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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant To Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 10,1999
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PHILADELPHIA SUBURBAN CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 1-6659 23-1702594
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010
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(Address of principal executive offices) (Zip Code)
(610) 527-8000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report.)
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As indicated in the Registrant's Form 8-K as filed with the Securities and
Exchange Commission on March 12, 1999 ("Form 8-K"), the financial and pro forma
financial information required to be filed therewith would be filed not later 60
days after March 12, 1999. Accordingly, this Amendment No. 1 to Form 8-K ("Form
8-K/A") amends and modifies Item 7 of the Form 8-K to read in its entirety as
follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
The financial statements of Consumers Water Company for the period ended
December 31, 1998 and the notes thereto, and the report of Arthur
Andersen LLP, independent auditors, thereon are filed as Exhibit 7.1
to this Form 8-K/A, and such Exhibit is incorporated herein by
reference.
(c) Exhibits
7.1 Financial Statements of Consumers Water Company as of and for the
year ended December 31, 1998.
23.1 Consent of Arthur Andersen LLP.
-2-
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILADELPHIA SUBURBAN CORPORATION
Date: May 5, 1999 Roy H. Stahl
---------------------------------
Name: Roy H. Stahl
Title: Senior Vice President and
General Counsel
-3-
EXHIBIT INDEX
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Exhibit Page
- ------- ----
7.1 Financial Statements of Consumers Water Company as of and 5
for the year ended December 31, 1998.
23.1 Consent of Arthur Andersen LLP. 26
-4-
Exhibit 7.1
CONSUMERS WATER COMPANY
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Consumers Water Company:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization and interim financing of Consumers
Water Company (a Maine corporation) and subsidiaries (the Company) as of
December 31, 1998 and 1997, and the related consolidated statements of income,
change in common shareholders' investment and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consumers Water
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
February 18, 1999
(Except with respect to the matter discussed in Note 12, as to which the date is
March 10, 1999)
1
CONSUMERS WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Years Ended December 31,
1998 1997 1996
OPERATING REVENUE $ 98,469 $ 98,339 $ 93,589
COSTS AND EXPENSES:
Operations and maintenance 42,852 42,659 42,734
Depreciation 11,992 11,270 10,128
Taxes other than income 11,796 12,452 11,823
-------- -------- --------
Operating expenses 66,640 66,381 64,685
-------- -------- --------
Operating income 31,829 31,958 28,904
-------- -------- --------
OTHER INCOME AND (EXPENSE):
Interest expense (13,702) (15,277) (14,635)
Construction interest capitalized 509 398 780
Preferred dividends and minority interest of subsidiaries (158) (166) (143)
Gains (losses) on sales of properties 6,733 690 (342)
Other 1,553 1,032 296
-------- -------- --------
Other expense (5,065) (13,323) (14,044)
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 26,764 18,635 14,860
INCOME TAXES (Note 2) 10,513 6,559 5,379
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS:
Income from continuing operations 16,251 12,076 9,481
-------- -------- --------
LOSS FROM DISCONTINUED OPERATIONS:
Before discontinuance -- (387) (3,230)
Provision for loss on disposal of discontinued operations -- (2,350) --
-------- -------- --------
Total from discontinued operations -- (2,737) (3,230)
-------- -------- --------
Net income $ 16,251 $ 9,339 $ 6,251
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,005 8,857 8,625
======== ======== ========
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ 1.80 $ 1.36 $ 1.09
-------- -------- --------
Discontinued operations-
Before discontinuance -- (0.04) (0.37)
Loss from disposal of discontinued operations -- (0.27) --
-------- -------- --------
Total discontinued operations -- (0.31) (0.37)
-------- -------- --------
Total basic earnings per common share $ 1.80 $ 1.05 $ 0.72
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations $ 1.80 $ 1.36 $ 1.09
-------- -------- --------
Discontinued operations-
Before discontinuance -- (0.04) (0.37)
Loss from disposal of discontinued operations -- (0.27) --
-------- -------- --------
Total discontinued operations -- (0.31) (0.37)
-------- -------- --------
Total diluted earnings per common share $ 1.80 $ 1.05 $ 0.72
======== ======== ========
Dividends Declared per Common Share $ 1.23 $ 1.21 $ 1.20
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
2
CONSUMERS WATER COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
For the Years Ended
December 31,
1998 1997
ASSETS
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Plant in service $479,211 $499,087
Less--Accumulated depreciation 96,703 92,787
Construction work in progress 23,878 11,843
-------- --------
Net property, plant and equipment 406,386 418,143
-------- --------
ASSETS OF DISCONTINUED OPERATIONS, NET (Note 11) 1,190 2,679
-------- --------
INVESTMENTS, AT COST 1,613 1,520
-------- --------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) 7,583 2,694
Accounts receivable, net of reserves of $936 in 1998 and $924 in 1997 8,488 8,695
Unbilled revenue 5,049 5,077
Inventories (Note 1) 1,948 2,068
Prepayments and other 5,874 6,585
-------- --------
Total current assets 28,942 25,119
-------- --------
OTHER ASSETS:
Funds restricted for construction activity (Note 3) -- 1,079
Deferred charges and other assets 18,160 17,159
-------- --------
Total other assets 18,160 18,238
-------- --------
$456,291 $465,699
======== ========
SHAREHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (SEE SEPARATE STATEMENT):
Common shareholders' investment $114,696 $108,657
Preferred shareholders' investment 1,044 1,044
Minority interest 2,589 2,370
Long-term debt 151,483 171,771
-------- --------
Total capitalization 269,812 283,842
-------- --------
CONTRIBUTIONS IN AID OF CONSTRUCTION 74,697 77,297
-------- --------
CURRENT LIABILITIES:
Interim financing (see separate statement) 19,839 19,666
Accounts payable 8,554 5,177
Accrued taxes (Note 2) 8,391 9,945
Accrued interest 3,953 3,919
Dividends payable 2,812 2,754
Accrued expenses and other 10,624 10,310
-------- --------
Total current liabilities 54,173 51,771
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
DEFERRED CREDITS:
Customers' advances for construction 21,928 22,049
Deferred income taxes (Note 2) 31,746 26,246
Unamortized investment tax credits 3,935 4,494
-------- --------
$456,291 $465,699
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CONSUMERS WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND INTERIM FINANCING
(DOLLARS IN THOUSANDS)
For the Years Ended
December 31,
1998 1997
CAPITALIZATION (Notes 3 and 5)
COMMON SHAREHOLDERS' INVESTMENT:
Common stock, $1 par value
Authorized--15,000,000 shares
Issued--9,020,037 shares in 1998 and 8,967,894 shares in 1997 $ 9,020 $ 8,968
Amounts in excess of par value 80,440 79,555
Reinvested earnings 25,236 20,134
-------- --------
114,696 108,657
PREFERRED SHAREHOLDERS' INVESTMENT:
Preferred stock, $100 par value 1,044 1,044
-------- --------
MINORITY INTEREST:
Common stock, at equity 911 692
Preferred stock 1,678 1,678
-------- --------
2,589 2,370
-------- --------
LONG-TERM DEBT:
First mortgage bonds, debentures and promissory notes-
Maturities Interest Rate Range
1998 5.94% -- 1
1999 7.00% to 8.50% 8 17,027
2000 5.94% to 8.59% 10,404 8
2001-2003 8.75% -- 1,215
2004-2008 0.00% to 9.50% 5,030 13,520
2009-2013 1.00% to 9.50% 9,839 13,899
2014-2018 10.40% 6,000 126
Thereafter 5.60% to 9.80% 120,731 126,811
-------- --------
Total first mortgage bonds, debentures and notes 152,012 172,607
-------- --------
Less--Sinking fund requirements and current maturities 529 836
-------- --------
151,483 171,771
-------- --------
Total capitalization 269,812 283,842
-------- --------
INTERIM FINANCING (Note 4):
Notes payable 19,310 18,830
Sinking fund requirements and current maturities 529 836
-------- --------
Total interim financing 19,839 19,666
-------- --------
Total capitalization and interim financing $289,651 $303,508
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CONSUMERS WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 16,251 $ 9,339 $ 6,251
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 13,755 13,397 11,944
Deferred income taxes and investment tax credits 4,941 1,556 2,466
(Gains) losses on sales of properties (6,680) (689) 342
Changes in assets and liabilities-
(Increase) decrease in accounts receivable and unbilled revenue (446) 214 (544)
Increase in inventories -- (14) (19)
Decrease (increase) in prepaid expenses 680 263 (1,015)
Increase in accounts payable and accrued expenses 1,349 2,447 578
Change in other assets, net of change in other liabilities of continuing
operations (3,206) (1,226) (3,188)
Change in assets, net of change in liabilities of discontinued operations 1,489 184 1,082
Loss on disposal of discontinued operations -- 2,350 --
-------- -------- --------
Total adjustments 11,882 18,482 11,646
-------- -------- --------
Net cash provided by operating activities 28,133 27,821 17,897
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (30,052) (27,605) (34,946)
Payment received on a note receivable -- -- 1,330
Decrease (increase) in funds restricted for construction activity 1,079 1,301 (2,093)
Increase (decrease) in construction accounts payable 1,001 (813) 205
Net cash cost of acquisition (Note 6) -- -- (1,988)
Proceeds from sales of properties (Note 7) 33,728 437 990
-------- -------- --------
Net cash provided by (used in) investing activities 5,756 (26,680) (36,502)
-------- -------- --------
FINANCING ACTIVITIES:
Net borrowing of short-term debt 480 1,476 6,724
Proceeds from issuance of long-term debt 1,875 -- 11,410
Repayment of long-term debt (22,470) (955) (716)
Proceeds from issuance of stock 937 4,095 4,182
Advances and contributions in aid of construction 2,347 7,010 8,437
Repayments of advances (1,078) (1,167) (1,294)
Taxes paid by developers on advances and contributions in aid of construction -- (4) (383)
Cash dividends paid (11,091) (10,677) (10,397)
-------- -------- --------
Net cash (used in) provided by financing activities (29,000) (222) 17,963
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,889 919 (642)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,694 1,775 2,417
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,583 $ 2,694 $ 1,775
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION FROM CONTINUING OPERATIONS:
Cash paid during the year for-
Interest (net of amounts capitalized) $ 12,854 $ 14,525 $ 13,306
Income taxes $ 4,473 $ 2,782 $ 4,538
NONCASH INVESTING AND FINANCING ACTIVITIES FOR THE YEAR:
Property advanced or contributed $ 3,276 $ 2,083 $ 1,543
The accompanying notes are an integral part of these
consolidated financial statements.
5
CONSUMERS WATER COMPANY
CONSOLIDATED STATEMENTS OF CHANGE IN COMMON SHAREHOLDERS' INVESTMENT
Number of
Shares, $1
Par Value,
Issued and Excess of Reinvested
Outstanding Par Value Earnings
(Dollars in Thousands)
BALANCE, DECEMBER 31, 1995 8,494,686 $ 71,718 $ 25,786
Net income -- -- 6,251
Cash dividends-
Common shares -- -- (10,386)
Preferred shares -- -- (55)
Dividend reinvestment plan 215,128 3,571 --
Employee benefit plans 22,388 384 --
Other -- 13 1
--------- --------- ---------
BALANCE, DECEMBER 31, 1996 8,732,202 75,686 21,597
Net income -- -- 9,339
Cash dividends-
Common shares -- -- (10,748)
Preferred shares -- -- (54)
Dividend reinvestment plan 211,886 3,463 --
Employee benefit plans 23,806 404 --
Other -- 2 --
--------- --------- ---------
BALANCE, DECEMBER 31, 1997 8,967,894 79,555 20,134
Net income -- -- 16,251
Cash dividends-
Common shares -- -- (11,094)
Preferred shares -- -- (55)
Dividend reinvestment plan 9,795 150 --
Employee benefit plans 42,016 735 --
Other 332 -- --
--------- --------- ---------
BALANCE, DECEMBER 31, 1998 9,020,037 $ 80,440 $ 25,236
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
6
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Consumers Water Company (Consumers or the Company) is a holding and
management company whose principal business is the ownership and operation
of water utility subsidiaries. Consumers owns directly or indirectly at
least 95% of the voting stock of seven water companies (the Consumers Water
Subsidiaries) which operate 27 divisions providing water service to
approximately 226,000 customers in five states. On April 9, 1998, the
Company disposed of the utility assets of Consumers New Hampshire Water
Company, as discussed in Note (7). The Company also owns 100% of Consumers
Applied Technologies, Inc. (CAT), which formerly provided services
primarily in the areas of meter installation, corrosion engineering,
contract operations and water conservation. On April 29, 1997, the Company
announced its intention to dispose of CAT.
On March 10, 1999, Consumers became a wholly owned subsidiary of
Philadelphia Suburban Corporation as discussed more fully in Note 12.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Consumers and its water utility and utility services subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements and related notes have
been restated to reflect the Company's utility services subsidiary, CAT, as
a discontinued operation (see Note 7).
Regulation
The rates, operations, accounting and certain other practices of the
Company's utility subsidiaries are subject to the regulatory authority of
state public utility commissions.
Property, Plant and Equipment
The utility subsidiaries generally capitalize interest at current rates on
short-term notes payable used to finance major construction projects.
Utility plant construction costs also include payroll, related fringe
benefits and other overhead costs associated with construction activity.
Depreciation is provided principally at straight-line composite rates.
Depreciation rates are based on the estimated useful lives of the assets
which range from 2 to 100 years. The consolidated provision, based on
average amounts of depreciable utility plant (which excludes contributions
in aid of construction and customers' advances for construction for most
subsidiaries), approximated 3.1% in 1998, 2.9% in 1997, 2.8% in 1996. Under
composite depreciation, when property is retired or sold in the normal
course of business, the entire cost, including net cost of removal, is
charged to accumulated depreciation, and no gain or loss is recognized.
7
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
All of the utility subsidiaries accrue estimated revenue for water
distributed but not yet billed as of the balance sheet date.
Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with an original maturity of three
months or less, which are not restricted for construction activity, to be
cash equivalents.
Disclosures about Fair Value of Financial Instruments
The carrying amount of cash, temporary investments, notes receivable and
preferred stock approximate their fair value. The fair value of long-term
debt based on borrowing rates currently available for loans with similar
terms and maturities is approximately $160 million.
Inventories
Inventories generally consist of materials and supplies. They are stated at
the lower of cost (average cost method) or market.
Other Assets
Deferred charges as of December 31, 1998 include the following:
(Dollars in
millions)
Financing charges $ 5.6
Rate case expense 1.6
Regulatory assets 7.9
Other expenses 3.1
-------
$ 18.2
=======
8
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Deferred financing charges are amortized over the lives of the related debt
issues. The expenses related to rate proceedings are deferred and amortized
over periods that generally range from one to three years, as permitted by
the governing regulatory authority. Regulatory assets result from providing
deferred income taxes on items not allowed currently in rates, as more
fully discussed in Note 2. Other expenses also include preliminary survey
and investigation costs and certain items amortized, subject to regulatory
approval, over their anticipated period of recovery.
Customers' Advances/Contributions in Aid of Construction
The water subsidiaries periodically receive property or cash to reimburse
the subsidiary for installing property for or on behalf of the customers
subject to written agreements. The terms of these agreements indicate
whether and under what circumstances these amounts are refundable. Amounts
that are not refundable are recorded as contributions in aid of
construction. For most of the subsidiaries, contributions in aid of
construction remains on the balance sheet until the property is retired.
Contributed property generally is not depreciated. Certain of the
subsidiaries do depreciate contributed property and amortize contributions
in aid of construction at the composite rate of the related property based
on specific orders of their governing regulatory authorities.
In accordance with Internal Revenue Code (IRC) Section 118(b), the
Company's water subsidiaries have been required to report as taxable income
all contributions in aid of construction and customer advances received
after 1986, and to make corresponding additions to the tax basis of its
depreciable property for such amounts. However, pursuant to the Small
Business Job Protections Act of 1996, which added IRC Section 118(c), water
utilities are not required to recognize contributions in aid of
construction or customer advances in taxable income after June 12, 1996.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. The rate-making practices followed by most regulatory agencies
allow the utility subsidiaries to recover, through customer rates, federal
and state income taxes payable currently and deferred taxes related to
certain temporary differences between pretax accounting income and taxable
income. The income tax effect of temporary differences not allowed
currently in rates is recorded as deferred taxes with an offsetting
regulatory asset or liability. The Company expects that these regulatory
assets will be recovered through customer rates in the future when such
taxes become payable.
Investment Tax Credits
Investment tax credits of utility subsidiaries are deferred and amortized
over the estimated useful lives of the related properties. Effective
January 1, 1986, investment tax credits were eliminated by the Tax Reform
Act of 1986 except for property meeting specific transitional rules.
9
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Earnings (Loss) per Common Share
Earnings (loss) per common share are based on the annual weighted average
number of shares outstanding and common share equivalents. The effect of
employee stock options, which are included as common share equivalents in
the diluted earnings per share calculation, is not significant.
Impairment of Long-Lived Assets
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets To Be Disposed Of, requires impairment losses on
long-lived assets to be recognized when an asset's book value exceeds its
expected future cash flows (undiscounted). This statement imposes stricter
criteria for regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. The Company adopted this
standard in 1996. The adoption of SFAS No. 121 did not have a material
impact on the financial position or results of operations of the Company.
New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
About Segments of an Enterprise and Other Related Information, require
certain disclosures and presentations in the financial statements. While
these standards apply to other utilities, management has determined they do
not currently apply to the Company.
(2) INCOME TAX EXPENSE
The Company uses the liability method in accounting for income taxes. Under
the liability method, deferred income taxes are recognized at currently
enacted income tax rates to reflect the tax effect of temporary differences
between the financial reporting and tax bases of assets and liabilities.
Such temporary differences are the result of provisions in the income tax
law that either require or permit certain items to be reported on the
income tax return in a different period than they are reported in the
financial statements. To the extent such income taxes are recoverable or
payable through future rates, regulatory assets and liabilities have been
recorded in the accompanying consolidated balance sheets. Net regulatory
assets of approximately $3.7 million and $4.2 million at December 31, 1998
and 1997, respectively, are reflected in the consolidated balance sheets.
Accumulated deferred taxes consisted of tax assets of $1,746,000 and
$1,972,000 related to alternative minimum tax in 1998 and 1997,
respectively, and are offset by liabilities of $32,848,000 and $27,836,000
which are predominantly related to depreciation and other plant related
differences in 1998 and 1997, respectively. Deferred tax assets are
expected to be realized in the future; therefore, no valuation allowance
has been recorded.
10
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
The components of income tax expense from continuing operations reflected
in the consolidated statements of income are as follows:
For the Years Ended December 31,
1998 1997 1996
(Dollars in Thousands)
Federal-
Currently payable $ 4,278 $ 4,738 $ 3,072
Deferred 4,077 1,269 1,994
Investment tax credit amortization (558) (187) (185)
-------- -------- --------
7,797 5,820 4,881
State-
Currently payable 1,553 287 202
Deferred 1,161 450 292
Investment tax credit amortization 2 2 4
-------- -------- --------
2,716 739 498
-------- -------- --------
Total provision $ 10,513 $ 6,559 $ 5,379
======== ======== ========
The table below reconciles the federal statutory rate to a rate computed by
dividing income tax expense, as shown in the previous table, by income from
continuing operations before income tax expense.
1998 1997 1996
Statutory rate 34.0% 34.0% 34.0%
Gain on sale of properties 4.3 -- --
State taxes, net of federal benefit 2.4 2.6 2.2
Effect of decrease in statutory rate on
reversing timing items (2.3) (.5) (.4)
Investment tax credit amortization (2.1) (1.0) (1.3)
Other 3.0 .2 1.4
------ ------ ------
39.3% 35.3% 35.9%
====== ====== ======
(3) LONG-TERM DEBT
Maturities and sinking fund requirements of the first mortgage bonds,
debentures and notes, including capitalized leases, are $529,000 in 1999,
$11,712,000 in 2000, $1,312,000 in 2001, $1,312,000 in 2002, $1,314,000 in
2003 and $135,833,000 thereafter.
11
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Substantially all of the Company's water utility plant is pledged as
security under various indentures or mortgages. The indentures restrict
cash dividends and repurchases of the Company's subsidiary's common stocks.
The various water utility subsidiaries' indentures generally prohibit the
payment of dividends on common shares in excess of retained earnings plus a
stated dollar amount. Approximately $37.7 million of reinvested earnings
were not so restricted at December 31, 1998. The Company has no cash
dividend restrictions on its retained earnings of $25.2 million.
Funds restricted for construction activity were obtained through the
issuance of tax exempt bonds, the use of which is restricted for utility
plant construction. At December 31,1998, there were no restricted funds
remaining. Interest income earned is included in other, in the accompanying
consolidated statements of income.
(4) NOTES PAYABLE
Notes payable are incurred primarily for temporary financing of plant
expansion. It is the subsidiaries' intent to repay these borrowings with
the proceeds from the issuance of long-term debt or equity securities.
Certain information related to the borrowings of the continuing operations
is as follows:
(Dollars in Thousands) 1998 1997 1996
Unused lines of bank credit $69,990 $69,970 $72,646
Borrowings outstanding at year-end 19,310 18,830 17,354
------- ------- -------
Total lines of bank credit $89,300 $88,800 $90,000
======= ======= =======
Monthly average borrowings during the year $15,689 $18,914 $17,071
======= ======= =======
Maximum borrowings at any month-end during the year $19,640 $20,430 $20,615
======= ======= =======
Weighted average annual interest rate during the year 6.6% 6.9% 7.0%
======= ======= =======
Weighted average interest rate on borrowings
outstanding at year-end 6.0% 6.9% 6.7%
======= ======= =======
12
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) SHAREHOLDERS' INVESTMENT
As of December 31, 1998, the Company reserved issuable common shares for
the following purposes:
401(k) Savings Plan 386,970
Stock Option Plans 57,600
Long-term Incentive Plan 400,000
-------
844,570
=======
The stock option plans approved by stockholders in 1988 and 1993 provide
for the sale of shares to eligible key employees of the Company and its
subsidiaries. The plans provide that option prices shall not be less than
100% of the fair market value on the date of the grant. The options expire
after five years. During 1998, no options were granted, 23,500 options were
exercised, and 25,300 options lapsed and were canceled. During 1997, no
options were granted, 2,000 options were exercised, and 20,600 options
lapsed and were canceled. During 1996, 30,000 options were granted, 1,300
options were exercised and 19,654 options lapsed and were canceled. At
December 31, 1998, options for 48,600 shares were exercisable at prices of
$17.25, $16.75, and $17.50 per share. Stock options were exercised in 1998
at $18.25, $17.50, $17.25 and $16.75 per share. Stock options were
exercised in 1997 at $16.75. Stock options were exercised in 1996 at
$16.50.
Information regarding outstanding preferred stock ($100 par value) of the
Company and its subsidiaries is as follows:
Par Value
of Shares
Cumulative Current Call Outstanding
Dividend Rate Price Per Shares Shares Issued (Dollars in
% Share Authorized and Outstanding Thousands)
Consumers Pennsylvania-
Shenango Valley Division 5 $ 110 10,000 9,964 $ 996
Consumers Illinois Water Company 5-1/2 107 5,000 3,577 358
Consumers Maine Water Company 5 105 4,000 2,739 274
Consumers Water Company 5-1/4 105 30,000 10,438 1,044
Consumers Water Company -- None 120,000 -- --
In addition to the shares listed above, the Company owns 36 preferred
shares of Consumers Pennsylvania Water Company-Shenango Valley Division,
423 preferred shares of Consumers Illinois Water Company and 11 preferred
shares of Consumers Maine Water Company.
Of the total 30,000 Consumers Water Company preferred shares authorized
with voting rights, 15,925 shares have been designated 5-1/4% Cumulative
13
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Preferred Stock Series A. The remaining 14,075 shares are undesignated. The
difference between par value and acquisition price was credited to amounts
in excess of par value.
The Company adopted the disclosure-only option under SFAS No. 123,
Accounting for Stock-Based Compensation, as of December 31, 1996. The
Company issued no stock options in 1998 or 1997 and does not plan to issue
any in the future. If the fair value based accounting had been used, 1996
net income would have been $6,243,000 compared to $6,251,000 as reported.
Earnings per share would not change from the reported amounts. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 1996: expected volatility of
6.57%; risk-free interest rate of 5.54%; expected life of 5 years and
dividend yields of 6.89% for the year. The weighted average fair value of
each option granted during the year ended December 31, 1996 was $0.40.
(6) ACQUISITIONS
On September 16, 1998, the Company, through its subsidiary, Consumers New
Jersey Water Company, acquired the stock of Woolwich Water and Woolwich
Sewer Companies. The Companies were subsequently merged into Consumers New
Jersey Water Company.
On November 18, 1996, the Company, through its subsidiary, Consumers Maine
Water Company, acquired the stock of the Bucksport Water Company for
$1,079,000. Bucksport Water Company was subsequently merged into Consumers
Maine Water Company.
On September 10, 1996, the Company, through its subsidiary, Consumers Maine
Water Company, acquired the assets of Hartland Water Company for $148,000.
On September 23, 1996, the Company, through its subsidiary, Consumers
Pennsylvania Water Company-Shenango Valley Division, acquired the assets of
Mercer Water Company for $761,000.
All of these acquisitions were accounted for using the purchase method of
accounting, and the results of their operations have been included in the
consolidated financial statements since the date of acquisition.
(7) DISPOSITIONS
Gains (losses) net of taxes equaled $3,943,000 or $0.44 per share, $425,000
or $0.05 per share, and ($240,000) or ($0.03) per share in 1998, 1997, and
1996, respectively. These gains (losses) were due to several small land
sales in Ohio, Illinois, Pennsylvania, New Hampshire and Maine plus the
sale of Consumers New Hampshire Water Company's utility assets as described
below.
The Company has sold six divisions with customers totaling approximately
23,000 under the threat of eminent domain since 1991. The gain on these
sales totaled over $10.9 million. This includes the April 9, 1998 sale of
Consumers New Hampshire Water Company's utility assets to the Town of
14
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Hudson under the New Hampshire condemnation statute for $33.7 million net
of certain closing costs. The sale generated a gain of $3.9 million, net of
taxes, or $0.43 per share, and was recorded in the second quarter of 1998.
Consumers New Hampshire had $6.5 million in sales, $744,000 in net income
and 8,229 customers in 1997.
(8) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
In December 1998, the Company adopted SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. 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
certain 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 SFAS
No. 87, Employers' Accounting for Pensions, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions.
The Company has a defined benefit pension plan covering substantially all
of its employees. Pension benefits are based on years of service and the
employee's average salary during the last five years of employment. The
Company's funding policy is to contribute an amount that will provide for
benefits attributed to service to date and for those expected to be earned
in the future by current participants, to the extent deductible for income
tax purposes. The Company also has a non-qualified Supplemental Executive
Retirement Plan which covers eligible members of senior management.
In addition to pension benefits, employees retiring from the Company in
accordance with the retirement plan provisions are entitled to
postretirement health care and life insurance coverage. These benefits are
subject to deductibles, co-payment provisions and other limitations. The
Company may amend or change the plan periodically. In 1997, the Company
established a Voluntary Employee Benefit Association (VEBA). The Company
contributed $440,941 to the VEBA during 1998.
15
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
The Company has adopted the delayed recognition method under which the
unrecorded SFAS 106 liability as of January 1, 1993, will be amortized to
expense on the straight-line basis over a 20-year period.
Pension Benefits Other Benefits
As of December 31, 1998 1997 1998 1997
Change in benefit obligation-
Benefit obligation at beginning of year $ 36,216,111 $ 32,457,979 $ 3,479,822 $ 3,225,825
Service cost 1,238,698 1,089,726 90,600 95,700
Interest cost 2,692,752 2,531,328 251,600 254,300
Participant contributions -- -- -- --
Plan amendments 793,167 -- -- --
Acquisitions/divestitures -- -- -- --
Curtailment (gain) or loss -- -- -- --
Settlement (gain) or loss -- -- -- --
Special termination benefits 55,846 -- -- --
Benefits paid (1,800,123) (1,557,149) (139,021) (133,414)
Settlement payments -- -- -- --
Actuarial loss 3,798,195 1,694,227 85,423 37,411
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 42,994,646 $ 36,216,111 $ 3,768,424 $ 3,479,822
============ ============ ============ ============
Change in plan assets-
Fair value of plan assets at beginning of year $ 42,660,570 $ 38,111,687 $ -- $ --
Actual return on plan assets 6,514,829 6,106,032 44,031 --
Acquisitions/divestitures -- -- -- --
Employer contributions 55,846 -- 419,941 133,414
Participant contributions -- -- -- --
Benefits paid (1,800,123) (1,557,149) (139,021) (133,414)
Settlement payments -- -- -- --
------------ ------------ ------------ ------------
Fair value of plan assets at end of year $ 47,431,122 $ 42,660,570 $ 324,951 $ --
============ ============ ============ ============
Reconciliation of funded status-
Funded status $ 4,436,476 $ 6,444,459 $ (3,443,473) $ (3,479,822)
Contributions for fourth quarter -- -- 356,700 335,700
Unrecognized actuarial gain (6,794,907) (8,099,662) (1,085,964) (1,211,256)
Unrecognized transition (asset) or obligation (2,243,402) (2,449,830) 2,245,900 2,406,300
Unrecognized prior service cost 2,291,239 1,746,616 -- --
------------ ------------ ------------ ------------
Net amount recognized at year-end $ (2,310,594) $ (2,358,417) $ (1,926,837) $ (1,949,078)
============ ============ ============ ============
Amounts recognized in the statement of
financial position consist of-
Prepaid benefit cost $ -- $ -- $ -- $ --
Accrued benefit liability (2,310,594) (2,358,417) (1,926,837) (1,949,078)
Intangible asset -- -- N/A N/A
Accumulated other comprehensive income -- -- N/A N/A
------------ ------------ ------------ ------------
Net amount recognized at year-end $ (2,310,594) $ (2,358,417) $ (1,926,837) $ (1,949,078)
============ ============ ============ ============
16
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Pension Benefits Other Benefits
As of December 31, 1998 1997 1998 1997
Components of net periodic benefit cost-
Service cost $ 1,238,698 $ 1,089,726 $ 90,600 $ 95,700
Interest cost 2,692,752 2,531,328 251,600 254,300
Expected return on plan assets (3,763,713) (3,356,578) (22,700) --
Amortization of prior service cost 248,544 212,081 -- --
Amortization of transitional (asset) or obligation (206,428) (206,428) 160,400 160,400
Recognized actuarial gain (257,676) (230,470) (61,200) (63,400)
------------ ------------ ------------ ------------
Net periodic benefit cost $ (47,823) $ 39,659 $ 418,700 $ 447,000
============ ============ ============ ============
Additional (gain) or loss recognized due to-
Curtailment $ -- $ -- $ -- $ --
Settlement -- -- -- --
Special Termination Benefits 55,846 -- -- --
Weighted-average assumptions
as of September 30-
Discount rate 7.00% 7.50% 7.00% 7.50%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
Assumed Health Care Cost Trend
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate is
assumed to decrease by 0.5% annually until 2001 and remain at 5.0%
thereafter.
Assumed health care cost trend rates have an effect on the amounts reported
for the health care plan. A one-percentage point change in assumed health
care cost trend rates would have the following effects.
One-Percentage One-Percentage
Point Increase Point Decrease
Effect on total of service and interest cost components
for 1998 $ 30,763 $ (22,704)
Effect on year-end 1998 postretirement benefit obligation 297,886 (244,967)
The Company also has a 401(k) plan, which covers substantially all its
employees. The Company matches up to 40% of an employee's contributions in
Company stock, subject to a $1,040 limitation. The value of the match was
$329,000, $371,000, and $394,000 in 1998, 1997, and 1996, respectively.
17
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
In addition, the Company had a long-term incentive plan, which covered
eligible members of senior management. Awards were at the discretion of the
Board of Directors. The Company discontinued this plan in 1998. No amounts
were earned in the current year.
(9) COMMITMENTS AND CONTINGENCIES
The Company is a party in or may be affected by various matters under
litigation. Many of the improvements required by the Safe Drinking Water
Act have been completed. The Company expects that some of its subsidiaries
will need to make significant additional improvements, however, including,
but not limited to, construction of treatment plants, new wells and
replacement of water mains, to stay in compliance with environmental
regulations and to replace aging plants. Management believes that the
ultimate treatment of these expenditures and the various matters under
litigation will not have a significant adverse effect on either the
Company's future results of operations, financial position or cash flows.
Estimated losses including the expected cost of legal fees are recorded for
any litigation where a loss is probable and can be reasonably estimated.
The Company has operating leases for buildings, vehicles, water meters and
office equipment. Rental expenses relating to these leases for the years
ended December 31, 1998, 1997 and 1996 were approximately $766,000,
$832,000, and $1,333,000, respectively. At December 31, 1998, minimum
future lease payments under noncancelable operating leases are $657,000 in
1999, $540,000 in 2000, $411,000 in 2001, $319,000 in 2002, $276,000 in
2003, and $568,000 thereafter.
Following an audit of the Company, the Maine State Tax Assessor assessed
additional state corporate income taxes against the Company for the period
1988 to 1993 due to the application of the unitary tax method. The amount
of the additional taxes, penalties and interest assessed was $586,207 as of
February 15, 1998. The Company has agreed to the application of the unitary
tax method with the State of Maine. The related additional taxes, penalties
and interest for the period 1988-1993 as well as the additional liability
for the period 1994-1998 are reflected in the accompanying consolidated
financial statements as of December 31, 1998.
The Company plans to expend approximately $35 million, of which $13.3
million is budgeted for 1999, on a new water treatment facility necessary
to meet environmental requirements. The Company's capital program, along
with sinking fund requirements and long-term debt retirements is expected
to be financed through internally-generated funds, existing credit
facilities and the issuance of new long-term debt.
18
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(10) EARNINGS PER SHARE
(In Thousands Except per Share Amounts) 1998 1997 1996
Basic
Weighted average basic shares 9,005 8,857 8,625
Income from continuing operations $ 16,251 $ 12,076 $ 9,481
Preferred dividends (55) (54) (55)
Earnings from continuing operations
applicable to common shares 16,196 12,022 9,426
Loss from discontinued operations -- (2,737) (3,230)
-------- -------- --------
Net income applicable to common shares $ 16,196 $ 9,285 $ 6,196
======== ======== ========
Basic earnings per common share from continuing
operations $ 1.80 $ 1.36 $ 1.09
Loss per common share from discontinued operations -- $ (0.31) $ (0.37)
-------- -------- --------
Total basic earnings per common share $ 1.80 $ 1.05 $ 0.72
======== ======== ========
Diluted
Weighted average number of shares outstanding 9,005 8,857 8,625
Net effect of dilutive common stock equivalents 17 2 3
-------- -------- --------
Weighted average diluted shares 9,022 8,859 8,628
======== ======== ========
Earnings from continuing operations applicable to
common shares $ 16,196 $ 12,022 $ 9,426
Loss from Discontinued Operations -- (2,737) (3,230)
-------- -------- --------
Net Income applicable to common shares $ 16,196 $ 9,285 $ 6,196
======== ======== ========
Diluted earnings per common share from continuing
operations $ 1.80 $ 1.36 $ 1.09
Loss per common share from discontinued operations -- $ (1.31) $ (0.37)
-------- -------- --------
Total diluted earnings per common share $ 1.80 $ 1.05 $ 0.72
======== ======== ========
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share for the years 1998, 1997, and 1996
were determined by taking employee stock options into account. In 1997, the
Company adopted SFAS No. 128, Earnings per Share. As a result, reported
earnings per share for 1998 and 1997 were restated. The effect of this
accounting change had no impact on the previously reported earnings per
share.
19
CONSUMERS WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(11) DISCONTINUED OPERATIONS
On April 29, 1997, the Company announced its intention to dispose of its
technical services company, CAT. The Company has been unsuccessful in
selling CAT as an on-going business and is proceeding with its liquidation.
Estimated loss on the disposal of $1.5 million, net of tax benefits of
$773,000 was recorded in the first quarter of 1997. In the fourth quarter
of 1997, an additional reserve of $850,000 net of tax benefits of $438,000
was recorded to reflect additional expenses associated with the completion
of contracts. CAT's operations were substantially shutdown during 1997. The
operating results of CAT prior to the date of discontinuance are shown
under discontinued operations on the accompanying consolidated statements
of income and all financial statements of prior periods have been restated.
Total sales for the discontinued operations during 1998 and 1997 were
$338,000 and $4,039,000, respectively. Net assets of the discontinued
operations approximate realizable value. A summary of the net assets of
discontinued operations follows:
December 31,
1998 1997
Cash $ 92,000 $ 332,000
Receivables, net 524,000 1,815,000
Income taxes receivable 772,000 2,443,000
Other current assets -- 16,000
---------- ----------
Total assets 1,388,000 4,606,000
---------- ----------
Accounts payable 12,000 17,000
Accrued expenses 93,000 1,816,000
Other 93,000 94,000
---------- ----------
Total liabilities 198,000 1,927,000
---------- ----------
Net assets of discontinued operations $1,190,000 $2,679,000
========== ==========
(12) SUBSEQUENT EVENT
On March 10, 1999, The Company completed a merger (the Merger) with
Philadelphia Suburban Corporation (PSC). The Merger was effected pursuant
to a June 27, 1998 merger agreement, as amended and restated by the parties
effective as of August 5, 1998. The Merger was completed after the
transaction received the approvals from the state utility commissions in
each state in which the companies operate. The shareholders of each company
approved the Merger at special meetings held on November 16, 1998. Pursuant
to the merger agreement, PSC issued 13,014,015 shares of common stock in
exchange for all of the outstanding stock of the Company. The Company's
common shareholders received 1.432 shares of PSC's common stock for each
company common share and the Company's preferred shareholders received
5.649 shares of PSC's common stock for each preferred share. As a result of
the Merger, the Company became a wholly-owned subsidiary of PSC. The Merger
will be accounted for as a pooling-of-interests under Accounting Principles
Board Opinion No. 16.
20
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our report on
Consumers Water Company dated February 18, 1999 (except with respect to the
matter discussed in Note 12, as to which the date is March 10, 1999) included in
this Form 8-K.
Arthur Andersen LLP
Boston, Massachusetts
May 3, 1999