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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 September 30, 2003
[ ] 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) has 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 28, 2003.
73,943,301.
----------
Part I - Financial Information
Item 1. Financial Statements
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
September 30, December 31,
Assets 2003 2002
---------- ----------
Property, plant and equipment, at cost $2,253,531 $1,836,892
Less accumulated depreciation 459,891 346,051
---------- ----------
Net property, plant and equipment 1,793,640 1,490,841
---------- ----------
Current assets:
Cash and cash equivalents 20,797 5,915
Accounts receivable and unbilled revenues, net 68,542 57,680
Inventory, materials and supplies 6,125 4,555
Prepayments and other current assets 5,362 2,758
---------- ----------
Total current assets 100,826 70,908
---------- ----------
Regulatory assets 93,377 88,175
Deferred charges and other assets, net 31,584 23,391
Funds restricted for construction activity 29,873 43,754
---------- ----------
$2,049,300 $1,717,069
========== ==========
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 74,588,853 and 70,067,784 in 2003 and 2002 $ 37,294 $ 35,034
Capital in excess of par value 418,844 317,871
Retained earnings 192,935 180,047
Minority interest 850 503
Treasury stock, 671,134 and 2,151,350 shares in 2003 and 2002 (12,467) (40,421)
Accumulated other comprehensive income 137 63
---------- ----------
Total stockholders' equity 637,593 493,097
---------- ----------
6.05% Series B cumulative preferred stock 172 172
Long-term debt, excluding current portion 695,811 582,910
Commitments - -
Current liabilities:
Current portion of long-term debt 34,369 34,265
Loans payable 109,849 115,113
Accounts payable 20,391 31,058
Accrued interest 9,585 9,269
Accrued taxes 26,203 14,500
Dividends payable 10,467 -
Other accrued liabilities 35,967 22,326
---------- ----------
Total current liabilities 246,831 226,531
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 173,335 187,300
Customers' advances for construction 73,823 69,790
Other 17,541 13,330
---------- ----------
Total deferred credits and other liabilities 264,699 270,420
---------- ----------
Contributions in aid of construction 204,194 143,939
---------- ----------
$2,049,300 $1,717,069
========== ==========
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)
Nine Months Ended
September 30,
----------------------
2003 2002
-------- --------
Operating revenues $266,021 $240,202
Costs and expenses:
Operations and maintenance 98,470 87,343
Depreciation 35,439 30,475
Amortization 2,251 1,933
Taxes other than income taxes 15,823 14,672
-------- --------
151,983 134,423
-------- --------
Operating income 114,038 105,779
Other expense (income):
Interest expense, net 32,985 30,257
Allowance for funds used during construction (1,489) (1,198)
Gain on sale of other assets (4,414) (2,079)
-------- --------
Income before income taxes 86,956 78,799
Provision for income taxes 34,769 30,252
-------- --------
Net income 52,187 48,547
Dividends on preferred stock 8 39
-------- --------
Net income available to common stock $ 52,179 $ 48,508
======== ========
Net income $ 52,187 $ 48,547
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 156 167
Reclassification adjustment for gains reported in net income (82) (767)
-------- --------
Comprehensive income $ 52,261 $ 47,947
======== ========
Net income per common share:
Basic $ 0.75 $ 0.71
======== ========
Diluted $ 0.74 $ 0.70
======== ========
Average common shares outstanding during the period:
Basic 69,483 68,678
======== ========
Diluted 70,226 69,397
======== ========
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
September 30,
--------------------
2003 2002
-------- -------
Operating revenues $102,153 $91,918
Costs and expenses:
Operations and maintenance 36,777 31,143
Depreciation 12,628 10,275
Amortization 889 724
Taxes other than income taxes 5,557 4,737
-------- -------
55,851 46,879
-------- -------
Operating income 46,302 45,039
Other expense (income):
Interest expense, net 11,722 10,586
Allowance for funds used during construction (613) (266)
Gain on sale of other assets (4,194) (321)
-------- -------
Income before income taxes 39,387 35,040
Provision for income taxes 15,764 13,213
-------- -------
Net income 23,623 21,827
Dividends on preferred stock 3 12
-------- -------
Net income available to common stock $ 23,620 $21,815
======== =======
Net income $ 23,623 $21,827
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities 7 (178)
Reclassification adjustment for gains reported in net income (71) (74)
-------- -------
Comprehensive income $ 23,559 $21,575
======== =======
Net income per common share:
Basic $ 0.33 $ 0.32
======== =======
Diluted $ 0.33 $ 0.31
======== =======
Average common shares outstanding during the period:
Basic 71,622 68,903
======== =======
Diluted 72,280 69,422
======== =======
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)
(UNAUDITED)
September 30, December 31,
2003 2002
---------- ----------
Stockholders' equity:
Common stock, $.50 par value $ 37,294 $ 35,034
Capital in excess of par value 418,844 317,871
Retained earnings 192,935 180,047
Minority interest 850 503
Treasury stock (12,467) (40,421)
Accumulated other comprehensive income 137 63
---------- ----------
Total stockholders' equity 637,593 493,097
---------- ----------
6.05% Series B cumulative preferred stock 172 172
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 2.49% 16,521 18,009
2.50% to 2.99% 16,622 14,052
3.00% to 3.49% 5,475 4,733
3.50% to 3.99% 2,800 3,200
4.00% to 4.99% 8,135 8,135
5.00% to 5.49% 97,875 90,955
5.50% to 5.99% 76,260 86,260
6.00% to 6.49% 119,360 126,360
6.50% to 6.99% 52,000 52,000
7.00% to 7.49% 46,756 58,000
7.50% to 7.99% 23,000 23,000
8.00% to 8.49% 17,500 17,497
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 53,846 54,359
9.50% to 9.99% 43,242 44,637
10.00% to 10.50% 6,000 6,000
---------- ----------
594,392 616,197
Notes payable, 6.05%, due 2006 788 978
Unsecured notes payable, 4.87%, due 2023 135,000 -
---------- ----------
730,180 617,175
Current portion of long-term debt 34,369 34,265
---------- ----------
Long-term debt, excluding current portion 695,811 582,910
---------- ----------
Total capitalization $1,333,576 $1,076,179
========== ==========
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)
Nine Months Ended
September 30,
---------------------------
2003 2002
--------- --------
Cash flows from operating activities:
Net income $ 52,187 $ 48,547
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 37,690 32,408
Deferred income taxes 7,526 5,110
Gain on sale of other assets (4,414) (2,079)
Net increase in receivables, inventory and prepayments (2,978) (1,814)
Net increase (decrease) in payables, accrued interest, accrued taxes
and other accrued liabilities 6,642 (9,371)
Other (4,625) 974
--------- --------
Net cash flows from operating activities 92,028 73,775
--------- --------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $1,489 and $1,198 (105,948) (89,028)
Acquisitions of water and wastewater systems (196,099) (7,909)
Proceeds from the sale of other assets 4,993 6,258
Net decrease (increase) in funds restricted for construction activity 13,880 (7,657)
Other (403) (300)
--------- --------
Net cash flows used in investing activities (283,577) (98,636)
--------- --------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 6,462 7,171
Repayments of customers' advances (1,306) (2,131)
Net repayments of short-term debt (5,264) (7,433)
Proceeds from long-term debt 145,404 57,270
Repayments of long-term debt (40,467) (5,438)
Redemption of preferred stock (401) (305)
Proceeds from issuing common stock 131,609 8,477
Repurchase of common stock (774) (1,476)
Dividends paid on preferred stock (8) (39)
Dividends paid on common stock (28,824) (27,294)
Other - (994)
--------- --------
Net cash flows from financing activities 206,431 27,808
--------- --------
Net increase in cash and cash equivalents 14,882 2,947
Cash and cash equivalents at beginning of period 5,915 1,010
--------- --------
Cash and cash equivalents at end of period $ 20,797 $ 3,957
========= ========
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)
(UNAUDITED)
Note 1 Basis of Presentation
---------------------
The accompanying consolidated balance sheet and statement of
capitalization of Philadelphia Suburban Corporation ("PSC") at
September 30, 2003, the consolidated statements of income and
comprehensive income for the nine months and quarter ended
September 30, 2003 and 2002, and the consolidated statements
of cash flow for the nine months ended September 30, 2003 and
2002, 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, 2002 and the Quarterly Reports on Form 10-Q for the
quarters ended June 30, 2003 and March 31, 2003. The results
of operations for interim periods may not be indicative of the
results that may be expected for the entire year.
Note 2 Acquisitions
------------
Pursuant to our strategy to grow through acquisitions, on July
31, 2003, PSC completed its acquisition of four operating
water and wastewater subsidiaries of AquaSource, Inc. (a
subsidiary of DQE, Inc.), including selected, integrated
operating and maintenance contracts and related assets
(individually and collectively the acquisition is referred to
as "AquaSource") for $195,533 in cash. Pursuant to the
purchase agreement, the total amount paid for AquaSource at
closing consisted of a purchase price of $190,179 ("purchase
price") plus a working capital adjustment of $5,354, both of
which are subject to further adjustment upon completion of a
closing balance sheet and the finalization of other
adjustments that may occur over approximately a six month
period. At this time, PSC expects the finalization of
adjustments to result in a decrease in the total amount paid
for AquaSource. The purchase agreement provides for a minimum
purchase price of $174,000. The maximum amount of the working
capital adjustment under the purchase agreement is $10,000.
The results of AquaSource have been included in our
consolidated financial statements beginning August 1, 2003.
The acquired operations of AquaSource serve over 130,000 water
and wastewater customer accounts in eleven states (including
the Connecticut operations which were sold in October 2003).
For the fiscal year ended December 31, 2002, the acquired
operations had revenues of $69,541 (unaudited).
Under the purchase method of accounting, the purchase price is
allocated to AquaSource's net tangible and intangible assets
based upon their estimated fair values at the date of the
acquisition. PSC is in the process of obtaining and reviewing
a third-party valuation of the non-regulated net tangible and
intangible assets. The purchase price allocation for this
acquisition is based on preliminary estimates and valuations
and will be refined at a later date with additional
information concerning
6
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
the final purchase price and the final asset and liability
valuations. The preliminary purchase price allocation is as
follows (unaudited):
July 31,
2003
--------
Property, plant and equipment, net $214,187
Current assets 9,783
Other long-term assets 14,204
Assets held for sale, net 4,096
--------
Total assets acquired 242,270
--------
Current liabilities 7,270
Long-term debt 7,170
Other long-term liabilities 32,297
--------
Total liabilities assumed 46,737
--------
Net assets acquired $195,533
========
The net property, plant and equipment balance includes
accumulated depreciation of $91,296. The following
supplemental pro forma information is presented to illustrate
the effects of the AquaSource acquisition, which was completed
on July 31, 2003, on the historical operating results for the
three and nine months ended September 30, 2003 and 2002 as if
the acquisition had occurred at the beginning of the
respective periods (unaudited):
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Operating revenues $306,416 $291,866 $108,266 $110,549
Net income $ 55,854 $ 52,434 $ 24,261 $ 23,135
Net income per common share:
Basic $ 0.77 $ 0.72 $ 0.33 $ 0.32
Diluted $ 0.76 $ 0.71 $ 0.33 $ 0.32
The supplemental information is not necessarily representative
of the actual results that may have occurred for these periods
or of the results that may occur in the future. This
information does not reflect the effects of recent rate
increases or cost savings that may result from the
acquisition, such as the effects of a reduction in
administrative costs. This information is based upon the
historical operating results of AquaSource for periods prior
to the acquisition date of July 31, 2003 as provided to PSC by
AquaSource, Inc. and DQE, Inc. management.
In May 2003, PSC announced agreements for the sale of the
AquaSource regulated and nonregulated operations located in
Connecticut and New York to a New England-based water company
for an aggregate purchase price of $5,000 and the assumption
of approximately $800 of debt. The sale of the Connecticut
regulated operations closed on October 31, 2003. The sale of
the New York regulated operations is subject to state
regulatory approval. Closing on the sale of the New York
operations is expected to occur by early 2004. The combined
operations in New York and Connecticut represented
approximately 2% of the operations acquired from AquaSource,
Inc.
7
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 3 Long-term Debt and Loans Payable
--------------------------------
In July 2003, PSC issued $135,000 of unsecured notes due 2023
and with an interest rate of 4.87%. In July 2003, an unsecured
note of $90,000 was issued by PSC. Interest under this note is
based, at the borrower's option, on either a defined base rate
or an adjusted London Interbank Offered Rate corresponding to
the interest period selected. The proceeds of these financings
were used to fund the AquaSource acquisition and to refinance
existing debt. The unsecured note of $90,000 was repaid on
August 21, 2003 with proceeds from the issuance of common
stock. At various times during the first nine months of 2003,
our operating subsidiaries issued notes payable in aggregate
of $11,480 at various rates ranging from 1% to 5.1% due at
various times in 2022, 2023, and 2032.
Note 4 Water Rates
-----------
During the first nine months of 2003, operating subsidiaries
located in Pennsylvania, Illinois, Ohio and Maine were granted
rate increases, representing thirteen rate adjustments,
intended to increase total revenues by approximately $9,001 on
an annual basis. Revenues from the rate increases recorded in
the first nine months of 2003 were approximately $5,333.
Note 5 Stockholders' Equity
--------------------
On August 5, 2003, PSC's Board of Directors declared a 5-for-4
common stock split to be effected in the form of a 25% stock
distribution for shareholders of record on November 14, 2003.
The new shares will be distributed on December 1, 2003. PSC's
par value of $.50 per share will not change as a result of the
common stock distribution, and as a result, on the
distribution date an amount will be transferred from Capital
in Excess of Par Value to Common Stock to record the common
stock split. The share and per share data contained in this
Quarterly Report on Form 10-Q have not been restated to give
effect to this stock dividend.
On August 21, 2003, PSC issued 4,000,000 shares of common
stock through a shelf registration, providing proceeds of
approximately $90,100, net of expenses. A portion of the net
proceeds were used to repay an unsecured note of $90,000. The
indebtedness was incurred by PSC in connection with the
acquisition of the operations that were purchased from
AquaSource, Inc.
On May 19, 2003, PSC issued 1,495,000 shares of common stock
through a shelf registration, providing proceeds of
approximately $33,100, net of expenses. The net proceeds were
used to repay short-term debt, including the repayment of
$22,000 of indebtedness incurred in connection with our
repurchase of 1.2 million shares of our common stock from
affiliates of Veolia Environnement, S.A. (formerly Vivendi
Environnement, S.A.) in October 2002.
8
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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:
2003 2002
------ ------
Balance at January 1, $ 63 $ 726
Unrealized holding gain arising during the period,
net of tax of $83 in 2003 and $89 in 2002 156 167
Less: reclassification adjustment for gains included
in net income, net of tax of $44 in 2003 and $412 in 2002 (82) (767)
------ ------
Other comprehensive income (loss), net of tax 74 (600)
------ ------
Balance at September 30, $ 137 $ 126
====== ======
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:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------- ---------------
2003 2002 2003 2002
------ ------ ------ ------
Average common shares outstanding during
the period for Basic computation 69,483 68,678 71,622 68,903
Dilutive effect of employee stock options 743 719 658 519
------ ------ ------ ------
Average common shares outstanding during
the period for Diluted computation 70,226 69,397 72,280 69,422
====== ====== ====== ======
9
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 7 Stock-Based Compensation
------------------------
PSC accounts for stock-based compensation using the intrinsic
value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no
compensation expense related to granting of stock options has
been recognized in the financial statements for stock options
that have been granted. Pursuant to the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, pro forma net
income available to common stock and earnings per share are
presented in the following table as if compensation cost for
stock options was determined as of the grant date under the
fair value method:
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- -------------------
2003 2002 2003 2002
-------- ------- ------- -------
Net income available to common stock:
As reported $ 52,179 $48,508 $23,620 $21,815
Less: pro forma expense related to
stock options granted, net of
tax effects (1,216) (951) (405) (317)
-------- ------- ------- -------
Pro forma $ 50,963 $47,557 $23,215 $21,498
======== ======= ======= =======
Basic net income per share:
As reported $ 0.75 $ 0.71 $ 0.33 $ 0.32
Pro forma 0.73 0.69 0.32 0.31
Diluted net income per share:
As reported $ 0.74 $ 0.70 $ 0.33 $ 0.31
Pro forma 0.73 0.69 0.32 0.31
The fair value of options at the date of grant was estimated
using the Black-Scholes option-pricing model.
Note 8 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, PSC
may settle the obligation for its recorded amount, or an
alternative amount, thereby incurring a gain or loss upon
settlement. The adoption of this statement as required on
January 1, 2003 did not have a material impact on PSC's
results of operations or financial position.
10
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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. PSC adopted this
statement in the first quarter of 2003 and it did not have a
material impact on PSC's 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. PSC adopted this standard in the first quarter of
2003 and it did not have a material impact on PSC's results of
operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others," an interpretation of SFAS No. 5, 57 and 107 and
rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for
Contingencies" relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees.
The disclosure provisions of the interpretation are effective
for financial statements of periods ending after December 15,
2002. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002. PSC adopted the
accounting provisions of this standard in the first quarter of
2003 and it did not have a material impact on PSC's results of
operations or financial position.
In April 2003, the FASB approved SFAS No. 149, "Amendment of
Statement No. 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities. PSC believes the adoption of this
standard will have no effect on its results of operations or
financial position. As of September 30, 2003, PSC had no
derivative instruments or hedging activities.
11
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
In May 2003, the FASB approved SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards
for classifying and measuring as liabilities certain financial
instruments with characteristics of both liabilities and
equity. The standard is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise
effective July 1, 2003. This statement did not have a material
impact on PSC's results of operations or financial position.
12
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
completion of various construction projects; the projected effects of recent
accounting pronouncements; the final purchase price for AquaSource; the
completion of the sale of the New York AquaSource operations; 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 plan,
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 discount rate used to value pension liabilities, and our ability to
assimilate acquired operations. 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 2.5 million people in Pennsylvania, Ohio, Illinois,
Texas, New Jersey, Indiana, Virginia, Florida, North Carolina, Maine, Missouri,
New York, South Carolina and Kentucky. One of our operating subsidiaries
provides water or wastewater services to approximately 1.3 million people in the
suburban areas north and west of the City of Philadelphia and in 18 other
counties in Pennsylvania. In addition we provide water and wastewater service
through operating and maintenance contracts with municipal authorities and other
parties close to our operating companies' service territories. We are the
largest U.S.-based publicly-traded water utility based on number of people
served.
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)
Financial Condition
-------------------
During the first nine months of 2003, we acquired AquaSource for $195,533 in
cash, had $105,948 of capital expenditures, repaid $1,306 of customer advances
for construction and repaid debt and made sinking fund contributions and other
loan repayments of $40,467. The capital expenditures were related to
improvements to treatment plants, new and rehabilitated water mains, customer
service lines and hydrants, in addition to well and booster improvements.
During the first nine months of 2003, the proceeds from the issuance of
long-term debt, proceeds from the issuance of common stock, internally generated
funds and available working capital were used to fund the cash requirements
discussed above and to pay dividends. On May 19, 2003, PSC issued 1,495,000
shares of common stock through a shelf registration, providing proceeds of
approximately $33,100, net of expenses. The net proceeds were used to repay
short-term debt, including the repayment of $22,000 of indebtedness incurred in
connection with our repurchase of 1.2 million shares of our common stock from
affiliates of Veolia Environnement, S.A. (formerly Vivendi Environnement, S.A.)
in October 2002. In July 2003, PSC issued $135,000 of unsecured notes due 2023
and with an interest rate of 4.87%. Also in July 2003, an unsecured note of
$90,000 was issued by PSC. The proceeds of these financings were used to fund
the AquaSource acquisition, and to refinance existing debt. At various times
during the first nine months of 2003, our operating subsidiaries issued notes
payable in aggregate of $11,480 at various rates ranging from 1% to 5.1% due at
various times in 2022, 2023, and 2032. On August 21, 2003, PSC issued 4,000,000
shares of common stock through a shelf registration, providing proceeds of
approximately $90,100, net of expenses. The net proceeds were used to repay the
unsecured note of $90,000 that had been issued in July 2003. The indebtedness
had been incurred by PSC in connection with the acquisition of the operations
that were purchased from AquaSource, Inc. At September 30, 2003, we had
short-term lines of credit of $179,000, of which $69,151 was available. On
August 5, 2003, PSC's Board of Directors increased the quarterly cash dividend
on common stock from $.14 per share to $.15 per share effective upon the
December 1, 2003 payment.
On July 31, 2003, we completed the acquisition of four operating water and
wastewater subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.),
including selected, integrated operating and maintenance contracts and related
assets (individually and collectively the acquisition is referred to as
"AquaSource") for $195,533 in cash. Pursuant to the purchase agreement, the
total amount paid for AquaSource at closing consisted of a purchase price of
$190,179 ("purchase price") plus a working capital adjustment of $5,354, both of
which are subject to further adjustment upon completion of a closing balance
sheet and the finalization of other adjustments that may occur over
approximately a six month period. At this time, PSC expects the finalization of
adjustments to result in a decrease in the total amount paid for AquaSource. The
purchase agreement provides for a minimum purchase price of $174,000. The
maximum amount of the working capital adjustment under the purchase agreement is
$10,000. The acquired operations of AquaSource serve over 130,000 water and
wastewater customer accounts in eleven states (including the Connecticut
operations which were sold in October 2003). For the fiscal year ended December
31, 2002, the acquired operations had revenues of $69,451 (unaudited). In May
2003, we announced agreements for the sale of the AquaSource regulated and
nonregulated operations located in Connecticut and New York to a New
England-based water company for an aggregate purchase price of $5,000 and the
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)
assumption of approximately $800 of debt. The sale of the Connecticut regulated
operations closed on October 31, 2003. The sale of the New York regulated
operations is subject to regulatory approval. Closing on the sale of the New
York operations is expected to occur by early 2004. The combined operations in
New York and Connecticut represented approximately 2% of the operations acquired
from AquaSource, Inc.
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 Nine Months of 2003 Compared to First Nine Months of 2002
---------------------------------------------------------------------------
Revenues for the first nine months increased $25,819 or 10.7% primarily due to
increased water rates granted to our Pennsylvania, Ohio, New Jersey and Maine
operating subsidiaries, and additional water revenues associated with the larger
customer base due to acquisitions, offset by lower water consumption due to
unfavorable weather conditions in several of the states where we operate. The
above-average rainfall experienced in the summer of 2003 resulted in lower
customer water usage as compared to the same period in 2002. The AquaSource
acquisition, which was closed on July 31, 2003, provided operating revenues of
$11,747 since the date of the acquisition.
Operations and maintenance expenses increased by $11,127 or 12.7% primarily due
to the additional operating costs associated with acquisitions, primarily from
AquaSource, increased postretirement benefits expenses, and higher maintenance
expenses, offset in part by reduced bad debt expense. The postretirement
benefits expense increase resulted principally from higher pension costs and
increased retiree medical costs. The increased maintenance expenses are
primarily a result of additional main break repairs resulting from the
relatively harsh winter weather that was experienced in 2003.
Depreciation expense increased $4,964 or 16.3% reflecting the utility plant
placed in service since the third quarter of 2002, including the assets acquired
through system acquisitions.
Amortization increased $318 due to the AquaSource acquisition and the
amortization of the costs associated with, and other costs being recovered in,
various rate filings.
Taxes other than income taxes increased by $1,151 or 7.8% as a result of the
additional taxes associated with the AquaSource acquisition, an increase in
state regulatory taxes, and an increase in capital stock tax due to an increase
in the base on which the tax is applied.
Interest expense increased by $2,728 or 9.0% primarily due to additional
borrowings to finance on-going capital projects and acquisitions, offset
partially by decreased interest rates on borrowings.
Allowance for funds used during construction ("AFUDC") increased by $291
primarily due to an increase in the AFUDC rate as a result of tax-exempt
borrowings for our multi-year infrastructure rehabilitation plan and an increase
in the average balance of utility plant construction work in progress,
associated with the AquaSource acquisition, to which AFUDC is applied.
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)
Gain on sale of other assets totaled $4,414 in the first nine months of 2003 and
$2,079 in the same period in 2002. The change is due to an increase in the gain
on the sale of land realized of $3,382 as compared to the same period in 2002
and a decrease in the gain on sale of marketable securities of $1,047.
Our effective income tax rate was 40.0% in the first nine months of 2003 and
38.4% in the first nine months of 2002. The change was due to a decrease in our
tax-deductible expenses.
Net income available to common stock for the first nine months increased by
$3,671 or 7.6%, in comparison to the same period in 2002 primarily as a result
of the factors described above. On a diluted per share basis, earnings increased
$.04 or 5.7% reflecting the change in net income and a 1.2% 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 issued through
the shelf registration, dividend reinvestment plan, and employee stock purchase
plan and equity compensation plan.
Analysis of Third Quarter of 2003 Compared to Third Quarter of 2002
-------------------------------------------------------------------
Revenues for the quarter increased $10,235 or 11.1% primarily due to additional
water and sewer revenues associated with the larger customer base due to the
AquaSource acquisition, and increased water rates granted to our Pennsylvania,
Ohio, New Jersey and Maine operating subsidiaries, offset partially by reduced
water consumption associated with the wet weather experienced in a significant
portion of our service territory during the third quarter of 2003 and the
revenues associated with a water system sold in 2002 of $564. The unfavorable
weather conditions resulted in lower water consumption by our customers in
Pennsylvania, Ohio and New Jersey.
Operations and maintenance expenses increased by $5,634 or 18.1% primarily due
to the additional operating costs associated with acquisitions, principally the
AquaSource acquisition, and increased postretirement benefits expenses, offset
partially by reduced water production costs and lower bad debt expenses. The
postretirement benefits expense increase resulted principally from higher
pension costs.
Depreciation expense increased $2,353 or 22.9% reflecting the utility plant
placed in service since the third quarter of 2002, including the assets acquired
through system acquisitions.
Amortization increased $165 due to the AquaSource acquisition and the
amortization of the costs associated with, and other costs being recovered in,
various rate filings.
Taxes other than income taxes increased by $820 or 17.3% due to the additional
taxes associated with the AquaSource acquisition and an increase in state taxes.
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)
Interest expense increased by $1,136 or 10.7% primarily due to additional
borrowings to finance the AquaSource acquisition and capital projects, offset
partially by decreased interest rates on borrowings due to refinancing of
certain existing debt issues.
Allowance for funds used during construction ("AFUDC") increased by $347
primarily due to an increase in the AFUDC rate as a result of tax-exempt
borrowings for our multi-year infrastructure rehabilitation plan and an increase
in the average balance of utility plant construction work in progress,
associated with the AquaSource acquisition, to which AFUDC is applied.
Gain on sale of other assets totaled $4,194 in the third quarter of 2003 and
$321 in the third quarter of 2002. The change is due to an increase in the gain
on the sale of land realized of $3,871 and a slight increase in the gain on sale
of marketable securities as compared to the third quarter of 2002.
Our effective income tax rate was 40.0% in the third quarter of 2003 and 37.7%
in the third quarter of 2002. The change was due to a decrease in our
tax-deductible expenses.
Net income available to common stock for the quarter increased by $1,805 or
8.3%, in comparison to the same period in 2002 primarily as a result of the
factors described above. On a diluted per share basis, earnings increased $.02
or 6.5% reflecting the change in net income and a 4.1% 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 issued in the
4,000,000 share offering in August 2003.
Recent Events
-------------
Environmental Regulation - Provision of water and wastewater services is subject
to regulation under the federal Safe Drinking Water Act, the Clean Water Act and
related state laws, and under state and federal regulations issued under these
laws. These laws and regulations establish criteria and standards for drinking
water and for discharges to surface waters. In addition, we are subject to
federal and state laws and other regulations relating to solid waste disposal,
dam safety and other operations. Capital expenditures and operating costs
required as a result of water quality standards and environmental requirements
have been generally recognized by state public utility commissions as
appropriate for inclusion in establishing rates.
There are some environmental compliance issues at various water and wastewater
facilities associated with the AquaSource acquisition that was completed on July
31, 2003. We estimate that the capital expenditures required to address these
AquaSource compliance issues will be approximately $65,000 over the next five
years. Various operating subsidiaries that were acquired in the AquaSource
acquisition are parties to agreements with regulatory agencies regarding
environmental compliance. These agreements are intended to provide the
regulators assurance that problems will be addressed, and they generally provide
some protection to us from fines, penalties and other actions while corrective
measures are being implemented. For the most part, the agreements were
negotiated by AquaSource prior to the acquisition being completed, and we have
assumed AquaSource's obligations under these agreements. In one case, PSC
negotiated a compliance agreement to address conditions that developed prior to
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)
closing. Actions remain to be taken to resolve the compliance issues covered by
these agreements. We are actively working directly with state environmental
officials to implement or amend these agreements as necessary. The regulatory
agencies may impose fines and penalties, with respect to existing compliance
issues at the AquaSource operations, which are not expected to be material and,
to the extent such fines and penalties arise from incidents that occurred prior
to our purchase of the AquaSource operations, we may make an indemnity claim for
such amounts against DQE, Inc. and AquaSource, Inc. under the purchase
agreement.
Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and
procedures for the Environmental Protection Agency to develop national quality
standards for drinking water. Regulations issued pursuant to the Safe Drinking
Water Act and its amendments set standards on the amount of certain microbial
and chemical contaminants and radionuclides allowable in drinking water. Current
requirements under the Safe Drinking Water Act are not expected to have a
material impact on our operations or financial condition as we have already made
investments to meet existing water quality standards. We may, in the future, be
required to change our method of treating drinking water at certain sources of
supply if additional regulations become effective.
Issuance by the EPA of a rule regulating radon in tap water has been postponed
repeatedly since 1991. Limits for radon would probably become effective 4 or 5
years after issuance of any such rule. We anticipate this rule may establish a
radon level that would require treatment at a number of our wells. If the states
in which we operate elect not to implement general radon reduction programs
(Multi-Media Mitigation), then a lower limit for radon may apply and a larger
number of wells would be affected. We anticipate that states will adopt
Multi-Media Mitigation programs. The capital costs to comply with the
anticipated limit are expected to total approximately $1,000 or less than 1% of
our typical annual capital expenditures.
The Safe Drinking Water Act provides for the regulation of radionuclides other
than radon, such as radium and uranium. In December 2000, the EPA issued a final
rule regulating certain radionuclides other than radon. The rule will become
effective in December 2003, may require additional testing, and may require
additional treatment at a limited number of wells. The cost of compliance is
expected to be less than $1,000. The impact of the new rulemaking is not
expected to have a material impact on our results from operations or financial
condition.
In order to eliminate or inactivate microbial organisms, the Surface Water
Treatment Rule and the Interim Enhanced Surface Water Treatment Rule were issued
by the EPA to improve disinfection or filtration of potable water. The EPA
developed the Disinfectants-Disinfection By-products Rule to reduce consumers'
exposure to disinfectants and by-products of the disinfection process. In 1998,
the EPA issued new rules on disinfection and on surface water treatment.
Groundwater and smaller surface water systems have until December 2003 to comply
with the rules on disinfection and on surface water treatment. In the future we
may be required to install filtration or other treatment for one surface water
supply. The cost of this treatment, should it be required, is not expected to
exceed $5,000. Certain groundwater systems could be reclassified as being
influenced by surface water. This may require additional treatment or the
development of replacement sources of supply over time, and the cost for which
is not expected to exceed $5,000.
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)
In January 2001, the EPA issued a final rule for arsenic that lowers the limit
on arsenic in potable water to a more stringent level effective by 2006, with a
provision for further time extensions for small systems. Currently, several
small well systems slightly exceed the new arsenic levels and may require
additional treatment. The cost of maintaining compliance with this new
rulemaking is not expected to exceed $1,000 and will not have a material impact
on our results from operations or financial condition.
In April 2000, the gasoline additive Methyl tert-Butyl Ether ("MtBE") was
discovered in a production well in one of our operating subsidiaries at levels
exceeding the state drinking water standard. The well was immediately taken out
of service and alternate water supplies were obtained. The company responsible
for the contamination has reimbursed us for a substantial portion of the
expenses incurred to-date. We continue to pursue developing a long-term
replacement supply and based on various studies we believe an alternate water
system will be needed. We have taken legal action seeking reimbursement for the
costs associated with obtaining an alternate long-term water supply, and we
expect to recover these costs from the responsible party.
Clean Water Act - The Clean Water Act regulates discharges from drinking water
and wastewater treatment facilities into lakes, rivers, streams, and
groundwater. We operate numerous water and wastewater facilities in a number of
states. It is our policy to obtain and maintain all required permits and
approvals for the discharge from these water and wastewater facilities, and to
comply with all conditions of those permits and other regulatory requirements. A
program is in place to monitor facilities for compliance with permitting,
monitoring and reporting for wastewater discharges. From time to time,
violations may occur which may result in fines. As described previously, various
operating subsidiaries that were acquired in the AquaSource acquisition had
entered into agreements, prior to the acquisition being completed, to address
compliance issues. Based on AquaSource's previous experience with these
agreements, penalties or fines that may be imposed under these agreements are
not expected to have a material impact on our results of operations or financial
condition, and the required costs to comply with the agreements previously cited
are expected to be recoverable in rates.
Solid Waste Disposal - The handling and disposal of residuals and solids from
water and wastewater treatment facilities are governed by state and federal laws
and regulations. A program is in place to monitor our facilities for compliance
with regulatory requirements, and we do not currently anticipate any major
expenditures in connection with the management and disposal of residuals and
solids from our water and wastewater facilities in the future.
Economic Regulation - The City of Fort Wayne, Indiana is considering the
acquisition, by eminent domain or otherwise, of a portion of the utility assets
of one of the operating subsidiaries that we acquired in connection with the
AquaSource acquisition in July 2003. The system represents approximately 7,500
customers or approximately 1% of our total customer base. We are actively
discussing this matter with the City of Fort Wayne officials. We believe that
our Indiana operating subsidiary is entitled to fair market value for its
assets.
19
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)
Pension Plan - During 2002, the fair market value of our pension plan assets
declined due to negative equity market performance and the decrease of the
discount rate resulting in an increase in pension liabilities. As a result, we
recorded an additional minimum liability of $4,731 on our consolidated balance
sheet as of December 31, 2002. The additional minimum liability equaled the
excess of the accumulated benefit obligation over the fair value of the plan
assets and resulted in the establishment of a regulatory asset, as we anticipate
recovery of the future, increased pension expense through customer rates.
During the first nine months of 2003, market interest rates have declined and we
will likely use a lower discount rate which would have the effect of increasing
our pension liabilities. As a result, we will likely be required to recognize an
increase to the additional minimum liability at December 31, 2003. The amount of
the increased additional minimum liability can not be determined at this time as
it is dependent on the asset returns through the fourth quarter of 2003 and the
assumed discount rate at the end of the fourth quarter.
Name Change - We have announced our intention to change our name to Aqua
America, Inc. to reflect our position as the largest U.S.-based publicly-traded
water utility. The name change is expected to become effective in mid-January
2004 at which time we will also change our ticker symbol on the New York Stock
Exchange and the Philadelphia Stock Exchange from "PSC" to "WTR".
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. The adoption of this statement as required on January 1, 2003 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, 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. We adopted
this statement in the first quarter of 2003 and it did not have a material
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 adopted this standard in the first
quarter of 2003 and it did not have a material impact on our results of
operations or financial position.
20
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5, 57 and
107 and rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of periods ending after December 15, 2002. The provisions
for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. We adopted the
accounting provisions of this standard in the first quarter of 2003 and it did
not have a material impact on our results of operations or financial position.
In April 2003, the FASB approved SFAS No. 149, "Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. We believe the adoption of this standard will have no effect
on our results of operations or financial position. As of September 30, 2003, we
had no derivative instruments or hedging activities.
In May 2003, the FASB approved SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments with characteristics of both liabilities and equity. The
standard is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective July 1, 2003. This statement did not
have a material impact on our results of operations or financial position.
21
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, 2002. Refer to Item 7A of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002 for additional information.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the
period covered by this report are functioning effectively
to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter
how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud,
if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting
occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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.
22
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
4.27 Note Purchase Agreement among the note
purchasers and Philadelphia Suburban
Corporation, dated July 31, 2003.
4.28 Credit Agreement dated as of July 31,
2003, between Philadelphia Suburban
Corporation and PNC Bank, National
Association
31.1 Certification of Chief Executive
Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act
of 1934.
31.2 Certification of Chief Financial
Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act
of 1934.
32.1 Certification of Chief Executive
Officer, pursuant 18 U.S.C. Section
1350.
32.2 Certification of Chief Financial
Officer, pursuant to 18 U.S.C. Section
1350.
(b) Reports on Form 8-K
Current Report on Form 8-K furnished on August 6, 2003,
responding to Item 9, Regulation FD Disclosure. (Related
to the Company's issuance of a press release on August 6,
2003 announcing its second quarter 2003 earnings).
Current Report on Form 8-K filed on August 14, 2003,
responding to Item 2, Acquisition or Disposition of
Assets. (Related to the Company's completion of its
acquisition of all of the outstanding common stock of four
operating water and wastewater subsidiaries of AquaSource,
Inc., including selected, integrated operating and
maintenance contracts and related assets for $195 million
in cash).
Current Report on Form 8-K filed on August 19, 2003,
responding to Item 5, Other Events. (Related to the
Company entering into an underwriting agreement on August
18, 2003 relating to the issuance of up to 4,600,000
shares of PSC common stock).
23
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.
November 13, 2003
PHILADELPHIA SUBURBAN CORPORATION
---------------------------------
Registrant
NICHOLAS DEBENEDICTIS
-------------------------------------
Nicholas DeBenedictis
Chairman and President
DAVID P. SMELTZER
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David P. Smeltzer
Senior Vice President - Finance
and Chief Financial Officer
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