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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 June 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 June 30, 1995. 11,950,854 ---------- PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) June 30, December 31, 1995 1994 ----------- ------------ (Unaudited) (Audited) Property, plant and equipment, at cost $498,339 $462,500 Less accumulated depreciation 81,680 76,791 -------- -------- Net property, plant and equipment 416,659 385,709 Current assets Cash (944) (636) Accounts receivable, net 19,564 19,303 Inventory, materials and supplies 1,815 1,696 Prepayments and other current assets 2,256 594 -------- -------- Total current assets 22,691 20,957 Regulatory assets 48,451 48,334 Deferred charges and other assets, net 4,090 3,183 -------- -------- $491,891 $458,183 ======== ======== Common stockholders' equity $149,259 $143,795 Preferred stock of subsidiary with mandatory redemption requirements 5,714 7,143 Long-term debt, excluding current portion 174,735 152,195 Commitments - - Current liabilities Current portion of preferred stock of subsidiary with mandatory redemption requirements 1,429 2,857 Current portion of long-term debt 8,887 887 Loans payable 5,675 4,050 Accounts payable 2,654 5,626 Accrued interest 3,660 3,346 Other accrued liabilities 10,162 9,912 Net reserves related to discontinued operations 2,559 2,701 -------- -------- Total current liabilities 35,026 29,379 Deferred credits and other liabilities Deferred income taxes and investment credits 69,082 67,721 Customers' advances for construction 24,201 24,713 Other non-current liabilities 11,561 11,028 -------- -------- Total deferred credits and other liabilities 104,844 103,462 Contributions in aid of construction 22,313 22,209 -------- -------- $491,891 $458,183 ======== ======== 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) [CAPTION] Six Months Ended June 30, ------------------------ 1995 1994 ------- ------- [S] [C] [C] Earned revenues $54,539 $51,579 Costs and expenses Operating expenses 24,123 24,057 Depreciation 5,575 5,165 Amortization (2) (159) Taxes other than income taxes 3,847 3,630 ------ ------ 33,543 32,693 ------ ------ Operating income 20,996 18,886 Interest and debt expenses 7,100 6,394 Dividends on preferred stock 322 433 Allowance for funds used during construction (89) (43) ------ ------ Income before income taxes 13,663 12,102 Provision for income taxes 5,689 5,118 ------ ------ Net income $ 7,974 $ 6,984 ====== ====== Net income per share $ .67 $ .61 ====== ====== Average common and common equivalent shares outstanding during the period 11,831 11,467 ====== ====== 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) [CAPTION] Three Months Ended June 30, ---------------------- 1995 1994 ---- ---- [S] [C] [C] Earned revenues $28,827 $26,730 Costs and expenses Operating expenses 12,357 12,001 Depreciation 2,805 2,592 Amortization 15 (28) Taxes other than income taxes 1,874 1,728 ------ ------ 17,051 16,293 ------ ------ Operating income 11,776 10,437 Interest and debt expenses 3,704 3,229 Dividends on preferred stock 155 217 Allowance for funds used during construction (49) (24) ------ ------ Income before income taxes 7,966 7,015 Provision for income taxes 3,307 2,980 ------ ------ Net income $ 4,659 $ 4,035 ====== ====== Net income per share $ .39 $ .35 ====== ====== Average common and common equivalent shares outstanding during the period 11,865 11,461 ====== ====== 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) Six Months Ended June 30, ----------------------- 1995 1994 ---- ---- Cash flows from operating activities Net income $ 7,974 $ 6,984 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 5,573 5,006 Deferred taxes, net of taxes on customers' advances 1,059 1,085 Net increase in receivables, inventory and prepayments (1,260) (3,270) Net decrease in payables and other accrued liabilities (2,795) (1,886) Net increase (decrease) in accrued interest 313 (41) Other 105 (226) ------- ------- Net cash flows from operating activities 10,969 7,652 ------- ------- Cash flows from investing activities Property, plant and equipment additions, including allowance for funds used during construction of $89 and $43 (11,276) (8,539) Acquisition of water system (25,711) - Other (42) 22 ------- ------- Net cash flows from investing activities (37,029) (8,517) ------- ------- Cash flows from financing activities Customers' advances and contributions in aid of construction, net of income tax payments 1,156 926 Repayments of customers' advances (1,564) (1,587) Net proceeds (repayments) of short-term debt 1,625 (749) Proceeds of long-term debt 31,044 12,464 Repayments of long-term debt (850) (4,850) Redemption of preferred stock of subsidiary (2,857) - Proceeds from issuing common stock 4,072 3,364 Repurchases of common stock (5) (2,020) Dividends paid (6,577) (6,151) Other (150) (142) ------- ------- Net cash flows from financing activities 25,894 1,255 ------- ------- Net cash flows to discontinued operations (142) (209) ------- ------- Net increase (decrease) in cash (308) 181 Cash deficit beginning of year (636) (868) ------- ------- Cash deficit at end of period $ (944) $ (687) ======= ======= 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 June 30, 1995, the consolidated statements of income for the six months and quarter ended June 30, 1995 and 1994, and the consolidated cash flow statements for the six months ended June 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 June 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 Report on Form 10-Q for the quarter ended March 31, 1995. Note 2 Water Rates Philadelphia Suburban Water Company (PSW) filed an application with the Pennsylvania Public Utility Commission ("PUC") on April 28, 1995 requesting a $14,000 or 12.1% increase in annual revenues. This application is currently pending before the PUC and a final determination is anticipated by January 1996. In addition to its base rates, PSW has utilized a surcharge or credit on its bills to reflect certain changes in Pennsylvania State taxes until such time as the tax changes are incorporated into base rates. In July 1994, PSW was required to initiate a revenue credit of .19% in order to provide its customers with the savings associated with State income tax rate decreases. Effective April 10, 1995, PSW revised the credit to .40% ($441 of annual revenues) and effective July 31, 1995, PSW revised the credit to 1.04% ($1,036 of annual revenues). Revisions to the revenue credit in 1995 reflect the savings associated with further decreases in State taxes, particularly a reduction in the income tax rate. -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"). The Media system, for which PSW paid $25,711 in cash and the assumption of $1,100 in liabilities, covers a 23 square mile service area contiguous to PSW's service territory. Annual revenue from this system approximates $4,500. The assets acquired, net of liabilities assumed, is presently recorded in Property, Plant and Equipment and Accounts Receivable pending final allocation to the appropriate accounts. Note 4 Long-Term Debt In May 1995, PSW issued $15,000 First Mortgage Bonds 7.72% Series due 2025, and in June 1995, PSW issued $10,000 First Mortgage Bonds 6.82% Series due 2005. Both of these issuances were made through the $100,000 Medium Term Note program that was established in March 1995. In addition, in May 1995 the revolving credit facility was temporarily increased from $30,000 to $40,000 until the end of August 1995. The proceeds from these issuances and the revolving credit facility were used to fund the Media acquisition, the retirement of the First Mortgage Bond noted below and PSW's ongoing capital program. During the second quarter, PSW called $8,000 of First Mortgage Bonds, 13% Series due 2005, for retirement in August 1995 and as of June 30, 1995, such amounts have been reclassified as current portion of long-term debt. The premium on the early retirement of 6.1% or $488 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 these transactions 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 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 half of 1995, the Company acquired the water utility assets of the Borough of Media ("Media") for $25,711 in cash, and made $11,276 of expenditures related to routine capital improvements and replacements for PSW, repaid $1,564 of customer advances for construction and redeemed $2,857 of Preferred Stock. During the first six months, 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 Plan amounted to approximately $4,072. Effective with the September 1, 1995 payment, the Company has increased the quarterly dividend on common stock from $.28 per share to $.29 per share. In May 1995, PSW temporarily increased its revolving credit facility from $30,000 to $40,000 until the end of August 1995. At June 30, 1995, PSW had $14,240 available under its revolving credit facility and the Company and PSW had $3,325 and $1,000 respectively, available under short-term lines of credit. 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. The proceeds from these issuances were used to acquire Media's water utility assets, to fund the ongoing capital projects of PSW and will be used to fund the early retirement of $8,000 First Mortgage Bonds 13% Series due 2005 in August 1995. 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. -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) 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 Plan are adequate to meet the Company's financing requirements for the balance of the year and beyond. Results of Operations Analysis of First Six Months of 1995 Compared to First Six Months of 1994 Revenues increased $3,115 or 6.1% primarily due to the 9.05% rate increase granted PSW in June 1994 and additional water revenues associated with the Media water system, offset partially by a decrease in customer consumption of water. Operating expenses increased by $66 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 $751 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 were 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. Depreciation increased by $410 or 7.9% reflecting the impact of utility plant placed in service since June 1994. Depreciation was approximately 2.3% of average utility plant in service in both the first half of 1995 and 1994. Amortization was a credit of $2 compared to a credit of $159 in the first six months of 1994, a change of $157. The change is primarily due to $148 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 $217 or 6.0% 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 due to increased state regulatory taxes. -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) Dividends on preferred stock decreased by $111 or 25.6% as a result of the redemption of 28,570 preferred shares in January 1995. Interest expense increased by $706 or 11% reflecting higher interest rates on borrowings under the Company's credit facilities and due to an increase in the average amount of debt outstanding. Allowance for funds used during construction ("AFUDC") increased by $46 primarily due to a higher AFUDC rate. The AFUDC rate increased in connection with the higher interest rate on the revolving credit facility. The Company's effective income tax rate was 41.6% 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, partially offset by a change in the expenses that are not tax deductible. Net income increased $990 or 14.2% primarily due to increased revenues, partially offset by higher interest expenses, depreciation, amortization and taxes other than income. On a per share basis, earnings increased $.06 or 9.8% 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 second quarter of 1994 through the Customer Stock Purchase Plan and the Dividend Reinvestment and Optional Stock Purchase Plan. Analysis of Second Quarter of 1995 Compared to Second Quarter of 1994 Revenues for the quarter increased $2,097 or 7.8% primarily due to the rate increase granted PSW in June 1994 and revenues associated with the Media water system acquired in May 1995, partially offset by a decrease in customers' consumption of water. Operating expenses increased $356 or 3.0% primarily as a result of the $332 of the additional costs for Postretirement Benefits Other than Pensions computed under Statement of Financial Accounting Standards No. 106 recognized in conjunction with the June 17, 1994 rate increase. Operating expenses were also affected by increased wages and the operating expenses associated with the Media water system. Depreciation increased by $213 or 8.2% reflecting the impact of utility plant placed in service since the second quarter of 1994. Depreciation was approximately 2.3% of average utility plant in service in both the second quarter of 1995 and 1994, respectively. -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) Amortization was a charge of $15 as compared to a credit of $28 in 1994 due to $63 of additional negative amortization associated with the June 1994 rate settlement related to the acquisition of two water systems in 1994. Taxes other than income taxes increased $146 or 8.4% 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 state regulatory taxes. Interest expense increased $475 or 14.70% 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 28.6% due to the reduced number of preferred stock shares outstanding for the quarter. Allowance for funds used during construction ("AFUDC") increased by $25 primarily due to a higher AFUDC rate. The AFUDC rate increased due to higher interest rates on the revolving credit facility in 1995 as compared to the second quarter of 1994. The Company's effective income tax rate was 41.5% in 1995 and 42.5% 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 $624 or 15.5% principally due to increased water revenues, partially offset by higher interest and operating expenses. Earnings per share, however, increased only $.04 per share or 11.4% due to the higher number of average shares outstanding. -10- 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 4. Results of Vote of Security Holders The Annual Meeting of Shareholders of Philadelphia Suburban Corporation (the "Company") was held on May 18, 1995 at the headquarters of the Company, 762 Lancaster Avenue, Bryn Mawr, Pennsylvania, pursuant to the Notice sent on or about March 31, 1995 to all shareholders of record at the close of business on March 17, 1995. At that meeting, the following nominees were elected as directors of the Company for terms expiring in 1998 and received the votes set forth after their names below: Name of Nominee For Withheld ------- --- -------- Mary C. Carroll 9,769,511 128,274 Claudio Elia 9,770,120 127,665 Joseph C. Ladd 9,763,081 134,704 Since the Board of Directors is divided into three classes with one class elected each year to hold office for a three-year term, the term of office for the following directors continued after the Annual Meeting: John W. Boyer, Jr.; Nicholas DeBenedictis; G. Fred DiBona; John H. Austin; John F. McCaughan; and Harvey J. Wilson. -11- PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Part II. Other Information (continued) Item 4., Continued In addition to the election of directors, the following proposals were presented at the Annual Meeting and received the votes set forth below: a. Adoption of Amendment 1994-1 to the 1994 Equity Compensation Plan Broker For Against Abstentions Non-votes --- ------- ----------- --------- 9,073,233 625,499 199,053 0 b. A Shareholder Proposal to Elect All Directors Annually Broker For Against Abstentions Non-votes --- ------- ----------- --------- 2,164,123 5,987,869 292,060 29,811 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 20 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. August 9, 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 27 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES FINANCIAL DATA SCHEDULE (In thousands, except per share amounts) Item Item Number Description Amount ------ ----------- ------ 1 Total Net Utility Plant $416,574 2 Other Property and Investments 85 3 Total Current Assets 22,691 4 Total Deferred Charges 4,090 5 Balancing Amount for Total Assets 48,451 6 Total Assets 491,891 7 Common Stock 2,992 8 Capital Surplus, Paid In 106,379 9 Retained Earnings 39,888 10 Total Common Stockholders Equity 149,259 11 Preferred Stock Subject to Mandatory Redemption 5,714 12 Preferred Stock Not Subject to Mandatory Redemption - 13 Long Term Debt, Net 174,735 14 Short Term Notes - 15 Notes Payable 5,675 16 Commercial Paper - 17 Long-term Debt - Current Portion 8,887 18 Preferred Stock - Current Portion 1,429 19 Obligations Under Capital Leases - 20 Obligations Under Capital Leases - Current Portion - 21 Balancing Amount for Capitalization and Liabilities 146,192 22 Total Capitalization and Liabilities 491,891 23 Gross Operating Revenue 54,539 24 Federal and State Income Taxes Expense 5,689 25 Other Operating Expenses 33,543 26 Total Operating Expenses 39,232 27 Operating Income (loss) 15,307 28 Other Income (loss), net - 29 Income Before Interest Charges 15,307 30 Total Interest Charges 7,011 31 Net Income 7,974 32 Preferred Stock Dividends 322 33 Earnings Available for Common Stock 7,974 34 Common Stock Dividends 6,577 35 Total Annual Interest Charges on all Bonds 13,488 36 Cash Flow from Operations 10,969 37 Earnings Per Share - Primary .67 38 Earnings Per Share - Fully Diluted .67 -14-