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, 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 September 30, 1999 40,962,206 - ----------------
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per share amounts) <TABLE> <CAPTION> September 30, December 31, 1999 1998 ----------------------------------- Assets (Unaudited) (Audited) <S> <C> <C> Property, plant and equipment, at cost $ 1,315,220 $ 1,248,621 Less accumulated depreciation 252,468 232,427 ----------------------------------- Net property, plant and equipment 1,062,752 1,016,194 ----------------------------------- Current assets: Cash and cash equivalents 6,454 8,247 Accounts receivable and unbilled revenues, net 41,903 40,768 Inventory, materials and supplies 4,368 3,857 Prepayments and other current assets 2,800 7,026 ----------------------------------- Total current assets 55,525 59,898 ----------------------------------- Regulatory assets 57,525 57,697 Deferred charges and other assets, net 26,199 22,944 ----------------------------------- $ 1,202,001 $ 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 40,962,206 and 40,702,311 in 1999 and 1998 20,780 20,617 Capital in excess of par value 249,890 244,457 Retained earnings 99,324 91,683 Minority interest 2,609 2,589 Treasury stock, 596,766 and 533,292 shares in 1999 and 1998 (10,891) (9,478) Accumulated other comprehensive income 1,068 - ----------------------------------- Total stockholders' equity 364,540 353,088 ----------------------------------- Long-term debt, excluding current portion 411,514 413,309 Commitments - - Current liabilities: Current portion of long-term debt 33,437 2,981 Loans payable 39,280 24,615 Accounts payable 10,292 25,248 Accrued interest 7,847 8,406 Accrued taxes 12,086 14,382 Other accrued liabilities 18,752 20,462 ----------------------------------- Total current liabilities 121,694 96,094 ----------------------------------- Deferred credits and other liabilities: Deferred income taxes and investment tax credits 132,919 126,809 Customers' advances for construction 56,866 57,781 Other 9,322 8,735 ----------------------------------- Total deferred credits and other liabilities 199,107 193,325 ----------------------------------- Contributions in aid of construction 105,146 100,917 ----------------------------------- $ 1,202,001 $ 1,156,733 =================================== </TABLE> See notes to consolidated financial statements on page 6 of this report. 2
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, --------------------------- 1999 1998 --------------------------- <S> <C> <C> Operating revenues $ 194,091 $ 188,664 Costs and expenses: Operations and maintenance 71,573 72,825 Depreciation 22,792 20,341 Amortization 989 1,737 Taxes other than income taxes 16,803 16,941 Restructuring costs 3,787 - --------------------------- 115,944 111,844 --------------------------- Operating income 78,147 76,820 Other expense (income): Interest expense, net 24,968 23,728 Dividends on preferred stock of subsidiary and minority interest 76 114 Allowance for funds used during construction (1,369) (861) Merger transaction costs 6,334 - Gains on sales of properties (198) (6,680) --------------------------- Income before income taxes 48,336 60,519 Provision for income taxes 21,551 24,157 --------------------------- Net income 26,785 36,362 Dividends on preferred stock 104 146 --------------------------- Net income available to common stock $ 26,681 $ 36,216 =========================== Net income $ 26,785 $ 36,362 Other comprehensive income: Unrealized gains on securities 1,643 - Provision for income taxes on other comprehensive income (575) - --------------------------- Comprehensive income $27,853 $36,362 =========================== Net income per common share: Basic $ 0.65 $ 0.90 =========================== Diluted $ 0.65 $ 0.89 =========================== Average common shares outstanding during the period: Basic 40,823 40,263 =========================== Diluted 41,281 40,741 =========================== </TABLE> See notes to consolidated financial statements on page 6 of this report. 3
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, --------------------------- 1999 1998 --------------------------- <S> <C> <C> Operating revenues $69,337 $68,991 Costs and expenses: Operations and maintenance 24,645 25,216 Depreciation 7,765 6,932 Amortization 277 601 Taxes other than income taxes 5,591 5,871 --------------------------- 38,278 38,620 --------------------------- Operating income 31,059 30,371 Other expense (income): Interest expense, net 8,347 7,671 Dividends on preferred stock of subsidiary and minority interest 34 45 Allowance for funds used during construction (512) (309) Gains on sales of properties (190) - --------------------------- Income before income taxes 23,380 22,964 Provision for income taxes 9,013 9,129 --------------------------- Net income 14,367 13,835 Dividends on preferred stock 35 48 --------------------------- Net income available to common stock $14,332 $13,787 =========================== Net income $14,367 $13,835 Other comprehensive income: Unrealized gains on securities 1,643 - Provision for income taxes on other comprehensive income (575) - --------------------------- Comprehensive income $15,435 $13,835 =========================== Net income per common share: Basic $ 0.35 $ 0.34 =========================== Diluted $ 0.35 $ 0.34 =========================== Average common shares outstanding during the period: Basic 40,898 40,563 =========================== Diluted 41,333 41,077 =========================== </TABLE> See notes to consolidated financial statements on page 6 of this report. 4
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands of dollars) (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------ 1999 1998 ------------------------------ Cash flows from operating activities: <S> <C> <C> Net income $ 26,785 $ 36,362 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 23,781 22,078 Deferred income taxes 5,576 7,637 Gains on sales of properties (198) (6,680) Net decrease (increase) in receivables, inventory and prepayments 2,645 (2,366) Net decrease in payables, accrued interest, accrued taxes and other accrued liabilities (14,753) (4,819) Net cash flows from discontinued operations 383 1,361 Other 2,533 (1,363) ------------------------------ Net cash flows from operating activities 46,752 52,210 ------------------------------ Cash flows from investing activities: Property, plant and equipment additions, including allowance for funds used during construction of $1,369 and $861 (67,723) (57,867) Acquisitions of water systems (199) (23,911) Proceeds from dispositions of properties 237 33,728 Other (6,280) 362 ------------------------------ Net cash flows used in investing activities (73,965) (47,688) ------------------------------ Cash flows from financing activities: Customers' advances and contributions in aid of construction 3,604 3,434 Repayments of customers' advances (2,125) (1,876) Net proceeds (repayments) of short-term debt 14,665 (9,500) Proceeds from long-term debt 34,664 29,120 Repayments of long-term debt (6,154) (23,519) Redemption of preferred stock (1,460) - Redemption of preferred stock of subsidiary - (4,214) Proceeds from issuing common stock 5,939 31,281 Repurchase of common stock (1,756) (3,334) Dividends paid on preferred stock (90) (146) Dividends paid on common stock (21,832) (21,898) Other (35) (47) ------------------------------ Net cash flows from (used in) financing activities 25,420 (699) ------------------------------ Net increase (decrease) in cash and cash equivalents (1,793) 3,823 Cash and cash equivalents at beginning of year 8,247 3,374 ------------------------------ Cash and cash equivalents at end of period $ 6,454 $ 7,197 ============================== </TABLE> See Merger with Consumers Water Company footnote for description of non-cash investing and financing activities. See notes to consolidated financial statements on page 6 of this report. 5
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (In thousands, except per share amounts) <TABLE> <CAPTION> September 30, December 31, 1999 1998 ----------------------------------- (Unaudited) (Audited) Stockholders' equity: <S> <C> <C> 6.05% Series B cumulative preferred stock $ 1,760 $ 3,220 Common stock, $.50 par value 20,780 20,617 Capital in excess of par value 249,890 244,457 Retained earnings 99,324 91,683 Minority interest 2,609 2,589 Treasury stock (10,891) (9,478) Accumulated other comprehensive income 1,068 - ----------------------------------- Total stockholders' equity 364,540 353,088 ----------------------------------- Long-term debt: First Mortgage Bonds secured by utility plant: Interest Rate Range 0.00% to 1.99% 903 949 2.00% to 4.99% 824 - 5.00% to 5.49% 2,200 - 5.50% to 5.99% 31,545 21,945 6.00% to 6.49% 102,210 87,210 6.50% to 6.99% 55,200 55,200 7.00% to 7.49% 38,000 40,001 7.50% to 7.99% 23,000 23,000 8.00% to 8.49% 16,500 16,500 8.50% to 8.99% 9,005 9,011 9.00% to 9.49% 53,776 53,776 9.50% to 9.99% 51,220 51,820 10.00% to 10.55% 6,000 6,000 ----------------------------------- Total First Mortgage Bonds 390,383 365,412 Note payable to bank under revolving credit agreement, due January 2000 43,425 38,935 Notes payable to banks under revolving credit agreements, due June 2000 9,600 10,400 Installment note payable, 9%, due in equal annual payments through 2013 1,543 1,543 ----------------------------------- 444,951 416,290 Current portion of long-term debt 33,437 2,981 ----------------------------------- Long-term debt, excluding current portion 411,514 413,309 ----------------------------------- Total capitalization $ 776,054 $ 766,397 =================================== </TABLE> See notes to consolidated financial statements on page 6 of this report. 6
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts) (UNAUDITED) Note 1 Basis of Presentation On March 10, 1999, Philadelphia Suburban Corporation (the "Company" or "PSC") completed a merger with Consumers Water Company ("CWC"). See Note 2 - Merger with Consumers Water Company. The merger has been accounted for as a pooling-of-interests under Accounting Principles Board Opinion No. 16. Accordingly, the Company's consolidated financial statements have been restated to include the accounts and results of CWC as if the merger had been completed as of the beginning of the earliest period presented. Certain reclassifications were made to the historical financial statements of the two companies to conform presentations. The accompanying consolidated balance sheet and statement of capitalization of PSC at September 30, 1999, the consolidated statements of income and comprehensive income for the nine months and quarter ended September 30, 1999 and 1998, and the consolidated statements of cash flow for the nine months ended September 30, 1999 and 1998 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated results of operations, and the consolidated cash flow for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements, and therefore, should be read in conjunction with the PSC Annual Report on Form 10-K for the year ended December 31, 1998, Form 8-K filed on May 24, 1999 containing the Company's audited Supplemental Consolidated Financial Statements as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998 and the Quarterly Report on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999. Note 2 Merger with Consumers Water Company On March 10, 1999, the Company completed a merger ("the Merger") with CWC. Pursuant to the merger agreement, the Company issued 13,014,015 shares of common stock in exchange for all of the outstanding stock of CWC. CWC common shareholders received 1.432 shares of the Company's Common Stock for each CWC common share and CWC preferred shareholders received 5.649 shares of the Company's Common Stock for each CWC preferred share. As a result of the Merger, CWC became a wholly-owned subsidiary of the Company. CWC serves approximately 230,000 customers in service territories covering parts of Pennsylvania, Ohio, Illinois, New Jersey and Maine. During the first quarter of 1999, the Company recorded a charge of $6,334 ($6,134, after tax benefits of $200) for merger transaction costs consisting primarily of fees for investment bankers, attorneys, accountants, and other administrative charges. In addition, the Company recorded in the first quarter of 1999 restructuring costs of $3,787 ($2,462, after tax benefits of $1,325) that includes severance and other costs associated with the closing of CWC's corporate office. As of March 31, 1999, $1,647 7
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts)(continued) (UNAUDITED) of restructuring costs were accrued and during the second and third quarters of 1999, $1,300 of these restructuring costs were paid with the balance anticipated to be paid over time. The merger transaction costs have been reported in Other expense and the restructuring costs have been reported as Costs and expenses in the Consolidated Statements of Income and Comprehensive Income. 8
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts)(continued) (UNAUDITED) Note 3 Acquisitions In January 1999, the Pennsylvania Public Utility Commission ("PAPUC") approved the franchise application of the Company's largest subsidiary, Philadelphia Suburban Water Company ("PSW") to expand PSW's service territory in Cumru Township, Berks County. It is anticipated that new customers will result as the territory is developed over time. In March 1999, one of CWC's Pennsylvania subsidiaries 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 assets of a wastewater system from a real estate developer and a township for $162 in cash, payable in installments over four years. The service territory covers approximately a one-half square mile area in East Bradford Township, Chester County. The annual revenues of this system approximate $40. In July 1999, PSW entered into an agreement to purchase the water system assets of the East Marlborough Township water system for $500 in cash. Located in Chester County, the system is contiguous to PSW's and has annual operating revenues of approximately $70. In October 1999, the PAPUC approved the transaction and closing is anticipated to occur by the end of 1999. In August 1999, CWC's Ohio subsidiary acquired the water system assets of two apartment complexes in Jackson Township, Ohio for $95 in cash. The annual revenues of this system, once fully developed, are projected to approximate $100. In August 1999, PSW entered into an agreement to purchase the water utility assets of Bensalem Township for approximately $36,500. In October 1999, the PAPUC approved the transaction. Closing on the acquisition is anticipated to occur in December 1999. The Bensalem Township system covers a 20 square-mile service area in Bucks County, Pennsylvania. The increase in annual revenues resulting from this acquisition approximate $4,100. In August 1999, CWC's Illinois subsidiary entered into an agreement to purchase the water utility assets of the Village of Bradley in Kankakee County for $975 in cash. The annual operating revenues of this system is $190. This transaction is anticipated to close by the end of 1999. The Company continues to actively explore other opportunities to expand its utility operations through acquisitions and otherwise. 9
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts)(continued) (UNAUDITED) Note 4 Water Rates PSW filed an application with the PAPUC on October 29, 1999 requesting a $28 million or 15.5% increase in annual revenues. The application is currently pending before the PAPUC and a final determination is anticipated by July 2000. In May 1999, a rate application was filed by CWC's Illinois subsidiary for one of its divisions. The amount of increased annual revenue requested is $558 and a decision is anticipated during the first quarter of 2000. During the first quarter of 1999, CWC's operating subsidiaries settled one rate case and implemented received a rate increase granted under the terms of a prior year rate settlement in two CWC divisions resulting in an aggregate annual revenue increase of $390. Water utilities in Pennsylvania are permitted by the PAPUC to add a Distribution System Improvement Charge ("DSIC") to their water bills reflecting the capital costs and depreciation related to certain distribution system improvement projects completed and placed into service between base rate filings. PAPUC rules require a utility to suspend the use of the DSIC in the quarter subsequent to a twelve-month period that the utility's adjusted return on equity exceeds a benchmark established by the PAPUC. The benchmark is established quarterly by the PAPUC staff based on recent economic data. Based on the adjusted return on equity for 1998 and the applicable benchmark, PSW's DSIC resumed in the second quarter of 1999 after having been suspended in the first quarter of 1999. PSW's DSIC in the second and third quarters of 1999 was 3.05% and 3.62% of base water rates, respectively. The amount of PSW's DSIC in the fourth quarter of 1999 has been set at 5.00% of base water rates, the maximum DSIC allowed. During the third and fourth quarters, two of CWC's Pennsylvania subsidiaries also reflect a DSIC on their water bills at rates less than 1%. The amount of the DSIC in the first quarter of 2000 is dependent on the adjusted return on equity of the individual Pennsylvania subsidiaries and the benchmark established by the PAPUC and therefore is not determinable at this time. In addition to its base rates and DSIC, PSW has utilized a surcharge on its bills to reflect certain changes in Pennsylvania State taxes until such time as the tax changes are incorporated into base rates. From May 1998 until February 1999, PSW was required to provide a revenue credit of 0.11% ($110 on an annual basis) of base water rates in order to provide its customers with the savings associated with a decrease in the Pennsylvania Capital Stock Tax rate. In February 1999, PSW added a 1.04% surcharge ($1,384 on an annual basis) as a result of increases in the Pennsylvania Public Utility Realty Tax, resulting in a combined surcharge of 0.93%. Effective April 1, 1999, the combined surcharge was adjusted to 0.96% due to a change in the revenue credit from 0.11% to 0.08%. Effective May 29, 1999, the combined surcharge was adjusted to 0.80% ($1,153 on an annual basis) due to a decrease in the Pennsylvania Capital Stock Tax rate. CWC's Pennsylvania subsidiaries have also begun to utilize a surcharge at various rates (providing approximately $250 of revenues on an annual basis) on their bills to reflect the changes in Pennsylvania State Taxes. 10
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts)(continued) (UNAUDITED) Note 5 Long-term Debt and Loans Payable In January 1999, PSW issued a First Mortgage Bond of $10,000 5.85% Series due 2004 and in April 1999, PSW issued a First Mortgage Bond of $15,000 6.00% Series due 2004 through the medium-term note program. Proceeds from these issues were used to reduce the balance of PSW's revolving credit facility. In June 1999, CWC's Maine subsidiary issued a First Mortgage Bond of $2,200 5.05% Series due 2024. In August 1999, CWC's Maine subsidiary issued a First Mortgage Bond of $824 2.68% Series due 2019. Proceeds from these issues were used to reduce the balance of its short-term debt. In June 1999, two of the three CWC revolving credit agreements were due and terminated as planned. The two expired revolving credit facilities had represented aggregate borrowing facilities of $20,000 and amounts borrowed under these facilities have been repaid. In August 1999, the remaining CWC revolving credit agreement was amended to increase the facility from $15,000 to $20,000. In October 1999, PSW issued $25,000 in First Mortgage Bonds 6.00% Series due 2029 as security for an equal amount of Bonds issued by the Delaware County Industrial Development Authority. The proceeds from these bonds are restricted to funding the costs of certain capital projects. As of closing, project costs of $22,562 were already incurred and accordingly the Trustee transferred such amounts to PSW. As a result, $22,562 of the balance on PSW's revolving credit agreement has been classified as long-term debt as of September 30, 1999. The remainder of the proceeds are being held by the Trustee pending completion of the remainder of the projects financed with this issue. It is expected that these projects will be completed in 2000, however, funds will be drawn from the trust during the interim as expenditures are made on these projects. Note 6 Net Income per Common Share Basic net income per common share is based on the weighted average number of common shares outstanding. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock options is included in the computation of Diluted net income per common share. The following table summarizes the shares, in thousands, used in computing Basic and Diluted net income per common share: Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1999 1998 1999 1998 ------ ------ ------ ------ Average common shares outstanding during the period for Basic computation....................... 40,823 40,263 40,898 40,563 Dilutive effect of employee stock options........................... 458 478 435 514 ------ ------ ------ ------ Average common shares outstanding during the period for Diluted computation....................... 41,281 40,741 41,333 41,077 ====== ====== ====== ====== 11
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; liquidity; Year 2000 disclosure, including statements regarding readiness, remediation, costs, risks and contingency plans; as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes", "expects", "anticipates", "plans", "projects" or similar expressions. These statements are based on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside the Company's control. Actual results may differ materially from such statements for a number of reasons, including the effects of regulation, abnormal weather, 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 303,000 customers within its 482 square-mile service territory. PSW's service territory is located north and west of the City of Philadelphia. In addition, water service is provided to approximately 6,800 customers through an operating and maintenance contract with a municipal authority contiguous to its service territory. CWC owns 100% of the voting stock of four water companies and at least 96% of the voting stock of three water companies, collectively CWC's operating subsidiaries. These water companies are regulated water utilities providing water and wastewater service in 27 operating divisions to approximately 230,000 customers in Pennsylvania, Ohio, Illinois, New Jersey and Maine. Financial Condition During the first nine months of 1999, the Company had $67,723 of capital expenditures, redeemed $1,460 of preferred stock, and repaid $2,125 of customer advances for construction. Of the total capital expenditures, $12,100 was related to the construction of the Shenango water treatment plant in Sharon, Pennsylvania, $24,200 for infrastructure improvements and the balance for routine capital improvements. Construction of the Shenango plant commenced in December 1997 and is expected to cost $35,000 with completion anticipated in the first quarter of 2000. To date, $27,400 has been expended on the Shenango plant construction. 12
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)(continued) During the first nine months of 1999, the proceeds from the issuance of long-term debt, proceeds from the issuance of common stock, internally generated funds, available working capital and funds available under the revolving credit agreements were used to fund the cash requirements discussed above and to pay dividends. In connection with the merger of CWC on March 10, 1999, the Company issued 13,014,015 shares of common stock in exchange for all of the outstanding stock of CWC. In January 1999, PSW issued a First Mortgage Bond of $10,000 5.85% Series due 2004 through the medium-term note program. In April 1999, PSW issued a First Mortgage Bond of $15,000 6.00% Series due 2004. Proceeds from these issues were used to reduce the balance of PSW's revolving credit facility. In June 1999, CWC's Maine subsidiary issued a First Mortgage Bond of $2,200 5.05% Series due 2024. In August 1999, CWC's Maine subsidiary issued a First Mortgage Bond of $824 2.68% Series due 2019. Proceeds from these issues were used to reduce the balance of its short-term debt. Effective with the September 1, 1999 payment, the Company has increased the quarterly dividend on common stock from $.17 per share to $.18 per share. At September 30, 1999, the Company, PSW and CWC had short-term lines of credit of $24,000, $1,000 and $87,800, respectively. At September 30, 1999, the Company, PSW and CWC had $12,000, $1,000 and $60,520 available, respectively under short-term lines of credit. In June 1999, two of the three CWC revolving credit agreements became due and were terminated as planned. The two expired revolving credit facilities had represented aggregate borrowing facilities of $20,000 and amounts borrowed under these facilities have been repaid. In August 1999, the remaining CWC revolving credit agreement was amended to increase the facility from $15,000 to $20,000. At September 30, 1999, PSW's revolving credit agreement remained as a $50,000 facility. At September 30, 1999, PSW and CWC had $6,575 and $10,400 available, respectively, under their revolving credit agreements. In October 1999, PSW issued $25,000 in First Mortgage Bonds 6.00% Series due 2029 as security for an equal amount of Bonds issued by the Delaware County Industrial Development Authority. As of November 12, 1999, the Trustee for this issue held $2,438 in an interest bearing account pending completion of the remainder of the projects financed with this issue. Accordingly, $22,562 of borrowings under the PSW revolving credit agreement were repaid with the proceeds from this issuance of First Mortgage Bonds and this portion of the revolving credit balance is classified as long-term debt as of September 30, 1999. The remainder of the revolving credit agreements balances have been classified as current portion of long-term debt. PSW intends to renew this facility and continue to periodically refinance portions of the borrowings under this facility through the issuance of First Mortgage Bonds. In the fourth quarter of 1999, PSW intends to establish a $300,000 medium-term note program to replace a similar program that expired in July 1999. The program will provide for the issuance of long-term debt with maturities ranging between one and 35 years at fixed rates of interest, as determined at the time of issuance. The proceeds from debt issuances under this program will be used for general corporate purposes, to fund PSW's ongoing construction programs and to partially fund the acquisition of the water utility assets of Bensalem Township and other acquisitions. 13
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)(continued) Results of Operations Analysis of First Nine Months of 1999 Compared to First Nine Months of 1998 Operating revenues increased $5,427 or 2.9% primarily due to additional revenues from acquisitions, rate increases, including an additional $2,260 from the Distribution System Improvement Charge and $1,040 of additional revenues from a state tax adjustment surcharge that were added to customers bills in Pennsylvania, offset in part by $1,623 of revenues associated with CWC's New Hampshire operations which was sold in April 1998. In addition, water consumption for the first nine months increased despite drought declarations in Pennsylvania and New Jersey that affected revenues in the third quarter of 1999. Six rate increases were granted or became effective in various CWC divisions since the first quarter of 1998 which contributed an additional $1,540 of revenues in the first nine months of 1999. Operations and maintenance expenses decreased by $1,252 or 1.7% due to $592 of operations and maintenance expenses associated with CWC's New Hampshire operations which was sold in April 1998, savings from reduced electric costs as a result of electric deregulation in Pennsylvania and a reduction in general corporate expenses due to the closing of CWC's corporate office. The decreased operating costs were offset in part by increased wages and higher maintenance expenses at PSW resulting from an increased number of main breaks. Depreciation expense increased $2,451 or 12.0% reflecting the utility plant placed in service since the third quarter of 1998, including the assets acquired through system acquisitions. Amortization decreased $748 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 $138 or 0.8% due to a decrease in the Pennsylvania Public Utility Realty Tax ("PURTA"), the other taxes of CWC's New Hampshire operations, sold in April 1998, and a reduction in state regulatory taxes. The reduction in the PURTA tax is due to an additional 1998 charge for PURTA tax resulting from an additional assessment. 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. Net interest expense increased by $1,240 or 5.2% due to increased borrowings to finance on-going capital projects and acquisitions, offset partially by a reduction in debt associated with CWC's New Hampshire operations and lower interest rates on borrowings. Allowance for funds used during construction increased by $508 primarily due to an increase in the average balance of utility plant construction work in progress resulting from the construction of the $35,000 Shenango water treatment plant. Construction commenced on this facility in December 1997 and is expected to be completed in the first quarter of 2000. The merger transaction costs in the first quarter of 1999 of $6,334 represents the fees for investment bankers, attorneys, accountants, and other administrative charges associated with the merger of Consumers Water Company consummated on March 10, 1999. See Note 2 - Merger with Consumers Water Company. 14
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)(continued) Gains on sales of properties decreased by $6,482 primarily due to the gain on the sale of CWC's New Hampshire operations of $6,680 recorded in the second quarter of 1998, offset in part by gains on sales of properties in 1999. The Company's effective income tax rate was 44.6% in the first nine months of 1999 and 39.9% in 1998. The effective tax rate increased due to the estimated non-deductible portion of the $6,334 of merger transaction costs recorded in the first quarter of 1999. Exclusive of the merger transaction costs and related tax benefits of $200, the 1999 effective income tax rate was 39.8%. Dividends on preferred stock decreased $42 or 28.8% 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 1999 decreased by $9,535, of which $8,596, net of tax, was related to the merger costs recorded in the first quarter of 1999, $3,903, net of tax, was related to the gain on sale of CWC's New Hampshire operations in April 1998 and the other factors described above. Excluding these non-recurring items, net income available to common stock increased $2,964 or 9.2%. On a diluted per share basis, earnings decreased $.24 reflecting the change in net income and a 1.3% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or otherwise issued through the Dividend Reinvestment Plan and the employee stock and incentive plan. Analysis of Third Quarter of 1999 Compared to Third Quarter of 1998 Operating revenues for the quarter increased $346 or 0.5% primarily due to rate increases, including an additional $1,100 from the Distribution System Improvement Charge and $420 of additional revenues from a state tax adjustment surcharge that were added to customers' bills in Pennsylvania, offset in part by a decrease in customer consumption of water in Pennsylvania and New Jersey. The Pennsylvania and New Jersey service territories were affected by drought declarations during the third quarter of 1999 in which the Governors of each state imposed mandatory bans on nonessential water usage. These restrictions were lifted at the end of September and in early October. While these restrictions were in effect, water consumption in these areas declined to levels below those experienced in 1998. Three rate increases were granted or became effective in various CWC divisions since the third quarter of 1998, providing for an additional $124 of revenues in the quarter. Operations and maintenance expenses decreased by $571 or 2.3% due to a reduction in general corporate expenses related to the closing of CWC's corporate office in March 1999, reduced production costs attributable to reduced production and savings from reduced electric costs, offset partially by increased wages and maintenance expenses. The reduced electric costs result from the electric deregulation in Pennsylvania. The increased maintenance expenses result from an increase in water main repairs. 15
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)(continued) Depreciation expense increased $833 or 12.0% reflecting the utility plant placed in service since the third quarter of 1998. Amortization decreased $324 primarily due to the completion of the amortization in 1998 of the costs associated with PSWs 1997 rate filing. Taxes other than income taxes decreased by $280 or 4.8% as a result of an additional 1998 charge for PURTA tax due to an additional tax assessment that had been necessary to offset a state-wide deficit in the collection of this tax. The decreased PURTA tax is offset partially by an increase in local real estate taxes due to additional capital expenditures. Net interest expense increased by $676 or 8.8% due to increased borrowings to finance on-going capital projects offset partially by lower interest rates on borrowings. Allowance for funds used during construction increased by $203 primarily due to an increase in the average balance of utility plant construction work in progress resulting from the construction of the $35,000 Shenango water treatment plant. Construction commenced on this facility in December 1997 and is expected to be completed in the first quarter of 2000. Gains on sales of properties increased by $190 due to the gain on the sale of various land parcels in CWC's Illinois subsidiary. The Company's effective income tax rate was 38.6% in the third quarter of 1999 and 39.8% in 1998. The effective tax rate decreased due to differences between tax deductible expenses and book expenses, offset in part by an increase in the statutory Federal income tax rate from 34% to 35% in the CWC operating subsidiaries. Dividends on preferred stock decreased $13 or 27.1% 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 quarter increased by $545 primarily as a result of factors described above. On a diluted per share basis, earnings increased $.01 or 2.9% reflecting the change in net income and a 0.6% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or otherwise issued through the Dividend Reinvestment Plan and the employee stock and incentive plan. Recent Events The Company's water customers are located in five states and as of December 31, 1998, 65% were located in Pennsylvania. On June 10, 1999, the Pennsylvania Department of Environmental Protection declared a drought warning for most of the counties in Pennsylvania, including the counties served by PSW and CWC's Pennsylvania subsidiaries. A drought warning calls for voluntary restrictions on water use, particularly non-essential uses of water. On July 20, 1999, the Governor of Pennsylvania issued a drought emergency order for the counties that were previously under the 16
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)(continued) drought warning. The drought emergency imposes a mandatory ban on all nonessential water usage. On September 30, 1999, the drought emergency order was lifted for nearly all Pennsylvania counties, including those served by PSC's water companies. While portions of Pennsylvania, particularly those dependent on ground water, experienced water shortages, the Company's water supplies remained adequate. As a result of these actions, water consumption and water revenues in these areas declined to levels below those experienced in 1998. As a result of the drought emergency order being lifted, water revenues are expected to return to normal levels. Year 2000 Overview The Company has actively pursued 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 that were 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. The Company's State of Readiness Internal Systems and Processes The Company has evaluated its systems and processes based on a prioritization of the risks they pose to the overall objectives of the Program. An inventory of all critical systems and processes and an assessment of Year 2000 issues for the Company's critical systems has been completed. As a result of the assessment, it was determined that the internal systems and processes directly related to the treatment and distribution of water to its customers would not be significantly affected by the Year 2000 issue. Some financial and office systems may have been affected and the remediation or replacement and testing of these systems is under way. It is anticipated that remediation or replacement and testing of the last of these office systems is anticipated to be completed in November 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 17
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)(continued) water use by customers in these categories will be significantly affected by the Year 2000 issue. No single customer accounted for more than one percent of the Company's 1998 revenues. The Company has contacted its key suppliers to determine their Year 2000 compliance status and the responses received to date indicate that such suppliers are or intend to be Year 2000 compliant. Because of the substantial electric power requirements of the Company's water treatment and distribution systems, electric power supply may be the most critical supplier relationship. To date, the Company's electric suppliers have indicated that they do not anticipate service disruptions from the Y2K problem. 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 total cost for its Year 2000 Program to be approximately $8,000 which includes the costs to develop a new customer billing system that the Company is implementing to provide added capacity and capabilities. Substantially all of these costs have been incurred to date in bringing its critical systems into compliance. The Risks of the Company's Year 2000 Issues A material Year 2000 noncompliance could result in an interruption in, or failure of, certain normal business activities or operations. Such noncompliance could materially and adversely affect the Company's water service and results of operations, liquidity and financial condition. Because of the uncertainty inherent in the Year 2000 issue, due primarily from the uncertainty of the Year 2000 readiness of third party suppliers, the Company is unable to determine at this time whether the consequences of Year 2000 noncompliances will have a material impact on the Company. The Company's Year 2000 Program is expected to significantly reduce the Company's level of uncertainty about the Year 2000 issue and, in particular, about the Year 2000 compliance and readiness of its key vendors and suppliers. The Company believes that, with the completion of its Program, the possibility of significant interruptions of normal operations should be reduced. The Company's Contingency Plans The Company had developed contingency plans for critical systems or processes or vendor relationships that cannot be verified as Year 2000 compliant. Contingency plans have also been developed for certain other critical systems, notwithstanding a determination of their Year 2000 compliance, where such systems would have a significant effect on the Company's ability to deliver water to its customers. Forward-looking Statements The statements in the Company's Year 2000 disclosure contain forward-looking statements and should be read in conjunction with the Company's disclosure under the "Forward-looking Statements" section in the "Management's Discussion and Analysis of Financial Condition and Results of Operations." 18
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)(continued) 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's adoption of this statement on January 1, 1999 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's adoption of this statement on January 1, 1999 did not have a material impact on the Company's results from operations or financial condition. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and in June 1999 amended this standard by issuing SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 137 changed the timing of the implementation of SFAS No. 133. The Company plans to adopt these statements in 2001 as required. As of September 30, 1999, the Company had no derivative instruments or hedging activities. 19
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 4.26 Thirty-second Supplemental Indenture, dated as of October 1, 1999 10.37 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Commerce Capital Markets dated September 29, 1999 10.38 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of October 1, 1999 27 Financial Data Schedule (b) Reports on Form 8-K None 20
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 12, 1999 PHILADELPHIA SUBURBAN CORPORATION Registrant /s/ Nicholas DeBenedictis --------------------------------- Nicholas DeBenedictis Chairman and President /s/ David P. Smeltzer --------------------------------- David P. Smeltzer Vice President - Finance and Chief Financial Officer
EXHIBIT INDEX Exhibit No. Description Page No. 4.26 Thirty-second Supplemental Indenture, dated as of October 1, 1999 23 10.37 Bond Purchase Agreement among the 58 Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Commerce Capital Markets dated September 29, 1999 10.38 Construction and Financing Agreement between 82 the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of October 1, 1999 27 Financial Data Schedule 121