (years) 10 10 10
Interest rate 6.6% 6.4% 7.4%
Volatility 13.8% 14.0% 12.5%
Dividend yield 4.0% 5.2% 6.3%
Dividend equivalents provide the grantee with an amount equal to the
dividends paid on a share of common stock over a specified period of time, not
to exceed four years, multiplied by the number of dividend equivalents awarded.
Payments of these awards are deferred until the completion of certain objectives
during a performance period established by a Committee of the Board at the time
of grant. A performance period is generally four years but may be adjusted by
the Committee to as long as eight years or as short as two years depending on
the Company's success in completing the objectives. Dividend equivalents are
"compensatory" and, as such, are charged to operating expense over the
performance period. The effect of changes to the performance period is accrued
when known or projected. The Board granted 103,974, 98,975 and 90,977 dividend
equivalents in 1997, 1996 and 1995, respectively, and costs associated with
these awards were $330 in 1997, $234 in 1996 and $197 in 1995. During 1997 and
1996, payments associated with the dividend equivalents of $191 and $124,
respectively, were made to recipients.
Restricted stock awards provide the grantee with the rights of a
shareholder, including the right to receive dividends and to vote such shares,
but not the right to sell or otherwise transfer the shares during the
restriction period. During 1997, 1996 and 1995, 3,600, 3,200 and 3,600 shares of
restricted stock were granted with a restriction period of six months. The value
of restricted stock awards, which are "compensatory", is equal to the fair
market value of the stock on the date of the grant less payments made by the
grantee and is recognized as expense in the year of the grant.
19
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans that cover its full-time
employees. Retirement benefits under the plans are generally based on the
employee's total years of service and compensation during the last five years of
employment. The Company's policy is to fund these plans annually at a level
which is deductible for income tax purposes and which provides assets sufficient
to meet its pension obligations. As a result of certain limitations imposed by
the Internal Revenue Code with respect to payments under qualified plans, the
Company, in 1989, adopted a non-qualified Excess Benefit Plan for Salaried
Employees in order to prevent certain employees from being penalized by these
limitations. The Company also has non-qualified Supplemental Executive
Retirement Plans for one current and one retired employee. The net pension costs
and obligations of the qualified and non-qualified plans are included in the
tables which follow.
The Company's pension expense includes the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Benefits earned during the year $ 1,432 $ 1,373 $ 905
Interest cost on projected benefit obligation 3,796 3,523 3,304
Actual return on plan assets (11,502) (6,784) (9,256)
Net amortization and deferral 7,222 2,904 6,029
Capitalized costs (40) (34) (133)
Rate-regulated adjustment (567) (707) (311)
-------------------------------------
Net pension cost $ 341 $ 275 $ 538
=====================================
</TABLE>
The rate-regulated adjustment set forth above is required in order to
reflect pension expense for PSW in accordance with the method used in
establishing water rates.
20
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The assets and obligations of the plans are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Accumulated benefit obligation:
Vested $ 43,894 $ 38,991
Non-vested 2,443 2,210
------------------------
Total $ 46,337 $ 41,201
========================
Projected benefit obligation $ 57,157 $ 51,321
Plan assets at fair value, primarily equity and fixed
income commingled funds 60,112 51,249
------------------------
Plan assets less than (in excess of) projected benefit obligation (2,955) 72
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions 7,715 3,522
Unrecognized prior service cost (1,737) (1,378)
Rate-regulated adjustment (1,662) (1,095)
Unrecognized net obligation (364) (453)
------------------------
Accrued pension costs included in other
current liabilities $ 997 $ 668
========================
</TABLE>
The accumulated and projected benefit obligations were calculated using
the projected unit credit method and reflect the following assumptions: discount
rates of 7% for 1997, 7.25% for 1996 and 7% for 1995; increase in future
compensation levels of 5.5% for all years presented; and long-term rate of
return on assets of 9% for all years presented.
In addition to providing pension benefits, PSW offers certain
Postretirement Benefits other than Pensions ("PBOPs") to employees retiring with
at least 15 years of service. These PBOPs include continuation of medical and
prescription drug benefits for all eligible retirees and a life insurance policy
for eligible union retirees.
The Company's costs for postretirement benefits other than pensions
includes the following components:
Years Ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Benefits earned during the year $ 389 $ 296 $ 208
Interest cost 919 872 994
Return on plan assets (647) (173) (101)
Net amortization and deferral 916 567 655
Amortization of regulatory asset 136 136 136
---------------------------------
Gross PBOP cost 1,713 1,698 1,892
Capitalized costs (407) (79) (94)
---------------------------------
Net PBOP cost $ 1,306 $ 1,619 $ 1,798
=================================
21
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The assets and liabilities of the plans for postretirement benefits
other than pensions are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------------------------
Accumulated postretirement benefit obligation (APBO):
<S> <C> <C>
Retirees $ 6,244 $ 6,246
Fully eligible active employees 2,857 3,325
Other employees 3,626 3,045
---------------------------
Total APBO 12,727 12,616
Fair value of plan assets 5,437 3,500
---------------------------
APBO in excess of plan assets 7,290 9,116
Unrecognized net transition obligation (11,151) (11,894)
Unrecognized net gain 5,892 4,974
---------------------------
Accrued PBOP cost included in other liabilities $ 2,031 $ 2,196
===========================
</TABLE>
The APBO is calculated utilizing the following assumptions: discount
rate of 7%; medical inflation rates of 5% for those employees not eligible by
December 31, 1993, and 8%, reducing to 4.5% by 2002 for all others; a 9% return
on plan assets for all years presented. The effect of a 1% increase in the
assumed medical inflation rates would be to increase the APBO and the 1997 PBOP
costs by $770 and $59, respectively. The Company funds its gross PBOP cost
through various trust accounts.
Water Rates
On October 23, 1997, the Pennsylvania Public Utility Commission ("PUC")
approved a rate settlement reached between PSW and the parties actively
litigating the rate application PSW filed in April 1997. The settlement is
designed to increase PSW's annual revenue by $9,300 or 7.3% over the level in
effect at the time of the filing. The rates in effect at the time of the filing
included a 1% or $1,300 Distribution System Improvement Charge ("DSIC").
Consequently, the settlement resulted in a total base rate increase of $10,600
or 8.3%. As a part of the settlement, the DSIC was reset to zero and the Company
agreed not to file a base rate increase request prior to April 1999, absent
extraordinary circumstances.
PSW was permitted by the PUC to increase its base rates by 5.3%
effective October 27, 1995 which was designed to provide additional annual
revenues of approximately $6,150.
In 1996, the PUC approved PSW's request to add a DSIC to its water
bills. The DSIC enabled PSW to add a surcharge to customer bills beginning
January 1, 1997 reflecting the capital costs and depreciation related to certain
distribution system improvement projects completed and placed into service
between base rate filings. PSW is permitted to request adjustments to the DSIC
quarterly to reflect subsequent capital expenditures and it is reset to zero
when new base rates that reflect the costs of those additions become effective.
The maximum DSIC that can be in effect at any time is 5%. The DSIC increased
revenues in 1997 by $1,104. In October 1997, the existing DSIC rate of 1.82% was
eliminated with the adoption of new base rates.
In addition to its base rates, PSW has utilized a surcharge or credit
on its bills to reflect certain changes in Pennsylvania State taxes until such
time as the tax changes are incorporated into base rates. In October 1995, the
existing credit of 1.04% was eliminated with the adoption of new base rates. PSW
was required to initiate a revenue credit in 1994 in order to provide its
customers with the savings associated with Pennsylvania tax rate decreases. The
credit decreased revenues in 1995 by $504.
22
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Discontinued Operations
The Board of Directors had authorized the sale of substantially all of
the Company's non-regulated businesses and the last of these businesses was sold
in 1993. At the time the Board of Directors authorized the sale of these
businesses, the Company established reserves for: projected operating losses of
these businesses subsequent to their sale authorizations; estimated losses on
the sale transactions; and certain future costs, including administrative and
legal services related to the sales, contingent legal and lease obligations and
certain employee costs. These reserves were recorded on the balance sheet net of
related income tax benefits. During 1997 and 1996, contingent sale proceeds of
$250 and $337 were received and credited to the reserve. During 1996 and 1995,
$18 and $178 of payments associated with discontinued operations were charged to
the reserve.
As a result of the continuing assessment of asserted and unasserted
legal claims related to these businesses, the passage of time, which reduced
certain lease contingencies, and the receipt of contingent sale proceeds, the
Company has determined that, the net reserves were in excess of estimates of
potential costs. Consequently, the contingent sale proceeds received in 1997
were included in Earned Revenues. In 1996 and 1995, the Company reversed $965
and $370 net of related income taxes, of these reserves. At December 31, 1997
there remains a balance in the reserve for discontinued operations of $1,009
which is included in other accrued liabilities.
23
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------------
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Total
First Second Third Fourth Year
---------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earned revenues $ 31,021 $ 33,315 $ 36,754 $ 35,081 $ 136,171
Operating expenses 13,068 13,295 14,466 15,070 55,899
Net income available to common
stock 4,460 5,778 7,323 5,432 22,993
Basic net income per common share 0.17 0.23 0.28 0.21 0.89
Diluted net income per common share 0.17 0.22 0.28 0.21 0.88
Dividend paid per common share 0.152 0.152 0.159 0.159 0.622
Price range of common stock
- high 15.47 15.10 18.00 22.18 22.18
- low 11.72 11.44 14.07 15.10 11.44
1996
- --------------------------------------------------------------------------------------------------------------------
Earned revenues $ 29,290 $ 30,683 $ 30,831 $ 31,699 $ 122,503
Operating expenses 13,070 12,614 11,757 14,174 51,615
Income, continuing operations 3,968 5,281 5,847 4,661 19,757
Basic income per share, continuing
operations 0.16 0.21 0.24 0.18 0.79
Diluted income per share, continuing
operations 0.16 0.21 0.23 0.18 0.78
Income, discontinued operations - - 365 600 965
Basic and diluted income per share,
discontinued operations - - 0.02 0.02 0.04
Net income available to common
stock 3,968 5,281 6,212 5,261 20,722
Basic net income per common share 0.16 0.21 0.26 0.20 0.83
Diluted net income per common share 0.16 0.21 0.25 0.20 0.82
Dividend paid per common share 0.145 0.145 0.152 0.152 0.594
Price range of common stock
- high 11.57 12.57 12.94 14.91 14.91
- low 10.26 11.25 11.63 12.38 10.26
</TABLE>
All per share data as presented has been adjusted for the 1997 common
stock split effected in the form of a stock distribution. High and low prices of
the Company's common stock are as reported on the New York Stock Exchange
Composite Tape.
24
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL DATA
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996* 1995* 1994* 1993*
---- ---- ------- ------ --------
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE:
Income from continuing operations
Basic $ 0.89 $ 0.79 $ 0.75 $ 0.68 $ 0.64
Diluted 0.88 0.78 0.75 0.68 0.64
Net income
Basic 0.89 0.83 0.77 0.68 0.64
Diluted 0.88 0.82 0.77 0.68 0.64
Cash dividends 0.62 0.59 0.57 0.55 0.54
Returns on average shareholders' equity(a) 12% 12% 12% 11% 11%
Book value at year end $ 7.31 $ 6.91 $ 6.44 $ 6.14 $ 5.95
Market value at year end 22.08 14.91 10.38 9.06 9.19
INCOME STATEMENT HIGHLIGHTS:
Earned revenues(a) $136,171 $122,503 $117,044 $108,636 $101,244
Depreciation and amortization(a) 14,580 13,333 11,557 10,330 10,935
Interest expense (a)(b) 17,738 15,541 15,178 13,636 13,169
Income before income taxes(a) 39,061 33,749 30,931 27,209 24,261
Provision for income taxes(a) 15,873 13,971 12,901 11,571 10,426
Income from continuing operations 23,188 19,778 18,030 15,638 13,835
Net income available to common stock 22,993 20,772 18,400 15,638 13,835
BALANCE SHEET HIGHLIGHTS:
Total assets $618,472 $582,944 $518,051 $460,062 $440,935
Property, plant and equipment, net 534,483 502,938 436,905 385,709 366,230
Stockholders' equity 194,745 180,015 156,976 143,795 135,934
Preferred stock with mandatory redemption(c) 4,214 5,643 7,143 10,000 10,000
Long-term debt(c) 234,919 229,962 188,985 153,082 150,176
Total debt 245,319 235,522 195,440 157,132 150,995
ADDITIONAL INFORMATION:
Net cash flows from operating activities(a) $ 41,843 $ 37,422 $ 32,954 $ 29,730 $ 27,049
Capital additions(a)(d) 38,960 31,389 33,182 27,379 27,958
Dividends on common stock 16,129 14,795 13,546 12,637 11,629
Number of metered water customers 287,516 284,141 264,865 249,533 247,195
Number of shareholders of common stock 13,894 13,650 12,209 11,243 10,811
Common shares outstanding (000) 26,210 25,598 24,377 23,436 22,860
Employees (full-time) 531 540 535 525 523
</TABLE>
*Share and per share data has been restated for the 1997 4-for-3 stock split.
(a) Continuing operations only.
(b) Includes dividend on preferred stock of subsidiary and is net of allowance
for funds used during construction.
(c) Includes current portion.
(d) Excludes payments for acquired water systems of $1,226 in 1997, $42,122 in
1996, $26,351 in 1995, $612 in 1994 and $1,323 in 1993.
<PAGE>
Exhibit 21
(unaudited)
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
The following table lists all of the subsidiaries of the Company at December
31, 1997:
Philadelphia Suburban Water Company (Pa.)
Utility & Municipal Services, Inc. (Pa.)
PSC Services, Inc. (Del.)
Suburban Wastewater Company (Pa.)
Suburban Environmental Services, Inc. (Pa.)
Little Washington Wastewater Company (Pa.)
Drexel Hill Corporation (Pa.)
Pennsylvania Suburban Water Company (Pa.)
(formerly PSC Information Services)
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Philadelphia Suburban Corporation
We consent to incorporation by reference in the Registration Statements on
Form S-8 (1994 Equity Compensation Plan No. 333-26613), (1994 Employee Stock
Purchase Plan No. 033-52557), (1988 Stock Option Plan No. 33-27032), (1982 Stock
Option Plan No. 2-81757); and on Form S-3 (Dividend Reinvestment and Direct
Stock Purchase Plan No. 333-42275), (Customer Stock Purchase Plan No. 33-64301)
of Philadelphia Suburban Corporation of our report dated January 28, 1998,
relating to the consolidated balance sheets and the statements of capitalization
of Philadelphia Suburban Corporation and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income and cash flow for
each of the years in the three-year period ended December 31, 1997, which report
is incorporated by reference in the December 31, 1997 Annual Report on Form 10-K
of Philadelphia Suburban Corporation.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of capitalization at December 31,
1997, and the consolidated statements of income and cash flow for the year ended
December 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 534,416
<OTHER-PROPERTY-AND-INVEST> 67
<TOTAL-CURRENT-ASSETS> 27,063
<TOTAL-DEFERRED-CHARGES> 5,723
<OTHER-ASSETS> 51,203
<TOTAL-ASSETS> 618,472
<COMMON> 7,324
<CAPITAL-SURPLUS-PAID-IN> 128,065
<RETAINED-EARNINGS> 56,136
<TOTAL-COMMON-STOCKHOLDERS-EQ> 191,525
0
3,220
<LONG-TERM-DEBT-NET> 232,471
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 10,400
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,448
4,214
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 174,194
<TOT-CAPITALIZATION-AND-LIAB> 618,472
<GROSS-OPERATING-REVENUE> 136,171
<INCOME-TAX-EXPENSE> 15,873
<OTHER-OPERATING-EXPENSES> 79,372
<TOTAL-OPERATING-EXPENSES> 95,245
<OPERATING-INCOME-LOSS> 40,926
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 40,926
<TOTAL-INTEREST-EXPENSE> 17,738
<NET-INCOME> 23,188
195
<EARNINGS-AVAILABLE-FOR-COMM> 22,993
<COMMON-STOCK-DIVIDENDS> 16,129
<TOTAL-INTEREST-ON-BONDS> 15,724
<CASH-FLOW-OPERATIONS> 41,843
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.88
</TABLE>
