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, 2001 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, 2001 54,109,888 - ----------
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per share amounts) <TABLE> <CAPTION> March 31, December 31, 2001 2000 ---------------------------- Assets (Unaudited) <S> <C> <C> Property, plant and equipment, at cost $ 1,562,305 $ 1,536,162 Less accumulated depreciation 292,052 284,735 ---------------------------- Net property, plant and equipment 1,270,253 1,251,427 ---------------------------- Current assets: Cash and cash equivalents 7,468 8,049 Accounts receivable and unbilled revenues, net 47,451 51,223 Inventory, materials and supplies 4,816 4,352 Prepayments and other current assets 6,040 7,054 ---------------------------- Total current assets 65,775 70,678 ---------------------------- Regulatory assets 78,724 67,757 Deferred charges and other assets, net 22,143 24,148 ---------------------------- $ 1,436,895 $ 1,414,010 ============================ 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 54,991,461 and 54,520,300 in 2001 and 2000 27,496 27,260 Capital in excess of par value 298,239 291,013 Retained earnings 128,614 123,911 Minority interest 2,156 2,823 Treasury stock, 881,573 and 844,376 shares in 2001 and 2000 (16,215) (15,346) Accumulated other comprehensive income 369 926 ---------------------------- Total stockholders' equity 442,419 432,347 ---------------------------- Long-term debt, excluding current portion 472,015 468,769 Commitments - - Current liabilities: Current portion of long-term debt 15,790 15,943 Loans payable 100,412 88,994 Accounts payable 11,267 20,635 Accrued interest 8,379 10,199 Accrued taxes 21,299 15,815 Other accrued liabilities 21,473 21,597 ---------------------------- Total current liabilities 178,620 173,183 ---------------------------- Deferred credits and other liabilities: Deferred income taxes and investment tax credits 155,080 151,718 Customers' advances for construction 56,225 58,718 Other 9,473 9,109 ---------------------------- Total deferred credits and other liabilities 220,778 219,545 ---------------------------- Contributions in aid of construction 123,063 120,166 ---------------------------- $ 1,436,895 $ 1,414,010 ============================ </TABLE> See notes to consolidated financial statements on page 5 of this report. 1
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share amounts) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, --------------------- 2001 2000 --------------------- <S> <C> <C> Operating revenues $70,193 $64,208 Costs and expenses: Operations and maintenance 26,186 24,928 Depreciation 8,953 8,251 Amortization 522 270 Taxes other than income taxes 5,588 5,982 --------------------- 41,249 39,431 --------------------- Operating income 28,944 24,777 Other expense (income): Interest expense, net 10,262 9,855 Allowance for funds used during construction (248) (734) Gain on sale of other assets (2,791) (1,363) Minority interest - 18 --------------------- Income before income taxes 21,721 17,001 Provision for income taxes 8,609 6,728 --------------------- Net income 13,112 10,273 Dividends on preferred stock 27 27 --------------------- Net income available to common stock $13,085 $10,246 ===================== Net income $13,112 $10,273 Other comprehensive income (loss), net of tax (557) (654) --------------------- Comprehensive income $12,555 $ 9,619 ===================== Net income per common share: Basic $ 0.24 $ 0.20 ===================== Diluted $ 0.24 $ 0.20 ===================== Average common shares outstanding during the period: Basic 53,952 51,188 ===================== Diluted 54,598 51,571 ===================== </TABLE> See notes to consolidated financial statements on page 5 of this report. 2
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands of dollars) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ----------------------- 2001 2000 ----------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 13,112 $ 10,273 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 9,475 8,521 Deferred income taxes 2,282 1,519 Gain on sale of other assets (2,791) (1,363) Net decrease in receivables, inventory and prepayments 3,990 2,458 Net decrease in payables, accrued interest, accrued taxes and other accrued liabilities (6,333) (8,826) Payment of Competitive Transition Charge (11,465) - Other 703 370 ----------------------- Net cash flows from operating activities 8,973 12,952 ----------------------- Cash flows from investing activities: Property, plant and equipment additions, including allowance for funds used during construction of $248 and $734 (19,809) (19,691) Proceeds from the sale of other assets 2,829 3,182 Acquisitions of water systems (424) - Other 545 (278) ----------------------- Net cash flows used in investing activities (16,859) (16,787) ----------------------- Cash flows from financing activities: Customers' advances and contributions in aid of construction 601 897 Repayments of customers' advances (1,653) (1,620) Net proceeds (repayments) of short-term debt 11,153 (328) Proceeds from long-term debt 3,389 16,515 Repayments of long-term debt (601) (520) Proceeds from issuing common stock 3,787 1,613 Repurchase of common stock (962) (3,502) Dividends paid on preferred stock (27) (27) Dividends paid on common stock (8,382) (7,367) Other - (3) ----------------------- Net cash flows from financing activities 7,305 5,658 ----------------------- Net increase (decrease) in cash and cash equivalents (581) 1,823 Cash and cash equivalents at beginning of period 8,049 4,658 ----------------------- Cash and cash equivalents at end of period $ 7,468 $ 6,481 ======================= </TABLE> See notes to consolidated financial statements on page 5 of this report.
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (In thousands of dollars, except per share amounts) <TABLE> <CAPTION> March 31, December 31, 2001 2000 ------------------------------- (Unaudited) (Audited) <S> <C> <C> Stockholders' equity: 6.05% Series B cumulative preferred stock $ 1,760 $ 1,760 Common stock, $.50 par value 27,496 27,260 Capital in excess of par value 298,239 291,013 Retained earnings 128,614 123,911 Minority interest 2,156 2,823 Treasury stock (16,215) (15,346) Accumulated other comprehensive income 369 926 --------------------------- Total stockholders' equity 442,419 432,347 --------------------------- Long-term debt: First Mortgage Bonds secured by utility plant: Interest Rate Range 0.00% to 2.49% 5,151 4,368 2.50% to 4.99% 7,666 6,712 5.00% to 5.49% 8,580 6,667 5.50% to 5.99% 31,060 31,060 6.00% to 6.49% 145,525 145,570 6.50% to 6.99% 55,200 55,200 7.00% to 7.49% 62,007 62,007 7.50% to 7.99% 23,000 23,000 8.00% to 8.49% 16,614 16,621 8.50% to 8.99% 10,457 10,460 9.00% to 9.49% 53,615 53,615 9.50% to 9.99% 49,336 49,831 10.00% to 10.55% 6,160 6,167 --------------------------- Total First Mortgage Bonds 474,371 471,278 Notes payable to banks under revolving credit agreements, due May 2001 12,000 12,000 Installment note payable, 9%, due in equal annual payments through 2013 1,434 1,434 --------------------------- 487,805 484,712 Current portion of long-term debt 15,790 15,943 --------------------------- Long-term debt, excluding current portion 472,015 468,769 --------------------------- Total capitalization $914,434 $901,116 =========================== </TABLE> See notes to consolidated financial statements on page 5 of this report. 4
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 March 31, 2001, the consolidated statements of income and comprehensive income and cash flow for the three months ended March 31, 2001 and 2000, 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, 2000. The results of operations for interim periods may not be indicative of the results that may be expected for the entire year. Certain prior year amounts have been reclassified to conform with current year's presentation. Note 2 Water Rates During the first quarter of 2001, Consumers Water Company ("CWC") operating subsidiaries were allowed annual rate increases of $4,168, representing six rate decisions in various states. Revenues from these rate increases realized in the first quarter of 2001 were approximately $700. In April 2001, two additional rate decisions were received in another operating subsidiary of CWC representing an annual rate increase of $119. Note 3 Regulatory assets The Pennsylvania Electricity Generation Customer Choice and Competition Act ("the Act") permitted distribution companies to recover their stranded costs over approximately 12 years in the form of a Competitive Transition Charge ("CTC"). Consistent with the provisions of the Act, during the quarter Philadelphia Suburban Water Company negotiated and closed on the full pay off of its allocable share of CTC charges from its electric distribution company, PECO Energy Company. The $11,465 payment has been recorded as a regulatory asset and is expected to be recovered in future water rates over 10 years. Note 4 Long-term Debt and Loans Payable During the first quarter of 2001, operating subsidiaries issued $3,321 of long-term debt at varying rates of interest ranging from 1% to 3.24% and due at various times in 2019, 2020 and 2021. The proceeds of these issues were used to reduce a portion of the balance of short-term debt. As March 31, 2001, the Trustees for two financing issues that closed in 2000 continues to hold $4,929 pending completion of the projects financed with the issue and the restricted funds are included as cash and cash equivalents in the consolidated balance sheet. 5
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts) (continued) (UNAUDITED) Note 5 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: Three Months Ended March 31, ---------------------- 2001 2000 ---------------------- Average common shres outstanding during the period for Basic computation 53,952 51,188 Dilutive effect of employee stock options 646 383 ---------------------- Average common shares outstanding during the period for Diluted computation 54,598 51,571 ====================== Note 6 Stockholders' Equity 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: 2001 2000 --------------- Balance at January 1, $ 926 $2,020 Unrealized holding loss arising during the period not of tax of $300 in 2001 and $42 in 2000 (557) (78) Less: reclassification adjustment for gains included in net income, net of tax of $409 - (576) --------------- Other comprehensive income (loss), net tax (557) (654) --------------- Balance at March 31, $ 369 $1,366 =============== Note 7 Acquisitions During the first quarter of 2001, four acquisitions or growth ventures were completed in North Carolina, Pennsylvania and New Jersey. The total purchase price for the systems acquired consisted of $424 in cash and the issuance of 195,368 shares of PSC's common stock. In April 2001, our wastewater operating subsidiary purchased the assets of the Media Borough wastewater system in Delaware County, Pennsylvania for $3,700 in cash. 6
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. 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, Maine and North Carolina. 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 north and west 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 five states. Other subsidiaries provide water and wastewater services in parts of Pennsylvania, North Carolina and Ohio. We are among the largest investor-owned water utilities in the United States based on the number of customers. In addition, we provide water and wastewater service to approximately 35,000 people through operating and maintenance contracts with municipal authorities and other parties close to our operating companies' service territories. Some of our subsidiaries provide wastewater collection, treatment and disposal services (primarily residential) to approximately 40,000 people in Pennsylvania, Illinois, New Jersey and North Carolina. Financial Condition During the quarter, we had $19,809 of capital expenditures, repaid $1,653 of customer advances for construction and made sinking fund contributions of $601. The capital expenditures were related to new water mains and customer service lines, the rehabilitation of existing water mains, hydrants and customer service lines, in addition to treatment plant, well and booster improvements. 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. During the quarter, operating subsidiaries issued $3,321 of long-term debt at varying rates of interest ranging from 1% to 3.24% and due at various times in 2019, 2020 and 2021. The proceeds of these issues were used to reduce a portion of the balance of short-term debt. 7
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) At March 31, 2001, we had short-term lines of credit of $190,402, of which $77,990 was available. The Pennsylvania Electricity Generation Customer Choice and Competition Act ("the Act") permitted distribution companies to recover their stranded costs over approximately 12 years in the form of a Competitive Transition Charge ("CTC"). Consistent with the provisions of the Act, during the quarter Philadelphia Suburban Water Company negotiated and closed on the full pay off of its allocable share of CTC charges from its electric distribution company, PECO Energy Company. The $11,465 payment has been recorded as a regulatory asset and is expected to be recovered in future water rates over 10 years. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt and common stock are adequate to meet our financing requirements for the balance of the year and beyond. Results of Operations Analysis of First Quarter of 2001 Compared to First Quarter of 2000 Revenues for the quarter increased $5,985 or 9.3% primarily as a result of increased water rates granted to the operating subsidiaries and additional water revenues associated with the larger customer base due to acquisitions, offset partially by a decrease in water consumption. The increased water rates are primarily associated with the Pennsylvania rate increase granted in April 2000. Operations and maintenance expenses increased by $1,258 or 5.0% due to the additional operating costs associated with acquisitions, increased wages and benefit costs, and additional treatment costs associated with new treatment plants in Illinois and Pennsylvania, offset partially by reduced maintenance costs resulting from the relatively mild winter weather experienced in 2001 as compared to 2000. Depreciation expense increased $702 or 8.5% reflecting the utility plant placed in service since the first quarter of 2000, including the assets acquired through system acquisitions. Amortization increased $252 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 $394 or 6.6% due to a reduction in the Pennsylvania Public Utility Realty Tax ("PURTA") and a decrease in the Pennsylvania Capital Stock Tax. The decrease in PURTA is a result of a reduction in the assessment and the Capital Stock Tax decreased due to a reduction in the tax rate. Interest expense increased by $407 or 4.1% primarily due to increased borrowings to finance on-going capital projects, offset partially by decreased interest rates on borrowings. Allowance for funds used during construction decreased by $486 primarily due to a decrease in the average balance of utility plant construction work in progress resulting from the completion of the construction of a $35,000 water treatment plant at one of the operating subsidiaries. Construction commenced on this facility in December 1997 and was completed in the third quarter of 2000. 8
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) Gain on sale of other assets increased $1,428 due to an increase of $2,489 in the gain on the sale of land recognized as compared to 2000, offset in part by a gain on the sale of marketable securities of $1,061 being realized in the first quarter of 2000. There were no marketable securities sold in the first quarter of 2001. Our effective income tax rate was 39.6% in the first quarter of 2001 and 2000. Net income available to common stock for the quarter increased by $2,839 or 27.7% in comparison to 2000 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $.04 or 20.0% reflecting the change in net income and a 5.9% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the 1,653,125 share stock offering in September 2000 and additional shares issued in connection with acquisitions. Impact of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of 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." In September 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an 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 No. 137 changed the timing of the implementation of SFAS No. 133. The adoption of these statements on January 1, 2001 did not have a material impact on our results of operations or financial condition. As of March 31, 2001, we had no derivative instruments or hedging activities. 9
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Part II. Other Information Item 1. Legal Proceedings There are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that are expected to have a material effect on our financial position, results of operations and cash flows. Reference is made to Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000, which is included by a reference herein. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 10.34 2001 Annual Cash Incentive Compensation Plan (b) Reports on Form 8-K None. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. There have been no significant changes in our exposure to market risks since December 31, 2000. 10
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 14, 2001 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 11
EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- 10.34 2001 Annual Cash Incentive Compensation Plan 13 12