<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000
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 September 30, 2000
42,457,668
----------
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Property, plant and equipment, at cost $ 1,475,763 $ 1,393,027
Less accumulated depreciation 277,096 257,663
----------- -----------
Net property, plant and equipment 1,198,667 1,135,364
----------- -----------
Current assets:
Cash and cash equivalents 3,642 4,658
Accounts receivable and unbilled revenues, net 53,805 44,399
Inventory, materials and supplies 4,953 3,948
Prepayments and other current assets 3,522 6,520
----------- -----------
Total current assets 65,922 59,525
----------- -----------
Regulatory assets 62,552 58,287
Deferred charges and other assets, net 32,321 27,629
----------- -----------
$ 1,359,462 $ 1,280,805
=========== ===========
Liabilities and Stockholders' Equity
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 1,760 $ 1,760
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 43,247,183 and 41,627,644 in 2000 and 1999 21,624 20,814
Capital in excess of par value 286,059 251,440
Retained earnings 111,766 101,533
Minority interest 2,597 2,604
Treasury stock, 789,515 and 615,038 shares in 2000 and 1999 (14,588) (11,270)
Accumulated other comprehensive income 1,630 2,020
----------- -----------
Total stockholders' equity 410,848 368,901
----------- -----------
Long-term debt, excluding current portion 459,475 413,752
Commitments - -
Current liabilities:
Current portion of long-term debt 12,974 12,194
Loans payable 80,550 103,069
Accounts payable 11,867 24,286
Accrued interest 9,441 8,994
Accrued taxes 16,499 12,689
Dividends payable 7,956 -
Other accrued liabilities 24,039 22,581
----------- -----------
Total current liabilities 163,326 183,813
----------- -----------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 142,812 136,528
Customers' advances for construction 58,231 59,494
Other 8,063 8,434
----------- -----------
Total deferred credits and other liabilities 209,106 204,456
----------- -----------
Contributions in aid of construction 116,707 109,883
----------- -----------
$ 1,359,462 $ 1,280,805
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating revenues $ 206,340 $ 194,289
Costs and expenses:
Operations and maintenance 74,315 71,573
Depreciation 23,956 22,792
Amortization 1,175 989
Taxes other than income taxes 17,039 16,803
Restructuring costs (recovery) (1,136) 3,787
--------- ---------
115,349 115,944
--------- ---------
Operating income 90,991 78,345
Other expense (income):
Interest expense, net 30,127 24,968
Allowance for funds used during construction (2,260) (1,369)
Minority interest 76 76
Gain on sale of marketable securities (1,061) -
Merger transaction costs (recovery) (2,905) 6,334
--------- ---------
Income before income taxes 67,014 48,336
Provision for income taxes 26,584 21,551
--------- ---------
Net income 40,430 26,785
Dividends on preferred stock 80 104
--------- ---------
Net income available to common stock $ 40,350 $ 26,681
========= =========
Net income $ 40,430 $ 26,785
Other comprehensive income (loss), net of tax (390) 1,068
--------- ---------
Comprehensive income $ 40,040 $ 27,853
========= =========
Net income per common share:
Basic $ 0.98 $ 0.65
========= =========
Diluted $ 0.97 $ 0.65
========= =========
Average common shares outstanding during the period:
Basic 41,081 40,823
========= =========
Diluted 41,472 41,281
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Operating revenues $ 73,336 $ 69,527
Costs and expenses:
Operations and maintenance 25,037 24,645
Depreciation 8,040 7,765
Amortization 517 277
Taxes other than income taxes 5,460 5,591
Recovery of restructuring costs (740) -
-------- --------
38,314 38,278
-------- --------
Operating income 35,022 31,249
Other expense (income):
Interest expense, net 10,282 8,347
Allowance for funds used during construction (541) (512)
Minority interest 30 34
Recovery of merger transaction costs (2,242) -
-------- --------
Income before income taxes 27,493 23,380
Provision for income taxes 10,927 9,013
-------- --------
Net income 16,566 14,367
Dividends on preferred stock 27 35
-------- --------
Net income available to common stock $ 16,539 $ 14,332
======== ========
Net income $ 16,566 $ 14,367
Other comprehensive income, net of tax 120 1,068
-------- --------
Comprehensive income $ 16,686 $ 15,435
======== ========
Net income per common share:
Basic $ 0.40 $ 0.35
======== ========
Diluted $ 0.39 $ 0.35
======== ========
Average common shares outstanding during the period:
Basic 41,317 40,898
======== ========
Diluted 41,751 41,333
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,430 $ 26,785
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 25,131 23,781
Deferred income taxes 6,247 5,576
Gain on sale of marketable securities (1,061) -
Net decrease (increase) in receivables, inventory
and prepayments (6,971) 2,645
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (7,830) (14,753)
Other (6,466) 2,718
-------- --------
Net cash flows from operating activities 49,480 46,752
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $2,260 and $1,369 (81,651) (67,723)
Purchases of marketable securities, net (1,649) (6,066)
Acquisitions of water and wastewater systems (2,506) (199)
Other 1,354 23
-------- --------
Net cash flows used in investing activities (84,452) (73,965)
-------- --------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 4,937 3,604
Repayments of customers' advances (2,691) (2,125)
Net proceeds (repayments) of short-term debt (22,519) 14,665
Proceeds from long-term debt 49,321 34,664
Repayments of long-term debt (3,936) (6,154)
Redemption of preferred stock - (1,460)
Proceeds from issuing common stock 34,454 5,939
Repurchase of common stock (3,543) (1,756)
Dividends paid on preferred stock (80) (90)
Dividends paid on common stock (22,161) (21,832)
Other 174 (35)
-------- --------
Net cash flows from financing activities 33,956 25,420
-------- --------
Net increase (decrease) in cash and cash equivalents (1,016) (1,793)
Cash and cash equivalents at beginning of period 4,658 8,247
-------- --------
Cash and cash equivalents at end of period $ 3,642 $ 6,454
======== ========
</TABLE>
See Acquisitions footnote for description of non-cash investing activities.
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 1,760 $ 1,760
Common stock, $.50 par value 21,624 20,814
Capital in excess of par value 286,059 251,440
Retained earnings 111,766 101,533
Minority interest 2,597 2,604
Treasury stock (14,588) (11,270)
Accumulated other comprehensive income 1,630 2,020
-------- --------
Total stockholders' equity 410,848 368,901
-------- --------
Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
0.00% to 2.49% 1,200 858
2.50% to 4.99% 5,259 824
5.00% to 5.49% 3,448 2,200
5.50% to 5.99% 31,060 31,545
6.00% to 6.49% 145,570 127,210
6.50% to 6.99% 55,200 55,200
7.00% to 7.49% 62,000 38,000
7.50% to 7.99% 23,000 23,000
8.00% to 8.49% 16,500 16,500
8.50% to 8.99% 9,000 9,003
9.00% to 9.49% 53,695 53,695
9.50% to 9.99% 49,826 51,220
10.00% to 10.55% 6,000 6,000
-------- --------
Total First Mortgage Bonds 461,758 415,255
Notes payable to bank under revolving credit agreement, due November 2000 9,200 9,200
Installment note payable, 9%, due in equal annual payments through 2013 1,491 1,491
-------- --------
472,449 425,946
Current portion of long-term debt 12,974 12,194
-------- --------
Long-term debt, excluding current portion 459,475 413,752
-------- --------
Total capitalization $870,323 $782,653
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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
The accompanying consolidated balance sheet and statement of
capitalization of Philadelphia Suburban Corporation ("PSC") at September
30, 2000, the consolidated statements of income and comprehensive income
for the nine months and quarter ended September 30, 2000 and 1999, and
the consolidated statements of cash flow for the nine months ended
September 30, 2000 and 1999, 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, 1999 and the
Quarterly Reports on Form 10-Q for the quarters ended June 30, 2000 and
March 31, 2000. The results of operations for interim periods may not be
indicative of the results that may be expected for the entire year.
Note 2 Water Rates
On April 27, 2000, the Pennsylvania Public Utility Commission approved a
rate settlement reached between PSC's Pennsylvania utility subsidiaries,
and the parties actively litigating the joint rate application filed in
October 1999. The settlement was designed to increase annual revenue by
$17,000 or 9.4% above the level in effect at the time of the filing. The
rates in effect at the time of the filing included $7,347 in
Distribution System Improvement Charges ("DSIC") ranging from 0.33% to
5%. Consequently, the settlement resulted in a total base rate increase
of $24,347 or 13.5% above the rates in effect before the DSIC was
applied. As a part of the settlement, the DSIC was reset to zero and PSC
agreed not to file a base rate increase request prior to April 29, 2001,
absent extraordinary circumstances.
The settlement agreement also provides for the recovery of up to $5,295
(the merger costs allocable to our Pennsylvania operations) of the
$10,121 ($8,596 after-tax) in merger costs that were expensed in the
first quarter 1999 in connection with the Consumers Water Company
("CWC") merger. In the second quarter of 2000, a portion of the
regulatory asset was established to reflect the amount to be recovered
before our next Pennsylvania rate filing is expected to become effective
and the remainder was not recognized at that time due to the need to
assess its recoverability. In September 2000, an evaluation of the
recoverability of the merger costs was concluded and consequently an
additional regulatory asset of $2,982 was established. This resulted in
a recovery in the third quarter of 2000 of $740 of restructuring costs
and $2,242 of merger transaction costs as reported on the Consolidated
Statements of Income and Comprehensive Income.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (In thousands of dollars, except
per share amounts) (continued)
(UNAUDITED)
In March 2000, an operating division in Illinois settled one rate case
designed to result in an aggregate annual revenue increase of
approximately $400. In April 2000, a rate increase was negotiated by an
operating division in Ohio designed to result in an aggregate annual
revenue increase of $140 in each of the following three years. In
September 2000, two operating divisions in Maine settled rate cases
designed to result in an aggregate annual revenue increase of
approximately $310. In addition, rate applications have been filed in
2000 by other operating divisions in Illinois, New Jersey and Ohio. The
additional annual revenue requested is $6,352 and decisions are
anticipated by the first quarter of 2001.
Note 3 Long-term Debt and Loans Payable
In January 2000, Philadelphia Suburban Water Company ("PSW") issued a
First Mortgage Bond of $15,000 7.40% Series due 2005 and in April 2000,
PSW issued a First Mortgage Bond of $11,000 7.40% Series due 2005
through the medium-term note program. At various times during the first
nine months of 2000, PSW and other operating subsidiaries issued notes
payable in aggregate of $6,071 at various rates ranging from 1% to 5.4%
due at various times in 2019, 2020 and 2030. In June 2000, one of CWC's
operating subsidiaries issued $18,360 of tax-exempt bonds due in 2030 at
a rate of 6.0%. The proceeds from these issues were used to reduce a
portion of the balance of short-term debt at each of the respective
operating subsidiaries.
Note 4 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>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average common shares outstanding during
the period for Basic computation 41,081 40,823 41,317 40,898
Dilutive effect of employee stock options 391 458 434 435
------ ------ ------ ------
Average common shares outstanding during
the period for Diluted computation 41,472 41,281 41,751 41,333
====== ====== ====== ======
</TABLE>
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (In thousands of dollars, except
per share amounts) (continued)
(UNAUDITED)
Note 5 Acquisitions and Water Sale Agreements
During the first nine months of 2000, four water systems and one
wastewater system were acquired in Pennsylvania and Ohio. The total
purchase price of $3,150 for the systems acquired consisted of $2,506 in
cash and the issuance of 30,440 shares of PSC's common stock. The
increase in annual revenues resulting from the acquired systems
approximate $950.
In August 2000, PSW entered into a 25-year bulk water sale agreement
with Liberty Electric Power, LLC, a subsidiary of Columbia Electric
Corporation, to supply water to a power plant that is expected to be
constructed and commence operations in the first quarter of 2002. The
agreement stipulates a minimum monthly payment through March 1, 2026.
The annual revenues resulting from this water sale agreement are
expected to approximate $1,350 initially, and may adjust annually based
upon changes in the Consumer Price Index.
Note 6 Stockholders' Equity
On August 1, 2000, PSC's Board of Directors declared a 5-for-4 common
stock split effected in the form of a 25% stock dividend for all common
shares outstanding, to shareholders of record on November 15, 2000. The
new shares will be distributed on December 1, 2000. PSC's par value of
$.50 per share will not change as a result of the common stock
distribution, and as a result, on the distribution date an amount will
be transferred from Capital in Excess of Par Value to Common Stock to
record the common stock split. The share and per share data contained in
this Quarterly Report on Form 10-Q have not been restated to give effect
to this stock dividend.
On September 15, 2000, PSC issued 1,322,500 shares of common stock
through a public offering, providing proceeds of approximately $29,689,
net of expenses.
PSC reports other comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The following table summarizes the activity of accumulated
other comprehensive income:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Balance at January 1, $ 2,020 $ -
Unrealized holding gain arising during the period,
net of tax of $100 and $575 186 1,068
Less: reclassification adjustment for gains included
in net income, net of tax of $409 (576) -
------- -------
Unrealized gains (losses) on sales of marketable securities (390) 1,068
------- -------
Balance at September 30, $ 1,630 $ 1,068
======= =======
</TABLE>
8
<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 contains, in addition to
historical information, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements address, among other things, our use of cash; projected capital
expenditures; liquidity; 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 our control. Actual results may differ materially from such statements
for a number of reasons, including the effects of regulation, abnormal weather,
changes in capital requirements and funding, and acquisitions. Except for our
ongoing obligations to disclose material information under the federal
securities laws, we undertake 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 ("we" or "us"), a Pennsylvania corporation, is
the holding company for regulated utilities providing water or wastewater
services to approximately 2 million people in Pennsylvania, Ohio, Illinois, New
Jersey and Maine. Our two primary subsidiaries are Philadelphia Suburban Water
Company ("PSW"), a regulated public utility that provides water or wastewater
services to about 1.1 million residents in the suburban areas west and north of
the City of Philadelphia, and Consumers Water Company ("CWC"), a holding company
for several regulated public utility companies that provide water or wastewater
service to about 850,000 residents in various communities in Pennsylvania, Ohio,
Illinois, New Jersey and Maine. We are among the largest investor-owned water
utilities in the United States based on the number of customers. In addition,
PSW and CWC provide water service to approximately 25,000 people through
operating and maintenance contracts with municipal authorities and other parties
in proximity to the operating company's service territory. Subsidiaries of PSW
and CWC provide wastewater services (primarily residential) to approximately
28,000 people in Pennsylvania, Illinois and New Jersey.
Financial Condition
During the first nine months of 2000, we had $81,651 of capital expenditures,
repurchased $3,543 of common stock, repaid $2,691 of customer advances for
construction and made sinking fund contributions of $3,936. The capital
expenditures were related to construction of a new treatment plant, improvements
to existing treatment plants, new water mains and customer service lines and the
rehabilitation of existing water mains, hydrants and customer service lines.
During the first nine months of 2000, the proceeds from the issuance of common
stock, long-term debt, 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 January 2000, PSW issued a
First Mortgage Bond of $15,000 7.40% Series due 2005 and in April 2000, PSW
issued a First Mortgage Bond of $11,000 7.40% Series due 2005 through the
medium-term note program. At various times during the first nine months of 2000,
PSW and other operating subsidiaries issued notes payable in aggregate of $6,071
at various rates ranging from 1% to 5.4% due at various times in 2019, 2020 and
2030. In June 2000, one of CWC's operating subsidiaries issued $18,360 of tax-
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)
exempt bonds due in 2030 at a rate of 6.0%. The proceeds from these issues were
used to reduce a portion of the balance of the short-term debt at each of the
respective operating subsidiaries. On September 15, 2000, we issued 1,322,500
shares of common stock through a public offering, providing proceeds of
approximately $29,689, net of expenses. The proceeds of this offering were used
to make an equity contribution to PSW. PSW used the contribution from PSC to
reduce the balance of its revolving credit loan. Effective with the December 1,
2000 payment, PSC has increased the quarterly cash dividend on common stock from
$.18 per share to $.19375 per share.
At September 30, 2000, we had short-term lines of credit and other credit
facilities of $190,000, of which $100,250 was available.
On April 27, 2000, the Pennsylvania Public Utility Commission approved a rate
settlement reached between PSC's Pennsylvania utility subsidiaries, and the
parties actively litigating the joint rate application filed in October 1999.
The settlement was designed to increase annual revenue by $17,000 or 9.4% over
the level in effect at the time of the filing. The rates in effect at the time
of the filing included $7,347 in Distribution System Improvement Charges ranging
from 0.33% to 5%. Consequently, the settlement resulted in a total base rate
increase of $24,347 or 13.5% above the rates in effect before the Distribution
System Improvement Charge was applied. As a part of the settlement, the
Distribution System Improvement Charge was reset to zero and PSC agreed not to
file a base rate increase request prior to April 29, 2001, absent extraordinary
circumstances. The settlement agreement also provides for the recovery of up to
$5,295 (the merger costs allocable to our Pennsylvania operations) of the
$10,121 ($8,596 after-tax) in merger costs that were charged off in the first
quarter 1999 in connection with the Consumers Water Company ("CWC") merger. In
the second quarter of 2000, a portion of the regulatory asset was established to
reflect the amount to be recovered before our next Pennsylvania rate filing is
expected to become effective and the remainder was not recognized at that time
due to the need to assess its recoverability. In September 2000, an evaluation
of the recoverability of the merger costs was concluded and consequently an
additional regulatory asset was established of $2,982. This resulted in a
recovery in the third quarter of 2000 of $740 of restructuring costs and $2,242
of merger transaction costs as reported on the Consolidated Statements of Income
and Comprehensive Income.
Management believes that internally generated funds along with existing credit
facilities and the proceeds from the issuance of long-term debt and common stock
will be adequate to meet our financing requirements for the balance of the year
and beyond.
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)
Results of Operations
Analysis of First Nine Months of 2000 Compared to First Nine Months of 1999
Revenues for the first nine months of 2000 increased $12,051 or 6.2% primarily
due to increased water rates, particularly as a result of the April 2000
Pennsylvania rate settlement, and the additional water revenues associated with
acquisitions, offset partially by a decrease in water consumption associated
with the cool, wet weather experienced in portions of our service territory in
2000. The additional revenues from acquisitions were primarily from the Bensalem
water system acquired in December 1999.
Operations and maintenance expenses increased by $2,742 or 3.8% due to
additional operating costs associated with acquisitions, offset in part by a
reduction in administrative expenses and corporate costs as part of our cost
containment initiatives, and lower water production costs. The reduction in
water production costs is associated with the lower water consumption resulting
from the relatively cool, wet weather experienced in the second and third
quarters of 2000. The reduction in general corporate costs was related to the
closing of CWC's corporate office in March 1999.
Depreciation expense increased $1,164 or 5.1% reflecting the utility plant
placed in service since the third quarter of 1999, including the assets acquired
through system acquisitions, offset partially by the effect of a change in
depreciation rates.
Amortization increased $186 primarily due to the amortization of the costs
associated with, and the other costs being recovered in, various rate filings.
Taxes other than income taxes increased by $236 or 1.4% due to a refund
recognized in the first quarter of 1999 of a regulatory assessment associated
with a prior year.
The recovery of restructuring costs of $1,136 in the first nine months of 2000
resulted from the April 2000 rate settlement. These costs were included in a
$3,787 charge that was recorded in the first quarter of 1999 when CWC's
corporate office was closed.
Interest expense increased by $5,159 or 20.7% primarily due to increased
borrowings to finance acquisitions, on-going capital projects and, to a lesser
extent, increased interest rates on borrowings.
Allowance for funds used during construction increased by $891 primarily due to
an increase in the average balance of utility plant construction work in
progress resulting from the construction of a $35,000 water treatment plant at
one of CWC's Pennsylvania subsidiaries. Construction commenced on this facility
in December 1997 and was completed in July 2000.
During the first quarter of 2000, gains on the sale of marketable securities of
$1,061 were recorded. There were no marketable securities sold in 1999 or since
the first quarter of 2000.
The recovery of merger transaction costs of $2,905 in the first nine months of
2000 resulted from the April 2000 rate settlement. These costs were included in
a $6,334 charge that was recorded in the first quarter of 1999 when the CWC
merger was completed. The charge represents the fees for investment bankers,
attorneys, accountants and other administrative charges.
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)
Our effective income tax rate was 39.7% in the first nine months of 2000 and
44.6% in the first nine months of 1999. The effective tax rate decreased 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 would have
been 39.8%.
Dividends on preferred stock decreased $24 or 23.1% 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 nine months of 2000 increased
by $13,669, in comparison to 1999 primarily as a result of the 1999 after-tax
charge of $8,596 for restructuring and transaction costs associated with the
merger of CWC, the 2000 net recovery of a portion of these merger costs of
$2,236 in connection with the April 2000 Pennsylvania rate settlement and the
other factors described above. On a diluted per share basis, earnings increased
$.32 reflecting the change in net income.
Results of Operations
Analysis of Third Quarter of 2000 Compared to Third Quarter of 1999
Revenues for the quarter increased $3,809 or 5.5% primarily as a result of the
increased water rates granted to the Pennsylvania operating subsidiaries in
April 2000 and additional water revenues associated with acquisitions, offset
partially by a decrease in water consumption associated with the relatively
cool, wet weather experienced in portions of our service territory in the third
quarter of 2000. The additional revenues from acquisitions were primarily from
the Bensalem water system acquired in December 1999.
Operations and maintenance expenses increased by $392 or 1.6% due to the
additional operating costs associated with acquisitions, offset in part by
reduced administrative expenses and lower water production expenses. The
reduction in the water production costs is associated with the lower water
consumption resulting from the relatively cool, wet weather experienced in the
third quarter of 2000.
Depreciation expense increased $275 or 3.5% reflecting the utility plant placed
in service since the third quarter of 1999, including the assets acquired
through system acquisitions, offset in part by the effect of a change in
depreciation rates.
Amortization increased $240 primarily due to the amortization of the costs
associated with, and the other costs being recovered in, various rate filings.
Taxes other than income taxes decreased by $131 or 2.3% due to a reduction in
certain state taxes.
The recovery of restructuring costs of $740 in the third quarter of 2000
resulted from the April 2000 rate settlement. These costs were charged off in
the first quarter of 1999 when CWC's corporate office was closed.
Interest expense increased by $1,935 or 23.2% primarily due to increased
borrowings to finance acquisitions, on-going capital projects and, to a lesser
extent, increased interest rates on borrowings.
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PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Allowance for funds used during construction increased by $29 or 5.7% primarily
due to a change in the average balance of utility plant construction work in
progress.
The recovery of merger transaction costs of $2,242 in the third quarter of 2000
resulted from the April 2000 rate settlement. These costs were charged off in
the first quarter of 1999 when the CWC merger was completed.
Our effective income tax rate was 39.7% in the third quarter of 2000 and 38.6%
in the third quarter of 1999. The change is due to a difference between tax
deductible expenses and book expenses.
Net income available to common stock for the third quarter of 2000 increased by
$2,207, in comparison to 1999 primarily as a result of the factors described
above. On a diluted per share basis, earnings increased $.04 reflecting the
change in net income.
Impact of Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and in September 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." In September 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," and amendment to SFAS
No. 133. SFAS No. 138 establishes accounting and reporting standards for
derivative instruments and for hedging activities and 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 137 changed
the timing of the implementation of SFAS No. 133. We plan to adopt these
statements on January 1, 2001 as required. As of September 30, 2000, we had no
derivative instruments or hedging activities.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." The Interpretation provides guidance for certain issues that
arose in the application of APB No. 25. We adopted the Interpretation as
required on July 1, 2000. The implementation of this new standard had no
material effect on our results of operations or financial position.
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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 our Annual Report on Form 10-K for the year
ended December 31, 1999, which is hereby incorporated by
reference.
Item 5. Other Information
On October 3, 2000, PSC dismissed KPMG LLP as its independent
accountant and engaged PricewaterhouseCoopers LLP as its new
independent accountant. As described in PSC's Report on Form
8-K filed on October 10, 2000, there were no accounting
disagreements and no reportable events during the two most
recent fiscal years and through October 3, 2000.
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 July 27, 2000, responding
to Item 5, Other Events. (Related to the Company's
announcement of the Registrant's earnings for the second
quarter of 2000 and the Registrant's unaudited consolidated
financial statements as of and for the quarter and six months
ended June 30, 2000).
Current Report on Form 8-K filed on September 18, 2000,
responding to Item 7, Financial Statements and Exhibits.
(Underwriting Agreement dated September 11, 2000 by and
between the Registrant and A.G. Edwards & Sons, Inc.,
PaineWebber Incorporated and Janney Montgomery Scott LLC.)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be executed on its behalf by the
undersigned thereunto duly authorized.
November 13, 2000
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
Registrant
/s/ Nicholas DeBenedictis
----------------------------------------
Nicholas DeBenedictis
Chairman and President
/s/ David P. Smeltzer
----------------------------------------
David P. Smeltzer
Senior Vice President - Finance
and Chief Financial Officer
\
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EXHIBIT INDEX
Exhibit No. Description Page No.
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27 Financial Data Schedule 17
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