<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission File Number 1-6659
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010 -3489
- ------------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)-527-8000
---------------------
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1999
40,865,330
- ----------
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Property, plant and equipment, at cost $ 1,291,831 $ 1,248,621
Less accumulated depreciation 245,441 232,427
---------------------------------
Net property, plant and equipment 1,046,390 1,016,194
---------------------------------
Current assets:
Cash and cash equivalents 6,944 8,247
Accounts receivable and unbilled revenues, net 42,876 40,768
Inventory, materials and supplies 4,004 3,857
Prepayments and other current assets 5,702 7,026
---------------------------------
Total current assets 59,526 59,898
---------------------------------
Regulatory assets 57,583 57,697
Deferred charges and other assets, net 22,640 22,944
---------------------------------
$ 1,186,139 $ 1,156,733
=================================
Liabilities and Stockholders' Equity
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 1,760 $ 3,220
Common stock at $.50 par value, authorized 100,000,000 shares,
outstanding 40,865,330 and 40,702,311 in 1999 and 1998 20,726 20,617
Capital in excess of par value 248,052 244,457
Retained earnings 92,359 91,683
Minority interest 2,594 2,589
Treasury stock, 586,062 and 533,292 shares in 1999 and 1998 (10,627) (9,478)
---------------------------------
Total stockholders' equity 354,864 353,088
---------------------------------
Long-term debt, excluding current portion 388,742 413,309
Commitments -- --
Current liabilities:
Current portion of long-term debt 55,974 2,981
Loans payable 38,072 24,615
Accounts payable 11,943 25,248
Accrued interest 8,756 8,406
Accrued taxes 9,633 14,382
Other accrued liabilities 18,292 20,462
---------------------------------
Total current liabilities 142,670 96,094
---------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 130,121 126,809
Customers' advances for construction 57,634 57,781
Other 9,092 8,735
---------------------------------
Total deferred credits and other liabilities 196,847 193,325
---------------------------------
Contributions in aid of construction 103,016 100,917
---------------------------------
$ 1,186,139 $ 1,156,733
=================================
</TABLE>
See notes to consolidated financial statements on page 6 of this report
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Operating revenues $ 124,754 $ 119,673
Costs and expenses:
Operations and maintenance 46,928 47,609
Depreciation 15,027 13,409
Amortization 712 1,136
Taxes other than income taxes 11,212 11,070
Restructuring costs 3,787 --
-----------------------------
77,666 73,224
-----------------------------
Operating income 47,088 46,449
Other expense (income):
Interest expense 16,621 16,057
Dividends on preferred stock of subsidiary and
minority interest 42 69
Allowance for funds used during construction (857) (552)
Merger transaction costs 6,334 --
Gains on sales of properties (8) (6,680)
-----------------------------
Income before income taxes 24,956 37,555
Provision for income taxes 12,538 15,028
-----------------------------
Net income 12,418 22,527
Dividends on preferred stock 69 98
-----------------------------
Net income available to common stock $ 12,349 $ 22,429
=============================
Net income per common share:
Basic $ 0.30 $ 0.56
=============================
Diluted $ 0.30 $ 0.55
=============================
Average common shares outstanding
during the period:
Basic 40,784 40,110
=============================
Diluted 41,266 40,564
=============================
</TABLE>
See notes to consolidated financial statements on page 6 of this report.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Operating revenues $ 66,157 $ 61,740
Costs and expenses:
Operations and maintenance 24,203 24,005
Depreciation 7,608 6,693
Amortization 292 574
Taxes other than income taxes 5,624 5,220
-----------------------------
37,727 36,492
-----------------------------
Operating income 28,430 25,248
Other expense (income):
Interest expense 8,530 7,830
Dividends on preferred stock of subsidiary and
minority interest 27 31
Allowance for funds used during construction (469) (357)
Gains on sales of properties (8) (6,680)
-----------------------------
Income before income taxes 20,350 24,424
Provision for income taxes 8,283 9,798
-----------------------------
Net income 12,067 14,626
Dividends on preferred stock 34 49
-----------------------------
Net income available to common stock $ 12,033 $ 14,577
=============================
Net income per common share:
Basic $ 0.29 $ 0.36
=============================
Diluted $ 0.29 $ 0.36
=============================
Average common shares outstanding
during the period:
Basic 40,800 40,423
=============================
Diluted 41,251 40,842
=============================
</TABLE>
See notes to consolidated financial statements on page 6 of this report.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,418 $ 22,527
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 15,739 14,545
Deferred income taxes 3,312 5,430
Gains on sales of properties (8) (6,680)
Net increase in receivables, inventory and prepayments (1,178) (1,178)
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (14,908) (6,157)
Other 3,419 (1,227)
-----------------------------
Net cash flows from operating activities 18,794 27,260
-----------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $857 and $552 (43,696) (32,861)
Acquisitions of water systems (199) (23,914)
Proceeds from dispositions of properties 8 33,728
Other (5,335) 358
-----------------------------
Net cash flows used in investing activities (49,222) (22,689)
-----------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 2,301 2,438
Repayments of customers' advances (1,441) (1,720)
Net proceeds (repayments) of short-term debt 13,456 (11,850)
Proceeds from long-term debt 30,716 26,033
Repayments of long-term debt (2,438) (25,232)
Redemption of preferred stock (1,460) --
Redemption of preferred stock of subsidiary -- (4,214)
Proceeds from issuing common stock 3,970 29,787
Repurchase of common stock (1,416) (3,333)
Dividends paid on preferred stock (63) (98)
Dividends paid on common stock (14,465) (14,446)
Other (35) (47)
-----------------------------
Net cash flows from (used in) financing activities 29,125 (2,682)
-----------------------------
Net increase (decrease) in cash and cash equivalents (1,303) 1,889
Cash and cash equivalents at beginning of year 8,247 3,374
-----------------------------
Cash and cash equivalents at end of period $ 6,944 $ 5,263
=============================
</TABLE>
See Merger with Consumers Water Company footnote for description of
non-cash investing and financing activities.
See notes to consolidated financial statements on page 6 of this report.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 1,760 $ 3,220
Common stock, $.50 par value 20,726 20,617
Capital in excess of par value 248,052 244,457
Retained earnings 92,359 91,683
Minority interest 2,594 2,589
Treasury stock (10,627) (9,478)
--------------------------------
Total stockholders' equity 354,864 353,088
--------------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
0.00% to 1.00% 917 949
5.00% to 5.49% 2,200 --
5.50% to 5.99% 31,545 21,945
6.00% to 6.49% 102,210 87,210
6.50% to 6.99% 55,200 55,200
7.00% to 7.49% 38,000 40,001
7.50% to 7.99% 23,000 23,000
8.00% to 8.49% 16,500 16,500
8.50% to 8.99% 9,005 9,011
9.00% to 9.49% 53,776 53,776
9.50% to 9.99% 51,820 51,820
10.00% to 10.55% 6,000 6,000
--------------------------------
Total First Mortgage Bonds 390,173 365,412
Note payable to bank under revolving credit agreement, due January 2000 40,300 38,935
Notes payable to banks under revolving credit agreements, due June 2000 12,700 10,400
Installment note payable, 9%, due in equal annual payments through 2013 1,543 1,543
--------------------------------
444,716 416,290
Current portion of long-term debt 55,974 2,981
--------------------------------
Long-term debt, excluding current portion 388,742 413,309
--------------------------------
Total capitalization $ 743,606 $ 766,397
================================
</TABLE>
See notes to consolidated financial statements on page 6 of this report.
5
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1 Basis of Presentation
On March 10, 1999, Philadelphia Suburban Corporation (the
"Company" or "PSC") completed a merger with Consumers Water
Company ("CWC"). See Note 2 - Merger with Consumers Water
Company. The merger has been accounted for as a
pooling-of-interests under Accounting Principles Board Opinion
No. 16. Accordingly, the Company's consolidated financial
statements have been restated to include the accounts and
results of CWC as if the merger had been completed as of the
beginning of the earliest period presented. Certain
reclassifications were made to the historical financial
statements of the two companies to conform presentations.
The accompanying consolidated balance sheet and statement of
capitalization of PSC at June 30, 1999, the consolidated
statements of income for the six months and quarter ended June
30, 1999 and 1998, and the consolidated statements of cash
flow for the six months ended June 30, 1999 and 1998 are
unaudited, but reflect all adjustments, consisting of only
normal recurring accruals, which are, in the opinion of
management, necessary to present fairly the consolidated
financial position, the consolidated results of operations,
and the consolidated cash flow for the periods presented.
Because they cover interim periods, the statements and related
notes to the financial statements do not include all
disclosures and notes normally provided in annual financial
statements and therefore, should be read in conjunction with
the PSC Annual Report on Form 10-K for the year ended December
31, 1998, Form 8-K filed on May 24, 1999 containing the
Company's audited Supplemental Consolidated Financial
Statements as of December 31, 1998 and 1997 and for each of
the years in the three-year period ended December 31, 1998 and
the Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
Note 2 Merger with Consumers Water Company
On March 10, 1999, the Company completed a merger ("the
Merger") with CWC. Pursuant to the merger agreement, the
Company issued 13,014,015 shares of common stock in exchange
for all of the outstanding stock of CWC. CWC common
shareholders received 1.432 shares of the Company's Common
Stock for each CWC common share and CWC preferred shareholders
received 5.649 shares of the Company's Common Stock for each
CWC preferred share. As a result of the Merger, CWC became a
wholly-owned subsidiary of the Company. CWC serves
approximately 228,000 customers in service territories
covering parts of Pennsylvania, Ohio, Illinois, New Jersey and
Maine.
During the first quarter of 1999, the Company recorded a charge
of $6,334 ($6,134, net of tax benefits of $200) for
merger-transaction costs consisting primarily of fees for
investment bankers, attorneys, accountants, and other
administrative charges. In addition, the Company recorded in
the first quarter of 1999 restructuring costs of $3,787
($2,462, net of tax benefits of $1,325) that includes severance
and other costs associated with the closing of CWC's corporate
office. As of March 31, 1999, $1,647 of restructuring costs
were accrued and during the second quarter of 1999, $1,285 of
restructuring costs were paid. The merger-transaction costs
have been reported in other expense and the restructuring costs
have been reported as costs and expenses in the Consolidated
Statements of Income.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (In thousands of dollars, except per
share amounts) (continued)
(UNAUDITED)
Note 3 Acquisitions
In January 1999, the Pennsylvania Public Utility Commission
("PAPUC") approved the franchise application of the Company's
other main subsidiary, Philadelphia Suburban Water Company
("PSW") to expand PSW's service territory in Cumru Township,
Berks County. It is anticipated that new customers will result
as the territory is developed over time.
In March 1999, CWC's Pennsylvania subsidiary purchased the
assets of a water system that the New Wilmington Municipal
Authority and the Wilmington Borough owned jointly, for $55 in
cash. The service territory covers 33 square miles and is
located in Wilmington Borough, Mercer County and Wilmington
Borough, Lawrence County. The annual revenues of this system
approximate $165.
In March 1999, PSW's wastewater subsidiary acquired the assets
of a wastewater system from a real estate developer and a
township for $162 in cash, payable in installments over four
years. The service territory covers approximately a one-half
square mile area in East Bradford Township, Chester County.
The annual revenues of this system approximate $40.
In July 1999, PSW entered into an agreement to purchase the
water system assets of the East Marlborough Township water
system for $500 in cash. Located in Chester County, the system
is contiguous to PSW's and has annual operating revenues of
approximately $70. The purchase is subject to the approval of
the PAPUC.
In August 1999, CWC's Ohio subsidiary entered into an
agreement to purchase the water system assets of two apartment
complexes in Jackson Township, Ohio for $95 in cash. The
annual revenues of this system, once fully developed, are
projected to approximate $100.
In August 1999, PSW submitted a proposal to purchase the water
utility assets of Bensalem Township for approximately $36,500.
Subsequently, the Bensalem Township Council voted to accept
the general principles of the proposal and to begin to
negotiate a sale agreement with PSW. Closing on the
acquisition is subject to the final agreements by the parties,
approval by the PAPUC and is not likely to occur before the
end of 1999. The service territory is located in Bucks County,
Pennsylvania. The annual revenues of this system approximate
$4,100.
The Company continues to actively explore other opportunities
to expand its utility operations through acquisitions and
otherwise.
Note 4 Long-term Debt and Loans Payable
In January 1999, PSW issued a First Mortgage Bond of $10,000
5.85% Series due 2004 and in April 1999, PSW issued a First
Mortgage Bond of $15,000 6.00% Series due 2004 through the
medium-term note program. Proceeds from these issues were used
to reduce the balance of PSW's revolving credit facility.
In June 1999, CWC's Maine subsidiary issued a First Mortgage
Bond of $2,200 5.05% Series due 2024. Proceeds from this issue
were used to reduce the balance of its short-term line of
credit.
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (In thousands of dollars, except per
share amounts) (continued)
(UNAUDITED)
In June 1999, two of the three CWC revolving credit agreements
were due and terminated as planned. The two expired revolving
credit facilities had represented aggregate borrowing
facilities of $20,000 and amounts borrowed under these
facilities have been repaid.
Note 5 Water Rates
During the first quarter of 1999, CWC's operating subsidiaries
settled one rate case and received a rate increase granted
under the terms of a prior year rate settlement in two CWC
divisions resulting in an aggregate annual revenue increase of
$390. In May 1999, a rate application was filed by CWC's
Illinois subsidiary for one of its divisions. The amount of
increased annual revenue requested is $558 and a decision is
anticipated during the first quarter of 2000.
Water utilities in Pennsylvania are permitted by the PAPUC to
add a Distribution System Improvement Charge ("DSIC") to their
water bills reflecting the capital costs and depreciation
related to certain distribution system improvement projects
completed and placed into service between base rate filings.
PAPUC rules require a utility to suspend the use of the DSIC
in the quarter subsequent to a twelve-month period that the
utility's adjusted return on equity exceeds a benchmark
established by the PAPUC. The benchmark is established
quarterly by the PAPUC staff based on recent economic data.
Based on the adjusted return on equity for 1998 and the
applicable benchmark, PSW's DSIC resumed in the second quarter
of 1999 and has been set at 3.05% of base water rates after
having been suspended in the first quarter of 1999. The amount
of PSW's DSIC in the third quarter of 1999 has been set at
3.62% of base water rates. Two of CWC's Pennsylvania
subsidiaries began to add a DSIC to their water bills during
the third quarter of 1999 in amounts ranging from .13% to
.58%. The amount of the DSIC in the fourth quarter of 1999 is
dependent on the adjusted return on equity of the individual
Pennsylvania subsidiaries and the benchmark established by the
PAPUC and therefore is not determinable at this time.
In addition to its base rates and DSIC, PSW has utilized a
surcharge on its bills to reflect certain changes in
Pennsylvania State taxes until such time as the tax changes
are incorporated into base rates. From May 1998 until February
1999, PSW was required to provide a revenue credit of 0.11%
($110 on an annual basis) of base water rates in order to
provide its customers with the savings associated with a
decrease in the Pennsylvania Capital Stock Tax rate. In
February 1999, PSW added a 1.04% surcharge ($1,384 on an
annual basis) as a result of increases in the Pennsylvania
Public Utility Realty Tax, resulting in a combined surcharge
of 0.93%. Effective April 1, 1999, the combined surcharge was
adjusted to 0.96% due to a change in the revenue credit from
0.11% to 0.08%. Effective May 29, 1999, the combined surcharge
was adjusted to 0.80% ($1,153 on an annual basis) due to a
decrease in the Pennsylvania Capital Stock Tax rate. CWC's
Pennsylvania subsidiaries have also begun to utilize a
surcharge at various rates (approximately $250 on an annual
basis) on their bills to reflect similar changes in
Pennsylvania State Taxes.
8
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (In thousands of dollars, except per
share amounts) (continued)
(UNAUDITED)
Note 6 Net Income per Common Share
Basic net income per common share is based on the weighted
average number of common shares outstanding. Diluted net
income per common 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 common
share. The following table summarizes the shares, in
thousands, used in computing Basic and Diluted net income per
common share:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
------------------------ -------------------------
<S> <C> <C> <C> <C>
Average common shares outstanding during
the period for Basic computation 40,784 40,110 40,800 40,423
Dilutive effect of employee stock options 482 454 451 419
------------------------ -------------------------
Average common shares outstanding during
the period for Diluted computation 41,266 40,564 41,251 40,842
======================== =========================
</TABLE>
9
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Forward-looking Statements
--------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements address, among other things, the Company's: use of cash;
projected capital expenditures; the merger with Consumers Water Company;
liquidity; Year 2000 disclosure, including statements regarding readiness,
remediation, costs, risks and contingency plans; as well as information
contained elsewhere in this Report where statements are preceded by, followed by
or include the words "believes," "expects," "anticipates," "plans", "projects"
or similar expressions. These statements are based on a number of assumptions
concerning future events, and are subject to a number of uncertainties and other
factors, many of which are outside the Company's control. Actual results may
differ materially from such statements for a number of reasons, including the
effects of regulation, changes in capital requirements and funding, acquisitions
and the Year 2000 readiness of third parties with whom the Company deals. The
Company undertakes no obligation to update or revise forward-looking statements,
whether as a result of new information, future events or otherwise.
General Information
-------------------
Philadelphia Suburban Corporation ("PSC" or "the Company"), a Pennsylvania
corporation, is the holding Company of Philadelphia Suburban Water Company
("PSW") and Consumers Water Company ("CWC"). PSW, a regulated water utility,
provides water to approximately 302,000 customers within its 482 square-mile
service territory. PSW's service territory is located north and west of the City
of Philadelphia. In addition, water service is provided to approximately 6,800
customers through an operating and maintenance contract with a municipal
authority contiguous to its service territory.
CWC owns 100% of the voting stock of four water companies and at least 96% of
the voting stock of three water companies, collectively CWC's operating
subsidiaries. These water companies are regulated water utilities providing
water and wastewater service in 27 operating divisions to approximately 228,000
customers in Pennsylvania, Ohio, Illinois, New Jersey and Maine.
Financial Condition
-------------------
During the first half of 1999, the Company had $43,696 of capital expenditures,
redeemed $1,460 of preferred stock, and repaid $1,441 of customer advances for
construction. Of the total capital expenditures, $7,900 was related to the
construction of the Shenango water treatment plant in Sharon, Pennsylvania,
$15,300 for infrastructure improvements and the balance for routine capital
improvements. Construction of the Shenango plant commenced in December 1997, is
expected to cost $34,000 and completion is anticipated in the first quarter of
2000. Since the Shenango plant construction commenced, $23,200 has been
expended to date on the Shenango plant construction.
During the first half of 1999, the proceeds from the issuance of long-term debt,
proceeds from the issuance of common stock, internally generated funds,
available working capital and funds available under the revolving credit
agreements were used to fund the cash requirements discussed above and to pay
dividends. In connection with the merger of CWC on March 10, 1999, the Company
issued 13,014,015 shares of
10
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
common stock in exchange for all of the outstanding stock of CWC. In January
1999, PSW issued a First Mortgage Bond of $10,000 5.85% Series due 2004 through
the medium-term note program. In April 1999, PSW issued a First Mortgage Bond of
$15,000 6.00% Series due 2004. Proceeds from these issues were used to reduce
the balance of PSW's revolving credit facility. In June 1999, CWC's Maine
subsidiary issued a First Mortgage Bond of $2,200 5.05% Series due 2024.
Proceeds from this issue were used to reduce the balance of its short-term line
of credit. Effective with the September 1, 1999 payment, the Company has
increased the quarterly dividend on common stock from $.17 per share to $.18 per
share.
At June 30, 1999, the Company, PSW and CWC had short-term lines of credit of
$24,000, $1,000 and $92,300, respectively. At June 30, 1999, the Company, PSW
and CWC had $10,982, $1,000 and $67,920 available, respectively under short-term
lines of credit. In June 1999, two of the three CWC revolving credit agreements
were due and terminated as planned. The two expired revolving credit facilities
had represented aggregate borrowing facilities of $20,000 and amounts borrowed
under these facilities have been repaid. At June 30, 1999, PSW and CWC had
$9,700 and $2,300 available, respectively, under their revolving credit
agreements.
Management believes that internally generated funds along with existing credit
facilities and the issuance of long-term debt are adequate to meet the Company's
financing requirements for the balance of the year and beyond.
Results of Operations
---------------------
Analysis of First Six Months of 1999 Compared to First Six Months of 1998
-------------------------------------------------------------------------
Operating revenues increased $5,081 or 4.2% primarily due to rate increases,
including $1,161 from the Distribution System Improvement Charge in
Pennsylvania, additional water revenues from an increased volume of water sold,
additional revenues from acquisitions and an increased state tax adjustment
surcharge that was added to customers' bills in Pennsylvania, offset in part by
$1,623 of revenues associated with CWC's New Hampshire operations which was sold
in April 1998. Six rate increases were granted or became effective in various
CWC divisions since the first quarter of 1998 which contributed an additional
$1,405 of revenues in the first half of 1999. The increased volume of water sold
was associated with the hot dry weather experienced during June 1999.
Operations and maintenance expenses decreased by $681 or 1.4% due to $592 of
operations and maintenance expenses associated with CWC's New Hampshire
operations which was sold in April 1998, savings from reduced electric costs as
a result of electric deregulation in Pennsylvania and a reduction in general
corporate expenses due to the closing of the CWC's corporate office. The
decreased operating costs were offset in part by increased wages and
administrative expenses, and higher maintenance expenses at PSW resulting from
an increased number of main breaks and the timing of plant maintenance. The
increase in PSW's main breaks in 1999 was a result of a colder winter in
comparison to the mild winter weather experienced in 1998.
Depreciation expense increased $1,618 or 12.1% reflecting the utility plant
placed in service since the second quarter of 1998, including the assets
acquired through system acquisitions.
11
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Amortization decreased $424 primarily due to the completion of the amortization
in 1998 of the costs associated with PSW's 1997 rate filing.
Taxes other than income taxes increased by $142 or 1.3% due to an increase in
the Pennsylvania Public Utility Realty Tax ("PURTA") and Pennsylvania Capital
Stock Tax, offset partially by the other taxes of CWC's New Hampshire
operations, sold in April 1998, and a reduction in state regulatory taxes. The
increased taxes are due to a higher base on which the taxes are calculated. The
increase in the taxable base for the PURTA is due to capital expenditures
completed in the last year. The increase in the Capital Stock Tax is due to
higher common equity.
Restructuring costs of $3,787 were recorded in the first quarter of 1999, as
described in Note 2 - Merger with Consumers Water Company, which includes
severance of $2,940 and other costs associated with the closing of CWC's
corporate office.
Interest expense increased by $564 or 3.5% due to increased borrowings to
finance on-going capital projects and acquisitions, offset partially by a
reduction in debt associated with CWC's New Hampshire operations and lower
interest rates on borrowings.
Allowance for funds used during construction increased by $305 primarily due to
an increase in the average balance of utility plant construction work in
progress resulting from the construction of the $34,000 Shenango water treatment
plant. Construction commenced on this facility in December 1997 and is expected
to be completed in the first quarter of 2000.
The merger transaction costs in the first quarter of 1999 of $6,334 represents
the fees for investment bankers, attorneys, accountants, and other
administrative charges associated with the merger of Consumers Water Company
consummated on March 10, 1999. See Note 2 - Merger with Consumers Water Company.
Gains on sales of properties decreased by $6,672 due to the gain on the sale of
CWC's New Hampshire operations of $6,680 recorded in the second quarter of 1998.
The Company's effective income tax rate was 50.2% in the first half of 1999 and
40.0% in 1998. The effective tax rate increased due to the estimated
non-deductible portion of the $6,334 of merger transaction costs recorded in the
first quarter of 1999. Exclusive of the merger transaction costs and related tax
benefits of $200, the 1999 effective income tax rate was 40.1%.
Dividends on preferred stock decreased $29 or 29.6% due to the redemption in
January 1999 of 14,600 shares of preferred stock. The preferred shares were
redeemed at the liquidation value of $100 per share.
Net income available to common stock for the first half of 1999 decreased by
$10,080, of which $8,596, net of tax, was related to the merger costs recorded
in the first quarter of 1999, $3,903, net of tax, was related to the gain on
sale of CWC's New Hampshire operations in April 1998 and the other factors
described above. On a diluted per share basis, earnings decreased $.25
reflecting the change in net income and a 1.7% increase in the average number of
common shares outstanding. The increase in the number of shares outstanding is
primarily a result of the additional shares sold or otherwise issued through the
Dividend Reinvestment Plan and the employee stock and incentive plan.
12
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Analysis of Second Quarter of 1999 Compared to Second Quarter of 1998
---------------------------------------------------------------------
Operating revenues for the quarter increased $4,417 or 7.2% primarily due to
rate increases, including $1,161 from the Distribution System Improvement Charge
in Pennsylvania, additional water revenues from an increased volume of water
sold, an increased state tax adjustment surcharge that was added to customers'
bills in Pennsylvania, additional revenues from acquisitions and other water
sale agreements, offset in part by $160 of revenues associated with CWC's New
Hampshire operations which was sold in April 1998. Five rate increases were
granted or became effective in various CWC divisions since the second quarter of
1998, accounting for an additional $570 of revenues in the quarter. The
increased volume of water sold during the quarter was associated with the hot
dry weather experienced during June 1999.
Operations and maintenance expenses increased by $198 or 0.8% due to increased
maintenance expenses and increased wages and administrative expenses, offset in
part by savings from reduced electric costs and a reduction in general corporate
expenses due to the closing of the former CWC corporate office in March 1999.
The increased maintenance expenses resulted from the timing of plant maintenance
and an increase in water main repairs. The reduced electric costs result from
the electric deregulation in Pennsylvania.
Depreciation expense increased $915 or 13.7% reflecting the utility plant placed
in service since the second quarter of 1998.
Amortization decreased $282 primarily due to the completion of the amortization
in 1998 of the costs associated with PSW's 1997 rate filing.
Taxes other than income taxes increased by $404 or 7.7% as a result of an
increase in the PURTA and Pennsylvania Capital Stock Tax. The increased taxes
are due to a higher base on which the taxes are calculated. The increase in the
taxable base for the PURTA is due to capital expenditures completed in the last
year. The increase in the Capital Stock Tax is due to higher common equity.
Interest expense increased by $700 or 8.9% due to increased borrowings to
finance on-going capital projects offset partially by lower interest rates on
borrowings.
Allowance for funds used during construction increased by $112 primarily due to
an increase in the average balance of utility plant construction work in
progress resulting from the construction of the $34,000 Shenango water treatment
plant. Construction commenced on this facility in December 1997 and is expected
to be completed in the first quarter of 2000.
Gains on sales of properties decreased by $6,672 due to the gain on the sale of
CWC's New Hampshire operations of $6,680 recorded in the second quarter of 1998.
The Company's effective income tax rate was 40.7% in the second quarter of 1999
and 40.1% in 1998. The effective tax rate increased due to an increase in the
statutory Federal income tax rate from 34% to 35% in the CWC operating
subsidiaries.
13
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Dividends on preferred stock decreased $15 or 30.6% due to the redemption in
January 1999 of 14,600 shares of preferred stock. The preferred shares were
redeemed at the liquidation value of $100 per share.
Net income available to common stock for the quarter decreased by $2,544, of
which $3,903, net of tax, was related to the gain on the sale of CWC's New
Hampshire operations in April 1998 and the other factors described above. On a
diluted per share basis, earnings decreased $.07 reflecting the change in net
income and a 1.0% increase in the average number of common shares outstanding.
The increase in the number of shares outstanding is primarily a result of the
additional shares sold or otherwise issued through the Dividend Reinvestment
Plan and the employee stock and incentive plan.
Recent Events
-------------
The Company's water customers are located in five states and as of December 31,
1998, 65% were located in Pennsylvania. On June 10, 1999, the Pennsylvania
Department of Environmental Protection declared a drought warning for most of
the counties in Pennsylvania, including the counties served by PSW and CWC's
Pennsylvania subsidiaries. The drought warning calls for voluntary restrictions
on water use, particularly non-essential uses of water. On July 20, 1999, the
Governor of Pennsylvania issued a drought emergency order for the counties that
were previously under the drought warning. The drought emergency imposes a
mandatory ban on all nonessential water usage. While portions of Pennsylvania,
particularly those dependent on ground water, experience water shortages, the
Company's water supplies in these areas are, at present, adequate. Despite these
actions, the Company's operating results are not expected to be severely
impacted as water consumption appears to have declined to the normal levels that
are customarily experienced during the summer season. If additional restrictions
or enforcements occur in Pennsylvania or in service territories in other states,
declines in water revenues may occur, but are not expected to have a material
impact on the Company's operating results or financial condition.
Year 2000
---------
Overview
- --------
The Company is actively pursuing a Year 2000 Program (the "Program"). The
objective of the Program is to provide reasonable assurance that the Company's
critical systems and processes that impact the Company's ability to deliver
water to its customers will not experience significant interruptions that would
interfere with such water service or result in a material business impairment
that would have an adverse impact to the Company's operations, liquidity or
financial condition as a result of the Year 2000 issue. For purposes of the
Program, the Year 2000 issue is defined as whether information technology
accurately processes date and time data from, into and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations.
The Company's systems and processes being reviewed include: (i) internal systems
and processes, consisting of software, databases, information technology
hardware and imbedded microprocessors; and (ii) relationships with third
parties. The Program involves a systematic approach to the Year 2000 issue
consisting of the following steps: (i) inventorying the component elements of
the Company's systems and processes; (ii) assessing whether there are Year 2000
issues with such systems and processes; (iii) remediation of systems and
processes that are identified as having Year 2000 issues; (iv) testing the
remediation measures that are implemented; and (v) developing contingency plans.
14
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The Company's State of Readiness
- --------------------------------
Internal Systems and Processes -- The Company has evaluated its systems and
processes based on a prioritization of the risks they pose to the overall
objectives of the Program. An inventory of all critical systems and processes
and an assessment of Year 2000 issues for the Company's critical systems has
been completed. As a result of the assessment, it was determined that the
internal systems and processes directly related to the treatment and
distribution of water to its customers would not be significantly affected by
the Year 2000 issue. Some financial and office systems may be affected and the
remediation or replacement and testing of these systems is under way. It is
anticipated that remediation or replacement and testing of these systems will be
completed in the summer of 1999.
Relationships with Third Parties - The Company's relationships with third
parties that may be affected by the Year 2000 issue may be classified into three
categories: customers; suppliers; and third party software vendors. The majority
of the Company's revenues are from residential customers and commercial
customers (consisting primarily of apartments, colleges, hospitals, small
businesses and municipalities), and from fire protection services. It is not
anticipated that water use by customers in these categories will be
significantly affected by the Year 2000 issue. No single customer accounted for
more than one percent of the Company's 1998 revenues.
The Company has contacted its key suppliers to determine their Year 2000
compliance status and the responses received to date indicate that such
suppliers are or intend to be Year 2000 compliant. Because of the substantial
electric power requirements of the Company's water treatment and distribution
systems, electric power supply may be the most critical supplier relationship.
To date, the Company's electric suppliers have indicated that they expect to be
Year 2000 compliant by October 31, 1999. Third party vendors of critical
software systems have been contacted regarding the compliance status of their
software and either the vendors have represented that their software packages
are compliant or the software is being remedied as part of the Company's Year
2000 Program.
The Costs to Address the Company's Year 2000 Issues
- ---------------------------------------------------
The Company estimates its cost to date for its Year 2000 Program to be
approximately $6,500 which includes the costs to develop a new customer billing
system that the Company is implementing to provide added capacity and
capabilities. The Company presently estimates that it will spend an additional
amount of approximately $2,300 to bring all of its critical systems into
compliance.
The Risks of the Company's Year 2000 Issues
- -------------------------------------------
A material Year 2000 noncompliance could result in an interruption in, or
failure of, certain normal business activities or operations. Such noncompliance
could materially and adversely affect the Company's water service and results of
operations, liquidity and financial condition. Because of the uncertainty
inherent in the Year 2000 issue, due primarily from the uncertainty of the Year
2000 readiness of third party suppliers, the Company is unable to determine at
this time whether the consequences of Year 2000 noncompliances will have a
material impact on the Company. The Company's Year 2000 Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
issue and, in particular, about the Year 2000 compliance and readiness of its
key vendors and suppliers. The Company believes that, with the completion of its
Program, the possibility of significant interruptions of normal operations
should be reduced.
15
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The Company's Contingency Plans
- -------------------------------
The Company had developed contingency plans for critical systems or processes or
vendor relationships that cannot be verified as Year 2000 compliant. Contingency
plans have also been developed for certain other critical systems,
notwithstanding a determination of their Year 2000 compliance, where such
systems would have a significant effect on the Company's ability to deliver
water to its customers.
Forward-looking Statements
- --------------------------
The statements in the Company's Year 2000 disclosure contain forward-looking
statements and should be read in conjunction with the Company's disclosure under
the "Forward-looking Statements" section in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Impact of Recent Accounting Pronouncements
------------------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company adopted this
statement effective January 1, 1999 and did not have a material impact on the
Company's results from operations or financial condition.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities." The Company adopted this statement effective January 1, 1999 and
did not have a material impact on the Company's results from operations or
financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and in June 1999 amended this standard by
issuing SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 137 changed the
timing of the implementation of SFAS No. 133. The Company plans to adopt these
statements in 2001 as required. As of June 30, 1999, the Company had no
derivative instruments or hedging activities.
16
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
There are no pending legal proceedings to which the Registrant
or any of its subsidiaries is a party or to which any of their
properties is the subject that present a reasonable likelihood
of a material adverse impact on the Registrant. Reference is
made to Item 3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, which is included by a
reference herein.
Item 4. Results of Vote of Security Holders
The Annual Meeting of Shareholders of Philadelphia Suburban
Corporation (the "Company") was held on May 20, 1999 at the
Double Tree Guest Suites - Plymouth Meeting, 640 W. Germantown
Pike, Plymouth Meeting, Pennsylvania, pursuant to the Notice
sent on or about April 9, 1999 to all shareholders of record
at the close of business on March 24, 1999. At that meeting,
the following nominees were elected as directors of the
Company for terms expiring in the year 2002 and received the
votes set forth after their names below:
Name of Nominee For Withheld
Mary C. Carroll 34,869,724 282,377
Nicholas DeBenedictis 34,927,707 224,394
G. Fred DiBona, Jr. 34,864,465 287,636
John E. Menario 34,908,062 244,039
Since the Board of Directors is divided into three classes
with one class elected each year to hold office for a
three-year term, the term of office for the following
directors continued after the Annual Meeting: Michel Avenas;
Richard H. Glanton, Esq.; Alan R. Hirsig; John F. McCaughan;
John E. Palmer, Jr.; Richard L. Smoot; Robert O. Viets; and
Harvey J. Wilson.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K/A, Amendment No. 1 to the
Form 8-K filed on March 12, 1999, filed May 5, 1999,
responding to Item 7, Financial Statements and
Exhibits. (Financial statements of Consumers Water
Company for the period ended December 31, 1998 and
the notes thereto, and the report of Arthur Andersen
LLP, independent auditors).
Current Report on Form 8-K/A, Amendment No. 2 to the
Form 8-K filed on March 12, 1999, filed May 11,
1999, responding to Item 7, Financial Statements and
Exhibits. (Pro forma condensed combined balance
sheet (unaudited) as of December 31, 1998 and the
pro forma combined statement of income (unaudited)
for the three years ended December 31, 1998, 1997
and 1996 and the notes thereto).
Current Report on Form 8-K filed on May 24, 1999,
responding to Item 5, Other Events. (Audited
Supplemental Consolidated Financial Statements as of
December 31, 1998 and 1997 and for each of the years
in the three-year period ended December 31, 1998,
the notes thereto, and the independent auditors'
report of KPMG LLP).
Current Report on Form 8-K filed on June 2, 1999,
responding to Item 5, Other Events. (Summary of
certain interim financial results of the Registrant
reflecting 30 days of combined operations
(unaudited) for the period ended April 30, 1999).
18
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be executed on its behalf by the
undersigned thereunto duly authorized.
August 12, 1999
PHILADELPHIA SUBURBAN CORPORATION
Registrant
/s/ Nicholas DeBenedictis
---------------------------------
Nicholas DeBenedictis
Chairman and President
/s/ David P. Smeltzer
---------------------------------
David P. Smeltzer
Vice President - Finance
and Chief Financial Officer
19
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ------------------------- --------
27 Financial Data Schedule 21
20
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of capitalization at June 30,
1999, and the consolidated statements of income and cash flow for the six months
ended June 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
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<OTHER-ASSETS> 57,583
<TOTAL-ASSETS> 1,186,139
<COMMON> 10,099
<CAPITAL-SURPLUS-PAID-IN> 248,052
<RETAINED-EARNINGS> 92,359
<TOTAL-COMMON-STOCKHOLDERS-EQ> 350,510
0
1,760
<LONG-TERM-DEBT-NET> 388,742
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<TOTAL-OPERATING-EXPENSES> 90,204
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<OTHER-INCOME-NET> (6,368)
<INCOME-BEFORE-INTEREST-EXPEN> 28,182
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<EARNINGS-AVAILABLE-FOR-COMM> 12,349
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