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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
------------------- ------------------------
Commission File Number 1-6659
PHILADELPHIA SUBURBAN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489
- ------------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)-527-8000
-------------------
- ------------------------------------------------------------------------------
(Former Name, former address and former fiscal year,
if changed since last report.)
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 July 30, 2002 68,858,761.
----------
Part I - Financial Information
Item 1. Financial Statements
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
Assets (Unaudited)
Property, plant and equipment, at cost $ 1,754,001 $ 1,677,061
Less accumulated depreciation 327,087 308,946
----------- -----------
Net property, plant and equipment 1,426,914 1,368,115
----------- -----------
Current assets:
Cash and cash equivalents 876 1,010
Accounts receivable and unbilled revenues, net 53,222 56,331
Inventory, materials and supplies 4,819 4,446
Prepayments and other current assets 5,120 8,085
----------- -----------
Total current assets 64,037 69,872
----------- -----------
Regulatory assets 79,458 79,669
Deferred charges and other assets, net 20,023 22,915
Funds restricted for construction activity 30,132 19,768
----------- -----------
$ 1,620,564 $ 1,560,339
=========== ===========
Liabilities and Stockholders' Equity
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 816 $ 1,116
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 69,755,662 and 69,300,346 in 2002 and 2001 34,878 34,650
Capital in excess of par value 311,191 304,039
Retained earnings 158,212 149,682
Minority interest 527 787
Treasury stock, 963,986 and 913,877 shares in 2002 and 2001 (18,356) (17,167)
Accumulated other comprehensive income 378 726
----------- -----------
Total stockholders' equity 487,646 473,833
----------- -----------
Long-term debt, excluding current portion 573,487 516,520
Commitments - -
Current liabilities:
Current portion of long-term debt 13,849 14,935
Loans payable 97,736 109,668
Accounts payable 15,200 27,667
Accrued interest 8,505 8,302
Accrued taxes 19,833 22,865
Other accrued liabilities 19,553 19,198
----------- -----------
Total current liabilities 174,676 202,635
----------- -----------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 170,407 167,577
Customers' advances for construction 67,407 59,886
Other 10,960 9,204
----------- -----------
Total deferred credits and other liabilities 248,774 236,667
----------- -----------
Contributions in aid of construction 135,981 130,684
----------- -----------
$ 1,620,564 $ 1,560,339
=========== ===========
See notes to consolidated financial statements on page 6 of this report.
1
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------
2002 2001
-------- ---------
Operating revenues $148,284 $ 147,433
Costs and expenses:
Operations and maintenance 56,200 52,648
Depreciation 20,200 18,682
Amortization 1,209 1,145
Taxes other than income taxes 9,935 10,938
-------- ---------
87,544 83,413
-------- ---------
Operating income 60,740 64,020
Other expense (income):
Interest expense, net 19,671 20,166
Allowance for funds used during construction (932) (512)
Gain on sale of other assets (1,758) (2,909)
-------- ---------
Income before income taxes 43,759 47,275
Provision for income taxes 17,039 18,705
-------- ---------
Net income 26,720 28,570
Dividends on preferred stock 27 53
-------- ---------
Net income available to common stock $ 26,693 $ 28,517
======== ========
Net income $ 26,720 $ 28,570
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 345 48
Reclassification adjustment for gains reported in net income (693) (36)
-------- ---------
Comprehensive income $ 26,372 $ 28,582
======== ========
Net income per common share:
Basic $ 0.39 $ 0.42
======== ========
Diluted $ 0.38 $ 0.42
======== ========
Average common shares outstanding
during the period:
Basic 68,576 67,598
======== ========
Diluted 69,408 68,403
======== ========
See notes to consolidated financial statements on page 6 of this report.
2
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
June 30,
----------------------
2002 2001
-------- ---------
Operating revenues $ 76,615 $ 77,240
Costs and expenses:
Operations and maintenance 28,915 26,462
Depreciation 10,307 9,729
Amortization 669 623
Taxes other than income taxes 4,621 5,350
-------- --------
44,512 42,164
-------- --------
Operating income 32,103 35,076
Other expense (income):
Interest expense, net 9,891 9,904
Allowance for funds used during construction (546) (264)
Gain on sale of other assets (1,409) (118)
-------- --------
Income before income taxes 24,167 25,554
Provision for income taxes 9,337 10,096
-------- --------
Net income 14,830 15,458
Dividends on preferred stock 12 26
-------- --------
Net income available to common stock $ 14,818 $ 15,432
======== ========
Net income $ 14,830 $ 15,458
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 217 605
Reclassification adjustment for gains reported in net income (466) (36)
-------- --------
Comprehensive income $ 14,581 $ 16,027
======== ========
Net income per common share:
Basic $ 0.22 $ 0.23
======== ========
Diluted $ 0.21 $ 0.22
======== ========
Average common shares outstanding
during the period:
Basic 68,701 67,754
======== ========
Diluted 69,461 68,587
======== ========
See notes to consolidated financial statements on page 6 of this report.
3
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 816 $ 1,116
Common stock, $.50 par value 34,878 34,650
Capital in excess of par value 311,191 304,039
Retained earnings 158,212 149,682
Minority interest 527 787
Treasury stock (18,356) (17,167)
Accumulated other comprehensive income 378 726
----------- ---------
Total stockholders' equity 487,646 473,833
----------- ---------
Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
0.00% to 2.49% 13,586 8,325
2.50% to 4.99% 12,882 9,023
5.00% to 5.49% 50,515 50,545
5.50% to 5.99% 80,260 30,660
6.00% to 6.49% 160,525 160,525
6.50% to 6.99% 55,200 55,200
7.00% to 7.49% 58,000 60,000
7.50% to 7.99% 23,000 23,000
8.00% to 8.49% 17,580 17,595
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 53,535 53,535
9.50% to 9.99% 45,537 46,031
10.00% to 10.50% 6,000 6,000
----------- ---------
Total First Mortgage Bonds 585,620 529,439
Notes payable, 6.05%, due 2006 344 644
Installment note payable, 9%, due in equal annual payments through 2013 1,372 1,372
----------- ---------
587,336 531,455
Current portion of long-term debt 13,849 14,935
----------- ---------
Long-term debt, excluding current portion 573,487 516,520
----------- ---------
Total capitalization $ 1,061,133 $ 990,353
=========== =========
See notes to consolidated financial statements on page 6 of this report.
4
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 26,720 $ 28,570
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 21,409 19,827
Deferred income taxes 2,949 4,376
Gain on sale of other assets (1,758) (2,909)
Net (increase) decrease in receivables, inventory and prepayments 6,108 (515)
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (13,151) (6,936)
Payment of Competitive Transition Charge - (11,465)
Other 488 1,546
-------- --------
Net cash flows from operating activities 42,765 32,494
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $932 and $512 (56,470) (50,959)
Acquisitions of water and wastewater systems (7,865) (4,187)
Proceeds from the sale of other assets 5,561 3,182
Net increase in funds restricted for construction activity (10,364) (168)
Other (331) 15
-------- --------
Net cash flows used in investing activities (69,469) (52,117)
-------- --------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 4,976 1,998
Repayments of customers' advances (1,705) (1,887)
Net proceeds (repayments) of short-term debt (11,932) 25,876
Proceeds from long-term debt 53,353 7,372
Repayments of long-term debt (3,612) (4,272)
Redemption of preferred stock (300) -
Proceeds from issuing common stock 6,486 7,042
Repurchase of common stock (1,472) (1,075)
Dividends paid on preferred stock (27) (53)
Dividends paid on common stock (18,163) (16,761)
Other (1,034) 42
-------- --------
Net cash flows from financing activities 26,570 18,282
-------- --------
Net decrease in cash and cash equivalents (134) (1,341)
Cash and cash equivalents at beginning of period 1,010 4,087
-------- --------
Cash and cash equivalents at end of period $ 876 $ 2,746
======== ========
See notes to consolidated financial statements on page 6 of this report.
5
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 1 Basis of Presentation
---------------------
The accompanying consolidated balance sheet and statement of
capitalization of Philadelphia Suburban Corporation ("PSC") at June 30,
2002, the consolidated statements of income and comprehensive income for
the six months and quarter ended June 30, 2002 and 2001, and the
consolidated statements of cash flow for the six months ended June 30,
2002 and 2001, are unaudited, but reflect all adjustments, consisting of
only normal recurring accruals, which are, in the opinion of management,
necessary to present fairly the consolidated financial position, the
consolidated results of operations, and the consolidated cash flow for
the periods presented. Because they cover interim periods, the
statements and related notes to the financial statements do not include
all disclosures and notes normally provided in annual financial
statements and, therefore, should be read in conjunction with the PSC
Annual Report on Form 10-K for the year ended December 31, 2001 and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. The
results of operations for interim periods may not be indicative of the
results that may be expected for the entire year. Certain prior year
amounts have been reclassified to conform with current year's
presentation.
Note 2 Acquisitions
------------
On July 29, 2002, we entered into a purchase agreement with DQE, Inc.
("DQE") and AquaSource, Inc. ("AquaSource") pursuant to which we agreed
to acquire three operating water and wastewater first tier subsidiaries
of AquaSource, a subsidiary of DQE, and assume selected, integrated
operating and maintenance contracts and related assets. The purchase
agreement provides for a target cash purchase price of approximately
$205 million. The final purchase price may be increased by up to $10
million or decreased by up to $25 million as various purchase price
adjustments are applied. These adjustments include the achievement of
certain specific operating performance metrics, involving revenue, rate
base and projected customer connections. We are purchasing the operating
utilities, including assets and franchises that serve approximately
130,000 water and wastewater customer accounts in 12 states, and
selected water and wastewater operating contracts that serve
approximately 40,000 customers in 7 states. Over 80% of the customers in
the businesses we are purchasing are located in Texas, Florida, Virginia
and Indiana. The acquisition is subject to certain regulatory approvals,
but does not require DQE or PSC shareholder approval. We do not expect
to obtain the requisite regulatory approvals before the second half of
2003. Within 45 days of the agreement, AquaSource has the option to sell
the operations in several states whose operations represent
approximately 6% of the total customers of the businesses we are
purchasing, in one or more separate transactions, with a consequent
reduction in the target purchase price of up to $14.8 million. On August
5, 2002, DQE announced the sale of one of the state operations under
this option resulting in an adjustment to the target purchase price of
less than one-half of the possible purchase price reduction related to
this option. It is our intention to fund the acquisition at closing with
cash from a combination of short-term debt, long-term debt, the issuance
of our common stock and/or an instrument convertible into our common
stock. The ultimate decision regarding the funding of the acquisition
will be based upon market conditions existing at the time the
acquisition is consummated.
6
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
On April 29, 2002, PSC entered into a definitive merger agreement with
Pennichuck Corporation ("Pennichuck") pursuant to which we agreed to
acquire Pennichuck by issuing shares of our common stock in exchange for
all of the outstanding shares of Pennichuck common stock. The merger
will be accounted for under the purchase method of accounting. The
merger, which is subject to several conditions, including the approval
by the shareholders of Pennichuck and the New Hampshire Public Utilities
Commission, is expected to close by early 2003. In June 2002, the
Federal Trade Commission granted early termination of the 30-day waiting
period applicable to the transaction under the Hart-Scott-Rodino
Antitrust Improvements Act. Pennichuck's shareholders will receive
shares of PSC common stock based on the PSC average closing price as
determined under the terms of the merger agreement. If the PSC average
closing price is between $23.00 and $25.00, Pennichuck's shareholders
will receive $33.00 in value for each share of Pennichuck common stock
that they own based on the PSC average closing price. Alternatively, if
the PSC average closing price is less than $23.00, Pennichuck
shareholders will receive 1.435 shares of PSC common stock or if it is
greater than $25.00, Pennichuck shareholders will receive 1.320 shares
of PSC common stock. After the merger, Pennichuck will be a wholly-owned
subsidiary of PSC. Pennichuck is a holding company based in Nashua, New
Hampshire whose operating utility subsidiaries serve approximately
28,200 water customers in service territories located in southern and
central New Hampshire, and whose non-regulated operating subsidiaries
develop real estate and provide water-related operating and management
contract services.
During the first half of 2002, eight acquisitions or growth ventures
were completed in Pennsylvania, New Jersey and North Carolina. The total
purchase price of $8,420 for the systems acquired consisted of $7,865 in
cash and the issuance of 28,917 shares of PSC common stock.
Note 3 Water Rates
-----------
On August 1, 2002, the Pennsylvania Public Utility Commission ("PAPUC")
granted Pennsylvania Suburban Water Company ("PSW") a $21,226 or 10.2%
base rate increase. The rates in effect at the time of the filing
included $9,400 in Distribution System Improvement Charges ("DSIC") at
5.0%. Consequently, the total base rates will increase by $30,626 or
15.4% and the DSIC will be reset to zero. During the first half of 2002,
operating subsidiaries located in Ohio, North Carolina and Maine were
allowed rate increases, representing six rate adjustments, designed to
increase total revenues by approximately $500 on an annual basis.
Revenues from these rate increases realized in the first half of 2002
were approximately $120. Our operating subsidiary in Illinois also
realized approximately $160 in revenue from implementation of the
Qualifying Infrastructure Plant Surcharge in three divisions.
7
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 4 Long-term Debt and Loans Payable
--------------------------------
In June 2002, PSW issued $25,000 of tax-exempt bonds due in 2032 at a
rate of 5.55%. The proceeds from these bonds issued are restricted to
funding the costs of certain capital projects. PSW also issued a First
Mortgage Bond of $25,000 5.93% Series due 2012. The proceeds of this
bond issuance were used to reduce a portion of the balance of short-term
debt. During the first half of 2002, operating subsidiaries also issued
$4,293 of long-term debt at varying rates of interest ranging from 0% to
3.24% and due at various times through 2032. The proceeds of these
issues were used to reduce a portion of the balance of short-term debt.
In connection with acquisitions completed in the first half of 2002,
$6,313 of long-term debt was acquired at an interest rate of 1% due in
various years. As of June 30, 2002, the Trustees for various financing
issues held $30,132 pending completion of the projects financed with the
issues and are reported in the consolidated balance sheet as funds
restricted for construction activity.
Note 5 Stockholders' Equity
--------------------
PSC reports other comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The following table summarizes the activity of accumulated
other comprehensive income:
2002 2001
------ ------
Balance at January 1, $ 726 $ 926
Unrealized holding gain arising during the period,
net of tax of $185 in 2002 and $25 in 2001 345 48
Less: reclassification adjustment for gains included
in net income, net of tax of $372 in 2002 and $19 in 2001 (693) (36)
------ ------
Other comprehensive income (loss), net of tax (348) 12
------ ------
Balance at June 30, $ 378 $ 938
====== ======
Vivendi Environnement, through its subsidiaries, owned approximately
16.1% of PSC's outstanding common stock as of July 1, 2002. In May 2002,
Vivendi Environnement advised PSC of its decision to sell its investment
in PSC. Vivendi Environnement has announced that its decision to sell
its interest in PSC is part of their overall strategy to divest non-core
assets and focus on other business strategies. On July 8, 2002, PSC
filed a Registration Statement to facilitate the orderly re-distribution
of a portion of the shares held by Vivendi Environnement's subsidiaries
into the market. In addition, on the same date PSC entered into a
Registration and Share Purchase Agreement with Vivendi Environnement and
its subsidiaries, pursuant to which PSC has agreed to repurchase up to
2,500,000 shares of PSC common stock at the public offering price. If
the underwriters elect to exercise their over-allotment option under the
proposed Underwriting Agreement, the number of shares that PSC is
obligated to repurchase will be reduced by the number of shares
purchased by the underwriters in exercising such over-allotment option.
It is our intention to fund the repurchase of the shares with proceeds
from a short-term credit facility. Interest under this short-term credit
facility will be on terms substantially similar to PSC's current
short-term lines of credit. It is PSC's current intention to repay these
short-term borrowings with proceeds from the issuance of common stock or
an instrument convertible into PSC common stock.
8
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 6 Net Income per Common Share
---------------------------
Basic net income per common share is based on the weighted average
number of common shares outstanding. Diluted net income per common share
is based on the weighted average number of common shares outstanding and
potentially dilutive shares. The dilutive effect of employee stock
options is included in the computation of Diluted net income per common
share. The following table summarizes the shares, in thousands, used in
computing Basic and Diluted net income per common share:
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Average common shares outstanding during
the period for Basic computation 68,576 67,598 68,701 67,754
Dilutive effect of employee stock options 832 805 760 833
--------- --------- ---------- ----------
Average common shares outstanding during
the period for Diluted computation 69,408 68,403 69,461 68,587
========= ========= ========== ==========
Note 7 Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred. When the liability is
initially recognized, the carrying amount of the related long-lived
asset is increased by the same amount. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, the Company may settle the obligation for its recorded
amount, or an alternative amount, thereby incurring a gain or loss upon
settlement. The Company intends to adopt this statement as required in
2003. The Company is currently evaluating the provisions of this
statement but does not expect the effect of adoption on its results of
operations or financial position to be material.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 144 on
January 1, 2002 did not have a material impact on the Company's results
of operations or financial position.
In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, rescinds SFAS
No. 4, which required all gains and losses from the extinguishment of
debt to be classified as an extraordinary item and amends SFAS No. 13 to
require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. This statement is not expected to
have a material impact on the Company's results of operations and
financial position.
9
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. This statement replaces the previous accounting guidance
provided in Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is currently evaluating
the provisions of this statement and has not yet determined the effect
of adoption on its results of operations and financial position.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Forward-looking Statements
--------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain, in addition to
historical information, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements address, among other things: our use of cash; projected capital
expenditures; liquidity; possible acquisitions and other growth ventures; the
expected completion dates for the Pennichuck merger and the AquaSource
acquisition; the completion of various construction projects; the impact of
drought conditions; the projected effects of recent accounting pronouncements;
the funding of the repurchase of PSC common shares from Vivendi Environnement;
the final purchase price for and the financing of the purchase of AquaSource;
the projected annual value of rate increases; the effect of any additional
minimum liability that may be recognized in connection with our defined benefit
retirement plans, as well as information contained elsewhere in this report
where statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates," "plans" or similar expressions. These statements are
based on a number of assumptions concerning future events, and are subject to a
number of uncertainties and other factors, many of which are outside our
control. Actual results may differ materially from such statements for a number
of reasons, including the effects of regulation, abnormal weather, changes in
capital requirements and funding, acquisitions, the rate of return on our
pension assets, the approval of the Pennichuck merger by the Pennichuck
shareholders and the New Hampshire Public Utilities Commission, and the approval
of the AquaSource acquisition by governmental authorities. We undertake no
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.
General Information
-------------------
Philadelphia Suburban Corporation ("we" or "us"), a Pennsylvania corporation, is
the holding company for regulated utilities providing water or wastewater
services to approximately 2 million people in Pennsylvania, Ohio, Illinois, New
Jersey, Maine and North Carolina. Our two primary subsidiaries are Pennsylvania
Suburban Water Company ("PSW"), a regulated public utility that provides water
or wastewater services to approximately 1.3 million residents in the suburban
areas north and west of the City of Philadelphia and in fourteen other counties
in Pennsylvania, and Consumers Water Company ("CWC"), a holding company for
several regulated public utility companies that provide water or wastewater
service to approximately 700,000 residents in various communities in Illinois,
Maine, New Jersey, and Ohio. Other subsidiaries provide water and wastewater
services in parts of Pennsylvania, North Carolina and Ohio. We are among the
largest investor-owned water utilities in the United States based on the number
of customers. In addition, we provide water and wastewater service to
approximately 35,000 people through operating and maintenance contracts with
municipal authorities and other parties close to our operating companies'
service territories. Some of our subsidiaries provide wastewater collection,
treatment, and disposal services (primarily residential) to approximately 40,000
people in Pennsylvania, Illinois, New Jersey and North Carolina.
11
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)
Financial Condition
-------------------
During the first half of 2002, we had $56,470 of capital expenditures, acquired
water and wastewater systems for $7,865, repaid $1,705 of customer advances for
construction and made sinking fund contributions and other loan repayments of
$3,612. The capital expenditures were related to improvements to treatment
plants, new water mains and customer service lines, the rehabilitation of
existing water mains, hydrants and customer service lines, in addition to well
and booster improvements.
During the first half of 2002, the proceeds from the issuance of long-term debt,
proceeds from the issuance of common stock, internally generated funds,
available working capital and funds available under our revolving credit
agreement and other credit facilities were used to fund the cash requirements
discussed above and to pay dividends. In June 2002, our Pennsylvania operating
subsidiary issued $25,000 of tax exempt bonds due in 2032 at a rate of 5.55% and
issued a First Mortgage Bond of $25,000 5.93% Series due 2012. During the first
half of 2002, operating subsidiaries also issued $4,293 of long-term debt at
varying rates of interest ranging from 0% to 3.24% and due at various times
through 2032. The proceeds of these issuances were used to reduce a portion of
the balance of short-term debt. At June 30, 2002, we had short-term lines of
credit of $180,000, of which $82,264, was available. Effective with the December
1, 2002 payment, PSC has increased the quarterly cash dividend on common stock
from $.1325 per share to $.14 per share.
Vivendi Environnement, through its subsidiaries, owned approximately 16.1% of
PSC's outstanding common stock as of July 1, 2002. In May 2002, Vivendi
Environnement advised PSC of its decision to sell its investment in PSC. Vivendi
Environnement has announced that its decision to sell its interest in PSC is
part of their overall strategy to divest non-core assets and focus on other
business strategies. On July 8, 2002, PSC filed a Registration Statement to
facilitate the orderly re-distribution of a portion of the shares held by
Vivendi Environnement's subsidiaries into the market. In addition, on the same
date PSC entered into a Registration and Share Purchase Agreement with Vivendi
Environnement and its subsidiaries, pursuant to which PSC has agreed to
repurchase up to 2,500,000 shares of PSC common stock at the public offering
price. If the underwriters elect to exercise their over-allotment option under
the proposed Underwriting Agreement, the number of shares that PSC is obligated
to repurchase will be reduced by the number of shares purchased by the
underwriters in exercising such over-allotment option. It is our intention to
fund the repurchase of the shares with proceeds from a short-term credit
facility. We expect interest under this short-term credit facility to be on
terms substantially similar to PSC's current short-term lines of credit. It is
PSC's current intention to repay these short-term borrowings with proceeds from
the issuance of common stock or an instrument convertible into PSC common stock.
On July 29, 2002, we entered into a purchase agreement with DQE, Inc. ("DQE")
and AquaSource, Inc. ("AquaSource") pursuant to which we agreed to acquire three
operating water and wastewater first tier subsidiaries of AquaSource, a
subsidiary of DQE, and assume selected, integrated operating and maintenance
contracts and related assets. The purchase agreement provides for a target cash
purchase price of approximately $205 million. The final purchase price may be
increased by up to $10 million or decreased by up to $25 million as various
purchase price adjustments are applied. These adjustments include the
achievement of certain specific operating performance metrics, involving
revenue, rate base and projected customer connections. We are purchasing the
operating utilities, including assets and franchises that serve approximately
130,000 water and wastewater customer accounts in 12 states, and selected water
and wastewater operating contracts that serve approximately 40,000 customers in
7 states. Over 80% of the customers in the businesses we are purchasing are
located in Texas, Florida, Virginia and Indiana. The acquisition is subject to
certain regulatory approvals, but does not require DQE or PSC
12
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)
shareholder approval. We do not expect to obtain the requisite regulatory
approvals before the second half of 2003. Within 45 days of the agreement,
AquaSource has the option to sell the operations in several states whose
operations represent approximately 6% of the total customers of the businesses
we are purchasing, in one or more separate transactions, with a consequent
reduction in the target purchase price of up to $14.8 million. On August 5,
2002, DQE announced the sale of one of the state operations under this option
resulting in an adjustment to the target purchase price of less than
one-half of the possible purchase price reduction related to this option. As a
result of our entering into a purchase agreement with DQE and AquaSource,
Standard & Poor's Rating Services ("S&P") placed PSW on Creditwatch with
negative implications. The Creditwatch listing reflects concern by S&P that
should we fund the acquisition entirely with debt, PSW's credit rating could
change. It is our intention to fund the acquisition at closing with cash from a
combination of short-term debt, long-term debt, the issuance of our common stock
and/or an instrument convertible into our common stock. The ultimate decision
regarding the funding of the acquisition will be based upon market conditions
existing at the time the acquisition is consummated.
We maintain several defined benefit retirement plans. The accounting for
pensions requires the use of assumptions, including discount rate, expected
return on plan assets, the rate of future compensation increases received by our
employees, and other factors. During the first half of 2002, the fair market
value of our plan assets declined due to negative equity market performance, and
as a result, we may be required to recognize an additional minimum liability on
our balance sheet by December 31, 2002 for one of our plans. The additional
minimum liability would equal the excess of the accumulated benefit obligation
over the fair value of plan assets and would result in a reduction of our common
stockholders' equity as of December 31, 2002. The amount of the additional
minimum liability, if any, cannot be determined at this time as it is dependent
on the asset returns during the second half of 2002 and the assumed discount
rate. However, based on the funding status of the plan at June 30, 2002, the
assumption of a zero return on the plan's assets during the second half of 2002
and an assumed 7% discount rate, common stockholders' equity at December 31,
2002 would be reduced by an after-tax adjustment of approximately $1,400. The
recognition of the additional minimum liability is not expected to affect net
income or cash flow in 2002. In future years, our pension expense and cash
funding requirements are anticipated to increase as a result of the decline in
plan assets and we will pursue recovery of such costs in future customer rates.
Management believes that internally generated funds along with existing credit
facilities and the proceeds from the issuance of long-term debt and common stock
will be adequate to meet our financing requirements for the balance of the year
and beyond.
Results of Operations
---------------------
Analysis of First Six Months of 2002 Compared to First Six Months of 2001
-------------------------------------------------------------------------
Revenues for the first six months of 2002 increased $851 or 0.6% primarily due
to revenues from the Distribution System Improvement Charge ("DSIC") in
Pennsylvania, additional water revenues associated with the larger customer base
due to acquisitions, and increased water rates, offset partially by a decrease
in overall water consumption. The DSIC provided $2,159 of additional revenues
over the prior year. The reduced water consumption is primarily due to drought
restrictions on water use in Pennsylvania and New Jersey and unfavorable weather
conditions in June in portions of our Pennsylvania service territories. In
addition, industrial water sales declined due to lower water usage.
13
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)
Operations and maintenance expenses increased by $3,552 or 6.7% due to the
additional operating costs associated with acquisitions, increased insurance
expense, higher bad debt expense, and increased wages as a result of normal wage
rate increases.
Depreciation expense increased $1,518 or 8.1% reflecting the utility plant
placed in service since the second quarter of 2001, including the assets
acquired through system acquisitions.
Amortization increased $64 primarily due to the amortization of the costs
associated with, and other costs being recovered in, various rate filings.
Taxes other than income taxes decreased by $1,003 or 9.2% due to a reduction in
state taxes and a decrease in the Pennsylvania Capital Stock Tax. The decrease
in state taxes is a result of a reduction in assessments. The Capital Stock Tax
decreased primarily due to a reduction in the base on which the tax is applied
in addition to a minor decrease in the Capital Stock Tax rate.
Interest expense decreased by $495 or 2.5% primarily due to decreased interest
rates on borrowings, offset partially by additional borrowings to finance
on-going capital projects.
Allowance for funds used during construction ("AFUDC") increased by $420
primarily due to an increase in the average balance of utility plant
construction work in progress ("CWIP"), to which AFUDC is applied, offset by a
decrease in the AFUDC rate which is based on short-term interest rates. The
increase in CWIP is primarily due to the $24,000 expansion and upgrade of a
water treatment plant in Pennsylvania. Construction commenced on this facility
in 2001 and was completed in mid-2002.
Gain on sale of other assets totaled $1,758 in the first half of 2002 and $2,909
in the first half of 2001. Gain on sales of land in the first half of 2002
decreased $2,161 and gain on sales of marketable securities in the first half of
2002 increased $1,010 over the same period in 2001.
Our effective income tax rate was 38.9% in the first half of 2002 and 39.6% in
the first half of 2001. The change is due to an increase in the tax deductible
portion of our book expenses.
Net income available to common stock for the first six months of 2002 decreased
by $1,824 or 6.4%, in comparison to the same period in 2001 primarily as a
result of the factors described above. On a diluted per share basis, earnings
decreased $.04 or 9.5% reflecting the change in net income and a 1.5% increase
in the average number of common shares outstanding. The increase in the number
of shares outstanding is primarily a result of the additional shares sold or
issued through the dividend reinvestment plan, and employee stock and incentive
plan and shares issued in connection with acquisitions.
Results of Operations
---------------------
Analysis of Second Quarter of 2002 Compared to Second Quarter of 2001
---------------------------------------------------------------------
Revenues for the quarter decreased $625 or 0.8% primarily due to an overall
decrease in water consumption, offset partially by revenues from the
Distribution System Improvement Charge ("DSIC") in Pennsylvania, additional
water revenues associated with the larger customer base due to acquisitions, and
increased water rates. The reduced water consumption is primarily due to drought
restrictions on water use in Pennsylvania and New Jersey and unfavorable weather
conditions in June in portions of our Pennsylvania service territories. In
14
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)
addition, industrial water sales declined due to lower water usage. The DSIC
provided $826 of additional revenues over the same period for the prior year.
Operations and maintenance expenses increased by $2,453 or 9.3% primarily due to
the additional operating costs associated with acquisitions, increased insurance
expenses, and increased wages as a result of normal wage rate increases.
Depreciation expense increased $578 or 5.9% reflecting the utility plant placed
in service since the second quarter of 2001, including the assets acquired
through system acquisitions, and the effect of an increase in the depreciation
rates.
Amortization increased $46 or 7.4% primarily due to the amortization of the
costs associated with, and other costs being recovered in, various rate filings.
Taxes other than income taxes decreased by $729 or 13.6% due to a reduction in
state taxes and a decrease in the Pennsylvania Capital Stock Tax. The decrease
in state taxes is a result of a reduction in assessments. The Capital Stock Tax
decreased primarily due to a reduction in the base on which the tax is applied
in addition to a minor decrease in the Capital Stock Tax rate.
Interest expense decreased by $13 or 0.1% primarily due to decreased interest
rates on borrowings, offset partially by additional borrowings to finance
on-going capital projects.
Allowance for funds used during construction ("AFUDC") increased by $282
primarily due to an increase in the average balance of utility plant
construction work in progress ("CWIP"), to which AFUDC is applied, offset by a
decrease in the AFUDC rate. The increase in CWIP is primarily due to the $24,000
expansion and upgrade of a water treatment plant in Pennsylvania. Construction
commenced on this facility in 2001 and was completed in mid-2002.
Gain on sale of other assets increased $1,291 due to an increase in the gain on
sale of marketable securities of $661 and an increase in the gain on the sale of
land realized of $630.
Our effective income tax rate was 38.6% in the second quarter of 2002 and 39.5%
in the second quarter of 2001. The change is due to an increase in the tax
deductible portion of our book expenses.
Net income available to common stock for the second quarter of 2002 decreased by
$614 or 4.0%, in comparison to the same period in 2001 primarily as a result of
the factors described above. On a diluted per share basis, earnings decreased
$.01 or 4.4% reflecting the change in net income and a 1.3% increase in the
average number of common shares outstanding. The increase in the number of
shares outstanding is primarily a result of the additional shares sold or issued
through the dividend reinvestment plan, and employee stock and incentive plan
and shares issued in connection with acquisitions.
15
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 occasion, drought warnings and water use restrictions are issued by
governmental authorities for portions of our service territories in response to
extended periods of dry weather conditions. The timing and duration of the
warnings and restrictions can have an impact on our water revenues and net
income. In general, water consumption in the summer months is affected by
drought warnings and restrictions to a higher degree because nonessential and
recreational use of water is highest during the summer months. At times other
than the summer months, warnings and restrictions generally have less of an
effect on water consumption.
In November 2001, a drought warning was declared in nine counties in
Pennsylvania, including one of the five counties we serve in southeastern
Pennsylvania. A drought warning calls for a 10 to 15 percent voluntary reduction
of water use, particularly non-essential uses of water. In February 2002, a
drought emergency was declared in 24 counties in Pennsylvania, including all
five of the counties we serve in southeastern Pennsylvania. A drought emergency
imposes a ban on non-essential water use. On June 14, 2002 drought restrictions
were relaxed in two of the counties we serve in southeastern Pennsylvania,
moving from a drought emergency back to a drought warning. On July 16, 2002,
drought emergency restrictions were relaxed in a substantial portion of one
additional county we serve, reverting to a drought warning condition involving
only voluntary conservation. Presently, a drought emergency ban remains in place
in two of the counties we serve in southeastern Pennsylvania. There are also
water use restrictions as a result of drought conditions nearby or within
portions of our service territories in New Jersey. In June 2002 the water
restrictions in New Jersey were eased by the State. As a result of the drought
declarations, water consumption and water revenues in these areas were reduced
below normal levels.
Disclosure regarding other recent events is contained in the "Financial
Condition" section of this Management's Discussion and Analysis of Financial
Condition and Results of Operations section.
Impact of Recent Accounting Pronouncements
------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred. When the liability is initially recognized, the carrying
amount of the related long-lived asset is increased by the same amount. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, we may settle the obligation for its recorded
amount, or an alternative amount thereby incurring a gain or loss upon
settlement. We intend to adopt this statement as required in 2003. We are
currently evaluating the provisions of this statement, but we do not expect the
effect of adoption on our results of operations or financial position to be
material.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on our results of operations or financial position.
In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things,
16
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)
rescinds SFAS No. 4, which required all gains and losses from the extinguishment
of debt to be classified as an extraordinary item and amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This statement is not expected to have an impact on
our results of operations or financial position.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
replaces the previous accounting guidance provided in Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. We are currently evaluating the
provisions of this statement and have not yet determined the effect of adoption
on our results of operations and financial position.
Risk Factors
------------
Our business requires significant capital expenditures and the rates we charge
our customers are subject to regulation. If we are unable to obtain government
approval of our requests for rate increases, or if approved rate increases are
untimely or inadequate to cover our investments, our profitability may suffer.
The water utility business is capital intensive. On an annual basis, we
spend significant sums for additions to or replacement of property, plant and
equipment. Our ability to maintain and meet our financial objectives is
dependent upon the rates we charge our customers. These rates are subject to
approval by the public utility commissions of the states in which we operate. We
file rate increase requests, from time to time, to recover our investments in
utility plant and expenses. Once a rate increase petition is filed with a public
utility commission, the ensuing administrative and hearing process may be
lengthy and costly. The timing of our rate increase requests are therefore
partially dependent upon the estimated cost of the administrative process in
relation to the investments and expenses that we hope to recover through the
rate increase to the extent approved. We can provide no assurances that any
future rate increase request will be approved by the appropriate state public
utility commission; and, if approved, we cannot guarantee that these rate
increases will be granted in a timely or sufficient manner to cover the
investments and expenses for which we initially sought the rate increase.
Our operating costs could be significantly increased in order to comply with new
or stricter regulatory standards imposed by federal and state environmental
agencies.
Our water and wastewater services are governed by various federal and
state environmental protection and health and safety laws and regulations,
including the federal Safe Drinking Water Act, the Clean Water Act and similar
state laws, and state and federal regulations issued under these laws by the
United States Environmental Protection Agency and state environmental regulatory
agencies. These laws and regulations establish, among other things, criteria and
standards for drinking water and for discharges into the waters of the United
States and states. Pursuant to these laws, we are required to obtain various
environmental permits from environmental regulatory agencies for our operations.
We cannot assure you that we have been or will be at all times in total
compliance with these laws, regulations and permits. If we violate or fail to
comply with these laws, regulations or permits, we could be fined or otherwise
sanctioned by regulators. Environmental laws are complex and change frequently.
These laws, and the enforcement thereof, have tended to become more
17
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)
stringent over time. While we have budgeted for future capital and operating
expenditures to maintain compliance with them and our permits, it is possible
that new or stricter standards could be imposed that will raise our operating
costs. Although these costs may be recovered in the form of higher rates, there
can be no assurance that the various state public utility commissions that
govern our business would approve rate increases to enable us to recover such
costs. In summary, we cannot assure you that our costs of complying with, or
discharging liability under, current and future environmental and health and
safety laws will not adversely affect our business, results of operations or
financial condition.
Our business is subject to seasonal fluctuations, which could affect demand for
our water service and our revenues.
Demand for our water during the warmer months is generally greater than
during cooler months due primarily to additional requirements for water in
connection with cooling systems, swimming pools, irrigation systems and other
outside water use. Throughout the year, and particularly during typically warmer
months, demand will vary with temperature and rainfall levels. In the event that
temperatures during the typically warmer months are cooler than expected, or if
there is more rainfall than expected, the demand for our water may decrease and
adversely affect our revenues.
Drought conditions may impact our ability to serve our current and future
customers, and may impact our customers' use of our water, which may adversely
affect our financial condition and results of operations.
We depend on an adequate water supply to meet the present and future
demands of our customers. Drought conditions could interfere with our sources of
water supply and could adversely affect our ability to supply water in
sufficient quantities to our existing and future customers. An interruption in
our water supply could have a material adverse effect on our financial condition
and results of operations. Moreover, governmental restrictions on water usage
during drought conditions may result in a decreased demand for our water, even
if our water reserves are sufficient to serve our customers during these drought
conditions, which may adversely affect our revenues and earnings.
An important element of our growth strategy is the acquisition of water and
wastewater systems. Any future acquisitions we decide to undertake may involve
risks.
An important element of our growth strategy is the acquisition and
integration of water and wastewater systems in order to broaden our current, and
move into new, service areas. We will not be able to acquire other businesses if
we cannot identify suitable acquisition opportunities or reach mutually
agreeable terms with acquisition candidates. Further, we may be required to
integrate any businesses we acquire with our existing operations. The
negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Future acquisitions by us could result in:
o dilutive issuances of our equity securities;
o incurrence of debt and contingent liabilities;
o fluctuations in quarterly results; and
o other acquisition-related expenses.
18
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)
Some or all of these items could have a material adverse effect on our
business and our ability to finance our business. The businesses we acquire in
the future may not achieve sales and profitability that justify our investment
and any difficulties we encounter in the integration process could interfere
with our operations and reduce our operating margins. In addition, as
consolidation becomes more prevalent in the water and wastewater industries, the
prices for suitable acquisition candidates may increase to unacceptable levels
and limit our ability to grow through acquisitions.
Contamination to our water supply may result in disruption in our services and
litigation which could adversely affect our business, operating results and
financial condition.
Our water supplies are subject to contamination, including
contamination from the development of naturally-occurring compounds and
chemicals in groundwater systems, and pollution resulting from man-made sources.
In the event that our water supply is contaminated, we may have to interrupt the
use of that water supply until we are able to substitute the flow of water from
an uncontaminated water source. In addition, we may incur significant costs in
order to treat the contaminated source through expansion of our current
treatment facilities, or development of new treatment methods. If we are unable
to substitute water supply from an uncontaminated water source, or to adequately
treat the contaminated water source in a cost-effective manner, there may be an
adverse effect on our revenues, operating results and financial condition. The
costs we incur to decontaminate a water source or an underground water system
could be significant and could adversely affect our business, operating results
and financial condition.
In addition to the potential pollution of our water supply as described
above, in the wake of the September 11, 2001 terrorist attacks and the ensuing
threats to the nation's health and security, we have taken steps to increase
security measures at our facilities and heighten employee awareness of threats
to our water supply. We have also tightened our security measures regarding the
delivery and handling of certain chemicals used in our business. We have and
will continue to bear increased costs for security precautions to protect our
facilities, operations and supplies. These costs may be significant. We are
currently not aware of any specific threats to our facilities, operations or
supplies; however, it is possible that we would not be in a position to control
the outcome of terrorist events should they occur.
We could also be held liable for consequences arising out of human
exposure to hazardous substances in our water supplies or other environmental
damage. For example, private plaintiffs have the right to bring personal injury
or other toxic tort claims arising from the presence of hazardous substances in
our drinking water supplies. Our insurance policies may not be sufficient to
cover the costs of these claims.
We depend significantly on the services of the members of our senior management
team, and the departure of any of those persons could cause our operating
results to suffer.
Our success depends significantly on the continued individual and
collective contributions of our senior management team. The loss of the services
of any member of our senior management or the inability to hire and retain
experienced management personnel could harm our operating results.
19
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We are subject to market risks in the normal course of business,
including changes in interest and equity prices. There have been no
significant changes in our exposure to market risks since December 31,
2001. Refer to Item 7A of the Company's Annual Report on Form 10K for
the year ended December 31, 2001 for additional information.
Part II. Other Information
-----------------
Item 1. Legal Proceedings
-----------------
There are no pending legal proceedings to which we or any of our
subsidiaries is a party or to which any of their properties is the
subject that are expected to have a material effect on our financial
position, results of operations or cash flows.
Item 4. Results of Vote of Security Holders
-----------------------------------
The Annual Meeting of Shareholders of Philadelphia Suburban Corporation
was held on May 16, 2002 at the Springfield Country Club, 400 West
Sproul Road, Springfield, Pennsylvania, pursuant to the Notice sent on
or about April 8, 2002 to all shareholders of record at the close of
business on March 25, 2002. At that meeting, the following nominees
were elected as directors of Philadelphia Suburban Corporation for
terms expiring in the year 2005 and received the votes set forth after
their names below:
Name of Nominee For Withheld
--------------- --- --------
G. Fred DiBona, Jr 47,265,862 515,494
Mary C. Carroll 47,284,419 496,937
John E. Menario 47,306,170 475,186
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; Nicholas DeBenedictis; Richard H. Glanton, Esq.; Alan R.
Hirsig, John F. McCaughan and Richard L. Smoot.
20
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
4.23 Thirty-sixth Supplemental Indenture, dated as of June 1, 2002
10.42 Bond Purchase Agreement among the Bucks County Industrial Development Authority,
Pennsylvania Suburban Water Company and Janney Montgomery Scott LLC, dated
May 21, 2002
10.43 Construction and Financing Agreement between the Bucks County Industrial
Development Authority and Pennsylvania Suburban Water Company dated as of
June 1, 2002
10.44 Registration and Stock Purchase Agreement, dated as of July 8, 2002, among
Philadelphia Suburban Corporation, Vivendi Enivironnement S.A., Vivendi Water
S.A. and Vivendi North America Company (1)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) Filed as Exhibit 10.1 to the Registration Statement on Form S-3 filed on July 8, 2002
(Registration No. 333-92050).
(b) Reports on Form 8-K
Current Report on Form 8-K filed on May 14, 2002, responding to Item 5, Other Events.
(Related to the Company's press release of May 12, 2002 announcing a change in the investment
strategy of our long-term shareholder, Vivendi Environnement).
Current Report on Form 8-K filed on August 5, 2002, responding to Item 5, Other Events.
(Related to the Company entering into a purchase agreement with DQE, Inc. and AquaSource,
Inc. pursuant to which we agreed to acquire three of AquaSource's investor-owned water and
wastewater utilities and selected, integrated operating and maintenance contracts and related
assets).
21
SIGNATURES
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 12, 2002
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
Registrant
/s/ Nicholas DeBenedictis
---------------------------------
Nicholas DeBenedictis
Chairman and President
/s/ David P. Smeltzer
---------------------------------
David P. Smeltzer
Senior Vice President - Finance
and Chief Financial Officer
22
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------------------------------------- --------
4.23 Thirty-sixth Supplemental Indenture, dated as of June 1, 2002 24
10.42 Bond Purchase Agreement among the Bucks County Industrial
Development Authority, Pennsylvania Suburban Water Company
and Janney Montgomery Scott LLC, dated May 21, 2002 58
10.43 Construction and Financing Agreement between the Bucks County
Industrial Development Authority and Pennsylvania Suburban
Water Company dated as of June 1, 2002 82
10.44 Registration and Stock Purchase Agreement, dated as of July 8, 2002,
among Philadelphia Suburban Corporation, Vivendi Enivironnement S.A.,
Vivendi Water S.A. and Vivendi North America Company (1) --
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 111
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 112
(1) Filed as Exhibit 10.1 to the Registration Statement on Form S-3
filed on July 8, 2002 (Registration No. 333-92050).
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