<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 March 31, 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 March 31, 1999
40,779,838
- -------------
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
-----------------------------------
<S> <C> <C>
Property, plant and equipment, at cost $ 1,265,149 $ 1,248,621
Less accumulated depreciation 238,825 232,427
-----------------------------------
Net property, plant and equipment 1,026,324 1,016,194
-----------------------------------
Current assets:
Cash and cash equivalents 6,046 8,247
Accounts receivable and unbilled revenues, net 37,572 40,768
Inventory, materials and supplies 3,928 3,857
Prepayments and other current assets 5,489 7,026
-----------------------------------
Total current assets 53,035 59,898
-----------------------------------
Regulatory assets 57,698 57,697
Deferred charges and other assets, net 20,219 22,944
-----------------------------------
$ 1,157,276 $ 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 40,779,838 and 40,702,311 in 1999 and 1998 20,672 20,617
Capital in excess of par value 246,309 244,457
Retained earnings 87,270 91,683
Minority interest 2,587 2,589
Treasury stock, 564,821 and 533,292 shares in 1999 and 1998 (10,150) (9,478)
-----------------------------------
Total stockholders' equity 348,448 353,088
-----------------------------------
Long-term debt, excluding current portion 401,453 413,309
Commitments -- --
Current liabilities:
Current portion of long-term debt 25,781 2,981
Loans payable 33,060 24,615
Accounts payable 11,180 25,248
Accrued interest 8,585 8,406
Accrued taxes 13,747 14,382
Other accrued liabilities 21,559 22,389
-----------------------------------
Total current liabilities 113,912 98,021
-----------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 128,013 126,809
Customers' advances for construction 56,877 57,781
Other 6,929 6,808
-----------------------------------
Total deferred credits and other liabilities 191,819 191,398
-----------------------------------
Contributions in aid of construction 101,644 100,917
-----------------------------------
$ 1,157,276 $ 1,156,733
===================================
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Operating revenues $ 58,597 $ 57,933
Costs and expenses:
Operations and maintenance 22,725 23,604
Depreciation 7,419 6,716
Amortization 420 562
Taxes other than income taxes 5,588 5,850
Restructuring costs 3,787 --
---------------------------
39,939 36,732
---------------------------
Operating income 18,658 21,201
Other expense (income):
Interest expense 8,091 8,227
Dividends on preferred stock of subsidiary and
minority interest 15 38
Allowance for funds used during construction (388) (195)
Merger transaction costs 6,334 --
---------------------------
Income before income taxes 4,606 13,131
Provision for income taxes 4,255 5,230
---------------------------
Net income 351 7,901
Dividends on preferred stock 35 49
---------------------------
Net income available to common stock $ 316 $ 7,852
===========================
Net income per common share:
Basic $ 0.01 $ 0.20
===========================
Diluted $ 0.01 $ 0.19
===========================
Average common shares outstanding
during the period:
Basic 40,771 39,793
===========================
Diluted 41,285 40,279
===========================
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 351 $ 7,901
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 7,841 7,278
Deferred income taxes 1,204 806
Net decrease in receivables, inventory and prepayments 3,757 3,060
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (7,353) (2,348)
Other 1,726 (1,004)
------------------------------
Net cash flows from operating activities 7,526 15,693
------------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $388 and $195 (19,357) (14,375)
Acquisitions of water systems (145) (22,613)
Other (1,333) 428
------------------------------
Net cash flows used in investing activities (20,835) (36,560)
------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 897 1,383
Repayments of customers' advances (1,360) (1,077)
Net proceeds (repayments) of short-term debt 8,445 (4,145)
Proceeds from long-term debt 12,066 21,674
Repayments of long-term debt (1,156) (10,318)
Redemption of preferred stock of subsidiary (1,460) (4,214)
Proceeds from issuing common stock 2,024 28,250
Repurchase of common stock (790) (2,781)
Dividends paid on preferred stock (37) (49)
Dividends paid on common stock (7,521) (7,246)
Other -- (48)
------------------------------
Net cash flows from financing activities 11,108 21,429
------------------------------
Net increase (decrease) in cash and cash equivalents (2,201) 562
Cash and cash equivalents at beginning of year 8,247 3,374
------------------------------
Cash and cash equivalents at end of period $ 6,046 $ 3,936
==============================
</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 5 of this report.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------------
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 1,760 $ 3,220
Common stock, $.50 par value 20,672 20,617
Capital in excess of par value 246,309 244,457
Retained earnings 87,270 91,683
Minority interest 2,587 2,589
Treasury stock (10,150) (9,478)
---------------------------------
Total stockholders' equity 348,448 353,088
---------------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
0.00% to 1.00% 933 949
5.60% to 5.99% 31,945 21,945
6.00% to 6.49% 87,210 87,210
6.50% to 6.99% 55,200 55,200
7.00% to 7.49% 40,000 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% 9,007 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 375,391 365,412
Note payable to bank under revolving credit agreement, due March 2000 37,800 38,935
Notes payable to banks under revolving credit agreements, due June 2000 12,500 10,400
Installment note payable, 9%, due in equal annual payments through 2013 1,543 1,543
---------------------------------
427,234 416,290
Current portion of long-term debt 25,781 2,981
---------------------------------
Long-term debt, excluding current portion 401,453 413,309
---------------------------------
Total capitalization $749,901 $766,397
=================================
</TABLE>
See notes to consolidated financial statements on page 5 of this report.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1 Basis of Presentation
---------------------
On March 10, 1999, the Company 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 Philadelphia Suburban Corporation at March 31, 1999,
the consolidated statements of income for the three months ended March
31, 1999 and 1998, and the consolidated statements of cash flow for the
three months ended March 31, 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. PSC will file a Form 8-K on or before May 24, 1999 containing the
Company's consolidated financial statements as of December 31, 1998 and
1997 and for the three years ended December 31, 1998, 1997 and 1996,
restated to reflect the merger with CWC which is accounted for as a
pooling-of-interests.
Note 2 Merger with Consumers Water Company
-----------------------------------
On March 10, 1999, the Company completed a merger ("the Merger") with
Consumers Water Company ("CWC"). The Merger was effected pursuant to a
June 27, 1998 merger agreement, as amended and restated by the parties
effective as of August 5, 1998. The Merger was completed after the
transaction received the approvals from the state utility commissions in
each state in which the companies operate. The shareholders of each
company approved the Merger at special meetings held on November 16,
1998. 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 preferred
share. As a result of the Merger, CWC became a wholly-owned subsidiary
of the Company. CWC serves approximately 227,000 customers in service
territories covering parts of Pennsylvania, Ohio, Illinois, New Jersey
and Maine.
5
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
During the first quarter of 1999, the Company recorded a charge of
$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 restructuring costs of $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 December 31, 1998, $3,368 of
merger-related costs were paid and deferred by the Company and $6,753
were incurred in the first quarter of 1999. The merger-related costs
have been reported on separate lines in the Consolidated Statements of
Income.
Note 3 Acquisitions
------------
In January 1999, the Pennsylvania Public Utility Commission ("PAPUC")
approved PSW's franchise application to expand the Company's service
territory in Cumru Township, Berks County. It is anticipated that new
customers will result as the area is developed over time.
In March 1999, CWC's Pennsylvania subsidiary purchased the water system
assets 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 wastewater
system assets 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.
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. Accordingly, $15,000 of the outstanding
balance of PSW's revolving credit agreement has been classified as
long-term debt.
Note 5 Water Rates
-----------
During the first quarter of 1999, the CWC operating subsidiaries settled
one rate case and received a rate increase granted under the terms of a
rate settlement from a previous year in two CWC divisions resulting in
an aggregate annual revenue increase of $390 for the recovery of and
return on capital used to fund capital expenditures. In May 1999, a rate
application was filed by CWC's Illinois subsidiary. The amount of
increased annual revenue requested is $558 and a decision is anticipated
during the first quarter of 2000.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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 most recent 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 or
the continuation of the DSIC in the third quarter of 1999 is dependent
on PSW's return on equity 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 an overall
surcharge of 0.93%. Effective April 1, 1999, the overall surcharge was
adjusted to 0.96% due to a change in the revenue credit from 0.11% to
0.8%.
Note 6 Net Income per Common Share
---------------------------
Basic net income per share is based on the weighted average number of
common shares outstanding. Diluted 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
following table summarizes the shares used in computing Basic and
Diluted net income per share:
Three Months Ended
March 31,
------------------
1999 1998
------------------
the period for Basic computation 40,771 39,793
Dilutive effect of employee stock options 514 486
------ ------
Average common shares outstanding during
the period for Diluted computation 41,285 40,279
====== ======
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
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" 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 301,000 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 6,700
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 227,000
customers in Pennsylvania, Ohio, Illinois, New Jersey and Maine.
Financial Condition
-------------------
During the quarter, the Company had $19,357 of capital expenditures, redeemed
$1,460 of preferred stock, and repaid $1,360 of customer advances for
construction. Of the total capital expenditures during the quarter, $3,500 was
related to the construction of the Shenango water treatment plant in Sharon,
Pennsylvania, $5,100 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.
During the quarter, 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
8
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
of 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.
At March 31, 1999, the Company, PSW and CWC had $7,945, $1,000 and $55,795
available, respectively under short-term lines of credit. PSW and CWC had
$12,200 and $22,500 available, respectively, under its 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 Quarter of 1999 Compared to First Quarter of 1998
-------------------------------------------------------------------
Revenues for the quarter increased $664 or 1.1% primarily due to rate increases,
additional revenues from acquisitions and an increased volume of water sold,
offset in part by $1,465 of revenues associated with CWC's New Hampshire
operations which was sold in April 1998. Nine rate increases were granted or
became effective in various CWC divisions since the first quarter of 1998,
accounting for an additional $835 of revenues.
Operations and maintenance expenses decreased by $879 or 3.7% due to $527 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 continuing cost
containment efforts. The decreased operating costs were offset in part by higher
maintenance expenses at PSW resulting from an increased number of main breaks.
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 $703 or 10.5% reflecting the utility plant placed
in service since the first quarter of 1998, including the assets acquired
through system acquisitions.
Amortization decreased $142 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 decreased by $262 or 4.5% due to the other taxes
of CWC's New Hampshire operations, sold in April 1998 and a reduction in state
regulatory taxes.
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 decreased by $136 or 1.7% due to a reduction in debt associated
with CWC's New Hampshire operations, lower interest rates on borrowings, offset
in part by increased borrowings to finance on-going capital projects and
acquisitions.
Allowance for funds used during construction increased by $193 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
9
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
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.
The Company's effective income tax rate was 92.4% in the first quarter of 1999
and 39.8% in 1998. The effective tax rate increased due to the estimated
non-deductible portion of the $10,121 of merger transaction costs in the first
quarter of 1999. Exclusive of the merger costs and related tax benefits of
$1,525, the 1999 effective income tax rate would be 39.2%.
Dividends on preferred stock decreased $14 or 28.6% 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 $7,536, of
which $8,596 was related to the merger transaction costs and other factors
described above. On a diluted per share basis, earnings decreased $.18
reflecting the change in net income and a 2.5% increase in the average number of
common shares outstanding. The increase in the number of shares outstanding is
primarily a result of the 1.25 million share stock offering in February 1998 and
the additional shares sold through the Dividend Reinvestment Plan and the
employee stock and incentive plan.
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.
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)
The Company's State of Readiness
- --------------------------------
Internal Systems and Processes - The Company is evaluating its systems and
processes based on a prioritization of the risks they pose to the overall
objectives of the Program. Therefore, different systems and processes are in
different phases of the overall Program. An inventory of all critical systems
and processes 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. The Company's industrial
customers represent approximately 6% of its total 1998 revenues and the Company
intends to contact its largest industrial customers to determine whether they
anticipate any adverse effect on their demand for water as a result of the Year
2000 issue. No single customer accounted for more than one percent of the
Company's 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 $5,500 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 $2,700 to bring all of its critical systems into
compliance.
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)
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.
The Company's Contingency Plans
- -------------------------------
The Company is evaluating contingency plans in the event that any critical
systems or processes or vendor relationships cannot be verified as Year 2000
compliant. Contingency plans are also being 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. The Company intends to complete its contingency planning
process for its mission critical systems by mid-1999.
Forward-looking Statements
- --------------------------
The statements in the Company's Year 2000 disclosure contain forward-looking
statements and should be read in conjunction with the Company's disclosure under
the "Forward-looking Statements" section "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
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 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. The Company plans to adopt this statement in 2000 as required. As
of March 31, 1999, the Company had no derivative instruments or hedging
activities.
12
<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 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 filed on March 12, 1999, responding to
Item 2, Acquisition or Disposition of Assets; Item 5, Other
Events; and Item 7, Financial Statements and Exhibits. (Related to
the March 10, 1999 consummation of the previously announced
agreement to merge Consumers Water Company with and into a
wholly-owned subsidiary of PSC).
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).
13
<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.
May 17, 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
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- -------
27 Financial Data Schedule 16
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This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of capitalization at March 31,
1999, and the consolidated statements of income and cash flow for the three
months ended March 31, 1999, and is qualified in its entirety by reference to
such financial statements.
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<OTHER-ASSETS> 57,698
<TOTAL-ASSETS> 1,157,276
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1,760
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<OPERATING-INCOME-LOSS> 14,403
<OTHER-INCOME-NET> (6,349)
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<NET-INCOME> 351
35
<EARNINGS-AVAILABLE-FOR-COMM> 316
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