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, 1998
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 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, 1998.
27,448,974
----------
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
March 31, December 31,
1998 1997
------------------------------
(Unaudited) (Audited)
Property, plant and equipment, at cost $ 688,024 $ 656,011
Less accumulated depreciation 124,730 121,528
------------------------------
Net property, plant and equipment 563,294 534,483
Current assets:
Cash 1,194 680
Accounts receivable, net 23,338 23,534
Inventory, materials and supplies 1,969 1,847
Prepayments and other current assets 620 1,002
------------------------------
Total current assets 27,121 27,063
Regulatory assets 51,169 51,203
Deferred charges and other assets, net 6,021 5,723
------------------------------
$ 647,605 $ 618,472
==============================
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock at $.50 par value, authorized 40,000,000 shares,
outstanding 27,448,974 and 26,210,654 in 1998 and 1997 13,976 13,294
Capital in excess of par value 155,029 128,065
Retained earnings 57,382 56,136
Treasury stock, 503,427 and 376,510 shares in 1998 and 1997 (8,798) (5,970)
------------------------------
Total stockholders' equity 220,809 194,745
------------------------------
Long-term debt, excluding current portion 243,390 232,471
Commitments - -
Current liabilities:
Current portion of long-term debt and preferred stock of subsidiary 2,448 6,662
Loans payable 5,445 10,400
Accounts payable 6,681 10,259
Accrued interest 4,751 3,978
Accrued taxes 5,948 3,643
Other accrued liabilities 9,534 9,755
------------------------------
Total current liabilities 34,807 44,697
------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 84,147 83,129
Customers' advances for construction 26,247 25,810
Other 12,521 12,764
------------------------------
Total deferred credits and other liabilities 122,915 121,703
------------------------------
Contributions in aid of construction 25,684 24,856
------------------------------
$ 647,605 $ 618,472
==============================
See notes to consolidated financial statements on page 5 of this report.
1
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
1998 1997
--------------------------
Earned revenues $34,276 $31,021
Costs and expenses
Operating expenses 13,668 13,068
Depreciation 3,603 3,687
Amortization 206 10
Taxes other than income taxes 2,518 2,242
--------------------------
19,995 19,007
--------------------------
Operating income 14,281 12,014
Interest expense 4,695 4,436
Dividends on preferred stock of subsidiary 15 96
Allowance for funds used during construction (115) (90)
--------------------------
Income before income taxes 9,686 7,572
Provision for income taxes 3,931 3,063
--------------------------
Net income 5,755 4,509
Dividends on preferred stock 49 49
--------------------------
Net income available to common stock $5,706 $4,460
==========================
Basic net income per common share $ 0.21 $ 0.17
==========================
Diluted net income per common share $ 0.21 $ 0.17
==========================
Average common shares outstanding
during the period:
Basic 26,866 25,643
==========================
Diluted 27,335 26,021
==========================
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)
Three Months Ended
March 31,
------------------------------
1998 1997
------------------------------
Cash flows from operating activities:
Net income $ 5,755 $ 4,509
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 3,809 3,697
Deferred taxes, net of taxes on customers' advances 550 532
Net decrease in receivables, inventory and prepayments 656 884
Net decrease in payables, accrued interest, accrued taxes
other accrued liabilities (514) (1,478)
Other (447) (352)
------------------------------
Net cash flows from operating activities 9,809 7,792
------------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $115 and $90 (8,001) (4,926)
Acquisitions of water systems (22,613) (435)
Other 193 (80)
------------------------------
Net cash flows used in investing activities (30,421) (5,441)
------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 364 20
Repayments of customers' advances (1,049) (1,219)
Net proceeds (repayments) of short-term debt (4,955) 15
Proceeds from long-term debt 19,799 9,930
Repayments of long-term debt (9,081) (8,976)
Redemption of preferred stock of subsidiary (4,214) (1,428)
Proceeds from issuing common stock 27,599 3,147
Repurchase of common stock (2,781) (569)
Dividends paid on preferred stock (49) (49)
Dividends paid on common stock (4,460) (3,892)
Other (47) (82)
------------------------------
Net cash flows from (used in) financing activities 21,126 (3,103)
------------------------------
Net increase (decrease) in cash 514 (752)
Cash balance beginning of year 680 1,518
------------------------------
Cash balance at end of period $ 1,194 $ 766
==============================
See notes to consolidated financial statements on page 5 of this report.
3
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
March 31, December 31,
1998 1997
-------------------------------
(Unaudited) (Audited)
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock, $.50 par value 13,976 13,294
Capital in excess of par value 155,029 128,065
Retained earnings 57,382 56,136
Treasury stock (8,798) (5,970)
-------------------------------
Total stockholders' equity 220,809 194,745
-------------------------------
Preferred stock of subsidiary with mandatory
redemption requirements - 4,214
Current portion of preferred stock of subsidiary - 4,214
-------------------------------
- -
-------------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
5.95% Series, due 2002* 2,000 2,000
6.30% Series, due 2002 10,000 10,000
5.80% Series, due 2003 10,000 -
6.83% Series, due 2003 10,000 10,000
7.47% Series, due 2003 10,000 10,000
7.06% Series, due 2004 10,000 10,000
6.82% Series, due 2005 10,000 10,000
6.99% Series, due 2006 10,000 10,000
6.75% Series, due 2007 10,000 10,000
6.14% Series, due 2008 10,000 -
9.89% Series, due 2008 5,000 5,000
7.15% Series, due 2008* 22,000 22,000
9.12% Series, due 2010 20,000 20,000
6.50% Series, due 2010* 3,200 3,200
9.17% Series, due 2011 5,000 5,000
9.93% Series, due 2013 5,000 5,000
6.89% Series, due 2015 12,000 12,000
9.97% Series, due 2018 5,000 5,000
9.17% Series, due 2021* 8,000 8,000
6.35% Series, due 2025 22,000 22,000
7.72% Series, due 2025 15,000 15,000
9.29% Series, due 2026 12,000 12,000
-------------------------------
Total First Mortgage Bonds 226,200 206,200
Note payable to bank under revolving credit agreement, due January 2000 18,047 27,128
Installment note payable, 9%, due in equal annual payments through 2013 1,591 1,591
-------------------------------
245,838 234,919
Current portion of long-term debt 2,448 2,448
-------------------------------
Long-term debt, excluding current portion 243,390 232,471
-------------------------------
Total capitalization $ 464,199 $ 427,216
===============================
*Trust indentures relating to these First Mortgage Bonds require annual
sinking fund payments.
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)
Note 1 Basis of Presentation
The accompanying consolidated balance sheet and statement of
capitalization of Philadelphia Suburban Corporation at March
31, 1998, the consolidated statements of income for the
three months ended March 31, 1998 and 1997, and the
consolidated statements of cash flow for the three months
ended March 31, 1998 and 1997 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 at March
31, 1998, 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 Annual
Report on Form 10-K for the year ended December 31, 1997.
Note 2 Common Stockholders' Equity
In February 1998, the Company issued 1,250,000 common shares
through a public offering, resulting in net proceeds of
approximately $25,840.
Note 3 Acquisitions and Water Sale Agreements
In January 1998, Philadelphia Suburban Water Company ("PSW")
purchased the water utility assets of West Chester Area
Municipal Authority ("West Chester") for $22,600 in cash,
subject to minor adjustment related to the final value of
current assets transferred and recent capital expenditures.
The West Chester service territory covers 16 square miles and
is contiguous to PSW's territory. The annual revenues of the
West Chester system approximate $4,500.
In March 1998, PSW entered into a 25-year water sale agreement
with Warwick Township Water and Sewer Authority for the sale
of water to supplement its water supply. Warwick Township is
located in Bucks County and is near PSW's existing service
territory. The agreement stipulates sales of minimum
quantities of water to the year 2023. The water sales
associated with this agreement are expected to begin in the
third quarter of 1998, upon completion of a water main
connection from Warwick Township to PSW's service territory.
The annual revenues of this water sale agreement approximate
$330.
In April 1998, PSW acquired the water system assets of the
Brandywine Hospital complex for $218. This water supply
system is located adjacent to PSW's service territory in Caln
Township, Chester County. The annual revenues of this system
approximate $100.
PSW is in negotiations to acquire the Flying Hills Water
Company ("Flying Hills") in a purchase transaction for
approximately 42,000 shares of the Company's Common Stock. The
transaction, which is subject to final negotiation and the
approval of the PUC, is currently expected to be completed
within three months. The Flying Hills system covers a one
square mile service territory in Berks County near Reading,
Pennsylvania and is 16 miles from the nearest edge of PSW's
system. The annual revenues of this system approximate $200.
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
In April 1998, PSW entered into an agreement with Bensalem
Township, Bucks County for PSW to provide water service to a
new development covering a one square mile area in the
Township, pending regulatory approval. The service territory
is located adjacent to PSW's existing service territory near a
major interstate highway interchange in suburban
Philadelphhia. The revenue from this service territory, once
developed, is anticipated to approximate $200 annually.
The Company is actively exploring other opportunities to
expand its water utility operations through acquisitions or
otherwise.
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)
Philadelphia Suburban Corporation ("PSC" or "the Company"), a Pennsylvania
corporation, is the holding Company of Philadelphia Suburban Water Company
("PSW"), a regulated water utility. PSW provides water to approximately
297,000 customers in 95 municipalities within its 480 square-mile service
territory. PSW's service territory is located north and west of the City of
Philadelphia. In addition, PSW provides water service to approximately 6,500
customers through an operating and maintenance contract with a municipal
authority contiguous to its service territory.
Financial Condition
-------------------
During the quarter, the Company acquired the water utility assets of West
Chester Area Municipal Authority ("West Chester") for $22,600 in cash, made
$8,001 of capital expenditures in PSW's service territory related to routine
capital improvements and replacements, redeemed $4,214 of Preferred Stock of
subsidiary, repurchased $2,781 of its common stock and repaid $1,049 of customer
advances for construction.
During the quarter, proceeds from the issuance of common stock, internally
generated funds, available working capital, funds available under the
revolving credit agreement and the proceeds from two long-term debt issues
were used to fund the cash requirements discussed and to pay dividends. In
January 1998, PSW issued $10,000 6.14% Series due 2008 and $10,000 5.8% Series
due 2003 through the medium-term note program. Proceeds from these issues were
used to reduce the balance of PSW's revolving credit facility. In February
1998, the Company issued 1.25 million shares of common stock in a public
offering for net proceeds of $25,840. The proceeds of this offering were used
to make a $19,000 equity contribution to PSW and to repay short-term debt of
the Company. PSW used the $19,000 equity contribution from the Company to
repay amounts outstanding under its revolving credit facility.
At March 31, 1998, the Company and PSW had $9,745 and $810 available,
respectively under short-term lines of credit and PSW had $31,953 available
under its revolving credit agreement.
Management believes that internally generated funds along with existing credit
facilities and the issuance of long-term debt are adequate to meet the
Company's financing requirements for the balance of the year and beyond.
Results of Operations
---------------------
Analysis of First Quarter of 1998 Compared to First Quarter of 1997
-------------------------------------------------------------------
Revenues for the quarter increased $3,255 or 10.5% primarily due to the 7.3%
rate increase granted PSW in October 1997, and the additional water revenues
associated with the West Chester acquisition.
Operating expenses increased by $600 or 4.6% due to additional operating costs
associated with the West Chester acquisition and increased wage and
administrative expenses, offset in part by cost containment efforts and the
effects of a mild winter which resulted in a lower number of main breaks that
reduced maintenance expenses.
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)
Depreciation expense decreased by $84 or 2.3% due to an adjustment to
depreciation expense, offset partially by the additional depreciation expense
reflecting utility plant placed in service in the past year. Depreciation was
approximately 2.48% and 2.44% of average utility plant in service in the first
quarter of 1998 and 1997, respectively.
Amortization increased $196 primarily due to the amortization of the costs
associated with the 1997 rate filing.
Taxes other than income taxes increased by $276 or 12.3% primarily due to an
increase in the base on which the Pennsylvania Public Utility Realty Tax
("PURTA"), local real estate taxes and the Capital Stock Tax are calculated.
The increase in the taxable base for the PURTA and local real estate taxes is
due to the West Chester acquisition and capital expenditures completed in the
last year. The increase in the Capital Stock Tax is due to the increase in the
Company's common equity.
Interest expense increased by $259 or 5.8% due to increased borrowing levels
since the first quarter of 1997, partially offset by lower interest rates. The
increased borrowings were used to finance the West Chester acquisition and
other capital projects.
Dividends on preferred stock of subsidiary decreased $81 due to the redemption
of the remaining shares with a par value of $4,214 in January 1998.
Allowance for funds used during construction increased by $25 primarily due to
an increase in the average balance of utility plant construction work in
progress.
The Company's effective income tax rate was 40.6% in the first quarter of 1998
and 40.5% in 1997.
Net income available to common stock for the quarter increased by $1,246 or
27.9% primarily as a result of the factors described above. On a diluted per
share basis, earnings increased $.04 or 23.5% reflecting the improvement in
net income, partially offset by a 5.0% increase in the average number of
common shares outstanding. The increase in the number of shares outstanding is
a result of the 1.25 million share stock offering in February 1998 and the
additional shares sold in 1997 through the Customer Stock Purchase Plan and
the Dividend Reinvestment and Optional Stock Purchase Plan.
Impact of Recent Accounting Pronouncements
------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted this statement
effective January 1, 1998 and has no components of other comprehensive income
to report.
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)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosure about
products and services, geographic areas and major customers. The Company will
adopt the disclosure prescribed by SFAS 131 in its 1998 Annual Report as
required.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). This statement revises employers' disclosures about
pension and other postretirement benefit plans but does not change the
measurement or recognition of costs associated with those plans. It standardizes
the disclosure requirements, eliminates unnecessary disclosures and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS 132 supersedes the
disclosure requirements of Statement of Financial Accounting Standards ("SFAS")
No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Company plans
to adopt this statement in its 1998 Annual Report as required.
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 intends to adopt
this statement in its 1999 Annual Report as required. The adoption of SOP 98-1
will not have a material impact on the Company's results from operations or
financial condition.
9
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,
1997, which is included by a reference herein.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Report on Form 8-K
Current Report on Form 8-K filed January 29, 1998,
responding to Item 5, Other Events. (Related to the filing
of the Company's audited consolidated balance sheets and
statements of capitalization as of December 31, 1997 and
1996, its consolidated statements of income and cash flow
for each of the years in the three-year period ended
December 31, 1997, its Management's Discussion and Analysis
of Financial Condition and Results of Operations related to
its fiscal year ended December 31, 1997, and its Summary of
Selected Financial Data for each of the years in the
five-year period ended December 31, 1997.)
Current Report on Form 8-K filed February 6, 1998,
responding to Item 5, Other Events. (Related to the
Company's Board of Directors adopting a new Shareholder
Rights Plan (the "New Plan") on February 3, 1998 that was
effective March 1, 1998. The New Plan, which expires March
1, 2008, is substantially the same as the former Shareholder
Rights Plan that expired on March 1, 1998 except that the
beneficial ownership threshold that would trigger the
exercisability of the rights issued to purchase Company
Common Stock was reduced from 25% of the outstanding Common
Stock to 20% of the outstanding Common Stock.)
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, 1998
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
Registrant
Nicholas DeBenedictis
----------------------------------
Nicholas DeBenedictis
Chairman and President
Michael P. Graham
---------------------------------
Michael P. Graham
Senior Vice President - Finance
and Treasurer
11
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule 13
12
UT
3-MOS
MAR-31-1998
MAR-31-1998
PER-BOOK
$563,229
65
27,121
6,021
51,169
647,605
5,178
155,029
57,382
217,589
0
3,220
243,390
0
5,445
0
2,448
0
0
0
175,513
647,605
34,276
3,931
19,995
23,926
10,350
0
10,350
4,595
5,755
49
5,706
4,460
16,918
9,809
0.21
0.21
