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, 1995 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 - --------------------------------------------- ------------- (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, 1995. 12,072,988 - ----------
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <TABLE> <CAPTION> September 30, December 31, 1995 1994 ------------- ------------ (Unaudited) (Audited) <S> <C> <C> Property, plant and equipment, at cost $514,743 $462,500 Less accumulated depreciation 89,458 76,791 ------- ------- Net property, plant and equipment 425,285 385,709 Current assets Cash 6,359 (636) Accounts receivable, net 21,917 19,303 Inventory, materials and supplies 1,943 1,696 Prepayments and other current assets 1,001 594 ------- ------- Total current assets 31,220 20,957 Regulatory assets 48,515 48,334 Deferred charges and other assets, net 5,429 3,183 ------- ------- $510,449 $458,183 ======= ======= Common stockholders' equity $153,594 $143,795 Preferred stock of subsidiary with mandatory redemption requirements 5,714 7,143 Long-term debt, excluding current portion 189,975 152,195 Commitments - - Current liabilities Current portion of preferred stock of subsidiary with mandatory redemption requirements 1,429 2,857 Current portion of long-term debt 887 887 Loans payable 6,515 4,050 Accounts payable 2,662 5,626 Accrued interest 4,412 3,346 Other accrued liabilities 12,751 9,912 Net reserves related to discontinued operations 2,544 2,701 ------- ------- Total current liabilities 31,200 29,379 Deferred credits and other liabilities Deferred income taxes and investment credits 70,252 67,721 Customers' advances for construction 25,181 24,713 Other non-current liabilities 10,333 11,028 ------- ------- Total deferred credits and other liabilities 105,766 103,462 Contributions in aid of construction 24,200 22,209 ------- ------- $510,449 $458,183 ======= ======= </TABLE> 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) <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------------- 1995 1994 ------- -------- <S> <C> <C> Earned revenues $86,894 $80,428 Costs and expenses Operating expenses 37,916 36,568 Depreciation 8,524 7,793 Amortization (43) (150) Taxes other than income taxes 5,775 5,418 ------ ------ 52,172 49,629 ------ ------ Operating income 34,722 30,799 Interest and debt expenses 10,972 9,633 Dividends on preferred stock 476 649 Allowance for funds used during construction (168) (80) ------ ------ Income before income taxes 23,442 20,597 Provision for income taxes 9,736 8,716 ------ ------ Net income $13,706 $11,881 ====== ====== Net income per share $ 1.15 $ 1.03 ====== ====== Average common and common equivalent shares outstanding during the period 11,889 11,522 ====== ====== </TABLE> See notes to consolidated financial statements on page 5 of this report. -2-
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended September 30, ----------------------------- 1995 1994 ---- ---- <S> <C> <C> Earned revenues $32,355 $28,849 Costs and expenses Operating expenses 13,793 12,511 Depreciation 2,949 2,628 Amortization (41) 9 Taxes other than income taxes 1,928 1,788 ------ ------ 18,629 16,936 ------ ------ Operating income 13,726 11,913 Interest and debt expenses 3,872 3,239 Dividends on preferred stock 154 216 Allowance for funds used during construction (79) (37) ------ ------ Income before income taxes 9,779 8,495 Provision for income taxes 4,047 3,598 ------ ------ Net income $ 5,732 $ 4,897 ====== ====== Net income per share $ .48 $ .42 ====== ====== Average common and common equivalent shares outstanding during the period 12,022 11,620 ====== ====== </TABLE> See notes to consolidated financial statements on page 5 of this report. -3-
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands of dollars) (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------ 1995 1994 ---- ---- <S> <C> <C> Cash flows from operating activities Net income $13,706 $11,881 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 8,481 7,643 Deferred taxes, net of taxes on customers' advances 2,277 2,582 Net increase in receivables, inventory and prepayments (2,337) (2,303) Net decrease in payables and other accrued liabilities (235) (837) Net increase in accrued interest 1,066 430 Other (1,439) 126 ------ ------ Net cash flows from operating activities 21,519 19,522 ------ ------ Cash flows from investing activities Property, plant and equipment additions, including allowance for funds used during construction of $168 and $80 (20,337) (17,023) Acquisitions of water systems (25,788) - Other (19) 66 ------ ------ Net cash flows from investing activities (46,144) (16,957) ------ ------ Cash flows from financing activities Customers' advances and contributions in aid of construction, net of income tax payments 1,575 2,273 Repayments of customers' advances (1,651) (1,785) Net borrowings of short-term debt 2,465 671 Proceeds of long-term debt 46,015 7,758 Repayments of long-term debt (9,708) (4,850) Redemption of preferred stock of subsidiary (2,857) - Proceeds from issuing common stock 6,546 5,311 Repurchases of common stock (411) (2,056) Dividends paid (10,042) (9,379) Other (155) (145) ------ ------ Net cash flows from financing activities 31,777 (2,202) ------ ------ Net cash flows to discontinued operations (157) 234 ------ ------ Net increase in cash 6,995 597 Cash deficit beginning of year (636) (868) ------ ------ Cash balance (deficit) at end of period $ 6,359 $ (271) ====== ====== </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) Note 1 Basis of Presentation The accompanying consolidated balance sheet of Philadelphia Suburban Corporation at September 30, 1995, the consolidated statements of income for the nine months and quarter ended September 30, 1995 and 1994, and the consolidated cash flow statements for the nine months ended September 30, 1995 and 1994 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 September 30, 1995, 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, 1994 and the Quarterly Reports on Form 10-Q for the quarters ended June 30, 1995 and March 31, 1995. Note 2 Water Rates In October 1995, the Pennsylvania Public Utility Commission ("PUC") approved a rate settlement that Philadelphia Suburban Water Company (PSW) reached with the parties (the Office of Consumer Advocate, the PUC Office of Trial Staff and the Office of Small Business Advocate) actively participating in litigating the rate application PSW filed in April 1995. The settlement is designed to increase annual water revenues by $6,150, or approximately 5.3%, effective October 27, 1995. As a part of the settlement agreement, PSW agreed not to file for a new general rate increase prior to April 26, 1996, absent extraordinary circumstances. In addition to its base rates, PSW has utilized a credit on its customers' water bills to reflect certain reductions in Pennsylvania State taxes until such time as the tax changes are incorporated into base rates. The credit, 1.04% prior to the rate settlement, was eliminated with the adoption of new base rates on October 27, 1995. -5-
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued) (In thousands of dollars, except per share amounts) Note 3 Acquisitions In May 1995, PSW purchased the water utility and related assets of Media Borough ("Media"). Revenues related to Media were $1,262 for the quarter and $1,775 since the date of acquisition. During the quarter, PSW purchased the water utility assets of two smaller water systems for a combined purchase price of $67. These systems serve customers within the boundaries of PSW's existing service territory and have combined annual operating revenues of approximate $40. In addition, PSW continues to hold discussions with the owners of several other water systems that are near or adjacent to PSW's service territory. If PSW is successful in acquiring these systems, the acquisitions would likely be funded primarily through the issuance of long-term debt and preferred stock of the Company. Note 4 Long-Term Debt On August 31, 1995, PSW issued $22,000 in First Mortgage Bonds 6.35% Series due 2025 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 September 30, 1995, the Trustee for this issue held $5.4 million in an interest bearing account pending completion of the remainder of the projects financed with this issue. The amount held by the Trustee is included in the balance sheet as cash. It is expected that these projects will be completed by the third quarter of 1996, however funds will be drawn from the trust during the interim as expenditures are made on these projects. On August 1, 1995 PSW redeemed $8,000 of First Mortgage Bonds 13% Series due 2005. The premium on the early retirement of 6.1% or $488 was paid and will be deferred and amortized in accordance with the Uniform System of Accounts prescribed by the PUC over the life of the First Mortgage Bonds issued during the second quarter of 1995. The effect of the redemption on the Company's sinking fund payments for the next five years is to reduce the total payments by $800 in each year from 1995 through the year 2000. -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 (the Company or PSC) is composed of two businesses, a regulated water utility (Philadelphia Suburban Water Company or PSW), and a non-regulated data processing service bureau (Utility & Municipal Services, Inc. or UMS). The operations of UMS are not significant to the financial results of the Company and, therefore, are not discussed separately. Corporate expenses include administrative expenses of a general nature. Financial Condition During the first nine months of 1995, the Company acquired the water utility assets of the Borough of Media ("Media") and two smaller water systems for a combined price of $25,778 in cash, made $20,337 of expenditures related to routine utility capital improvements and replacements, repaid $1,651 of customer advances for construction and redeemed $2,857 of Preferred Stock. In addition, the Company made $850 in sinking fund payments on long-term debt and, in August, called $8,000 of First Mortgage Bonds 13% Series at a premium of 6.1% or $488. During this period, internally generated funds, available working capital, funds available under the revolving credit facility, and funds obtained from the proceeds of common stock and long-term debt were sufficient to fund the cash requirements discussed above, and to pay dividends. Proceeds from the issuance of common stock, primarily through the Company's Customer Stock Purchase Plan and the Dividend Reinvestment and Optional Stock Purchase Plan amounted to approximately $6,546. In August 1995, PSW issued $22,000 of First Mortgage Bonds 6.35% Series due 2025. These bonds were issued through an Industrial Development Authority and proceeds from the issue are restricted to the funding of certain capital projects. As of September 30, 1995, $5,428 of proceeds from this issue are being held by the trustee in an interest bearing account pending completion of the projects. It is expected that all projects financed by this issue will be completed by the third quarter of 1996. Proceeds received at closing were unrestricted since the Company has already funded an equal amount towards the completion of the projects, prior to closing. During the second quarter of 1995, PSW issued $15,000 First Mortgage Bonds 7.72% Series due 2025 and $10,000 First Mortgage Bonds 6.82% Series due 2005. In May 1995, PSW temporarily increased its revolving credit facility from $30,000 to $40,000 until the end of August 1995. During this period the maximum amount outstanding was $37,200. At September 30, 1995, PSW had $11,000 available under its revolving credit facility and the Company and PSW had $2,485 and $1,000 respectively, available under short-term lines of credit. -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) Traditionally, PSW has financed its ongoing construction program and other financial requirements separately from PSC. PSW's ability to finance its future construction program and pay dividends to the Company depends on its ability to attract the necessary external financing and to maintain or increase internally generated funds. Rate increases and regulatory support will continue to be required to allow PSW to achieve a level of earnings necessary to attract capital, to maintain satisfactory debt coverage ratios and to provide shareholders an adequate return on their investment. Management believes that internally generated funds along with the existing credit facilities, the issuance of long-term debt and proceeds from the issuance of common stock, primarily through the Company's Customer Stock Purchase Plan and the Dividend Reinvestment and Optional Stock Purchase Plan are adequate to meet the Company's financing requirements for the balance of the year and beyond. Results of Operations Analysis of First Nine Months of 1995 Compared to First Nine Months of 1994 Revenues increased $6,466 or 8.0% primarily due to the 9.05% rate increase granted PSW in June 1994, additional water revenues associated with the Media water system, and an increase, during the third quarter, in water sales. Operating expenses increased by $1,348 or 3.7% due to higher employee benefit expenses, expenses associated with the recently acquired Media water system and increased wages, offset partially by a reduction in maintenance and production costs. Employee benefit expenses increased as a result of the recognition of $816 of increased costs for Postretirement Benefits Other than Pensions computed under Statement of Financial Accounting Standards No. 106 in conjunction with the June 1994 rate increase. The decrease in maintenance and production costs was a result of the effects of the milder winter weather experienced in 1995. The effects of the severe winter weather in 1994 caused significant maintenance and production cost increases estimated at $800 over normal winter costs. Production costs also decreased as a result of reductions in the quantity of water purchased from other water utilities due to the completion of certain water mains that allow more Company-produced water to be distributed to areas that previously required supplemental sources. Depreciation increased by $731 or 9.4% reflecting the impact of utility plant placed in service since June 1994, including the Media acquisition. Depreciation was approximately 2.3% of average utility plant in service in both the first nine months of 1995 and 1994. -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) Amortization was a credit of $43 compared to a credit of $150 in the first nine months of 1994, a change of $107. The change is primarily due to $211 of additional negative goodwill amortization associated with the December 1992 acquisitions of two water systems that was recognized in 1994 in conjunction with the June 1994 rate settlement. Taxes other than income taxes increased by $357 or 6.6% primarily due to increases in the Pennsylvania Capital Stock Tax associated with increased equity, a higher Pennsylvania Public Utility Realty Tax Assessment resulting from the Media acquisition and increased state regulatory taxes and employment taxes. Dividends on preferred stock decreased by $173 or 26.7% as a result of the redemption of 28,570 preferred shares in January 1995. Interest expense increased by $1,339 or 13.9% reflecting higher interest rates on borrowings under the Company's revolving credit facilities and an increase in the average amount of borrowings outstanding. The increase in borrowings were used to fund the Media acquisition and ongoing capital projects. Allowance for funds used during construction ("AFUDC") increased by $88 primarily due to a higher AFUDC rate and an increase in the average balance of Construction Work in Progress ("CWIP") to which AFUDC is applied. The increase in CWIP is associated with two projects that have a relatively long construction duration. The AFUDC rate increased in connection with the higher interest rate on the revolving credit facility. The Company's effective income tax rate was 41.5% in 1995 and 42.3% in 1994. The decrease in the effective tax rate is due primarily to a 1% reduction in the Pennsylvania Corporate Net Income tax rate. Net income increased $1,825 or 15.4% primarily due to increased revenues, partially offset by higher operating and interest expenses, depreciation, amortization and taxes other than income taxes. On a per share basis, earnings increased $.12 or 11.7% reflecting the improvement in net income offset by a 3.2% increase in the average number of shares outstanding. The increased number of shares outstanding reflects shares sold since the third quarter of 1994 through the Customer Stock Purchase Plan and the Dividend Reinvestment and Optional Stock Purchase Plan. Analysis of Third Quarter of 1995 Compared to Third Quarter of 1994 Revenues for the quarter increased $3,506 or 12.2% primarily due to an increase in water sales associated with the hot, dry weather experienced during the summer of 1995 and to revenues associated with the Media water system. -9-
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) Operating expenses increased $1,282 or 10.2% primarily as a result of increases in wages, production costs and expenses associated with the Media water system. The increase in wages reflects normal merit increases and the impact of the improved operating results on employee incentive programs. Production costs rose due to the increase in the volume of water sold and a slight decline in raw water quality which required additional treatment. Depreciation increased by $321 or 12.2% reflecting the impact of utility plant placed in service since the third quarter of 1994, including the Media acquisition. Depreciation was approximately 2.3% of average utility plant in service in both the third quarter of 1995 and 1994, respectively. Amortization was a credit of $41 as compared to a charge of $9 in 1994 primarily due to the completion in the second quarter of 1995 of the amortization of the costs associated with the June 1994 rate increase, offset in part by a decrease in the aforementioned amortization of negative goodwill. Taxes other than income taxes increased $140 or 7.8% as a result of increases in the Pennsylvania Capital Stock Tax associated with increased equity, a higher Pennsylvania Public Utility Realty Tax Assessment resulting from the Media acquisition and due to increased employment taxes. Interest expense increased $633 or 19.5% reflecting higher interest rates on the short-term credit facilities and an increased level of borrowings. The increase in borrowings were used to fund the Media acquisition and ongoing capital projects. Dividends on preferred stock decreased $62 or 28.7% due to the reduced number of preferred stock shares outstanding for the quarter. Allowance for funds used during construction ("AFUDC") increased by $42 primarily due to a higher AFUDC rate and to an increase in the average balance of CWIP to which AFUDC is applied. The AFUDC rate increased due to higher interest rates on the revolving credit facility in 1995 as compared to the third quarter of 1994. The Company's effective income tax rate was 41.4% in 1995 and 42.4% in 1994. The decrease in the effective tax rate is primarily due to a 1% reduction in the Pennsylvania Corporate Net Income tax rate. Net income for the quarter increased by $835 or 17.1% principally due to increased water revenues, partially offset by higher interest and operating expenses. Earnings per share, however, increased $.06 per share or 14.3% due to the higher number of average shares outstanding. -10-
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) Recent Events On September 20, 1995 the Governor of Pennsylvania issued a drought emergency order which mandated certain restrictions on water use, particularly non-essential uses of water. Because the order was issued toward the end of the summer when non-essential and recreational use of water has traditionally decreased, the restrictions are not expected to have a significant impact on revenues. Recent rainfalls have been well above average, and as a result, the Governor eased these restrictions in all but three counties in Pennsylvania, including one county in PSW's service territory. This declaration by the Governor eased the restriction from a drought emergency order to a drought watch, which calls for voluntary restrictions on non-essential water uses. While portions of the Commonwealth of Pennsylvania, particularly those dependant on ground water, experienced water shortages, PSW's water supplies were and continue to be adequate. -11-
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, 1994, which is included by a reference herein. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 4.18 Thirtieth Supplemental Indenture dated as of August 15, 1995. 10.13 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Legg Mason Wood Walker, Incorporated dated August 24, 1995. 10.14 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of August 15, 1995. 27 Financial Data Schedule (b) Report on Form 8-K None -12-
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 14, 1995 PHILADELPHIA SUBURBAN CORPORATION --------------------------------- Registrant Nicholas DeBenedictis ---------------------------------- Nicholas DeBenedictis Chairman and President Michael P. Graham ---------------------------------- Michael P. Graham Senior Vice President - Finance and Treasurer -13-
EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- 4.18 Thirtieth Supplemental Indenture, dated as of August 15, 1995 16 10.13 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Legg Mason Wood Walker, Incorporated dated August 24, 1995. 52 10.14 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of August 15, 1995. 72 27 Financial Data Schedule 110 -14-