EXHIBIT 13.4
SELECTED PORTION OF ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands of dollars, except per share amounts)
This Report contains, in addition to historical information
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements regarding the Company's
development, growth and expansion plans and the sufficiency of the Company's
liquidity and capital. Such statements are based on management's current
expectations and are subject to a number of uncertainties and risks that could
cause actual results to differ materially from those described in the
forward-looking statements.
Following are selected five-year financial statistics for the Company:
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
Earned revenues $ 122,503 $ 117,044 $ 108,636 $ 101,244 $ 93,307
- ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 33,749 $ 30,931 $ 27,209 $ 24,261 $ 18,661
- ------------------------------------------------------------------------------------------------------------------------
Operating Statistics
Earned revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Operating expenses 42.1 % 44.2 % 46.3 % 45.4 % 46.1 %
Depreciation and amortization 10.9 % 9.9 % 9.5 % 10.8 % 10.1 %
Taxes other than income taxes 6.8 % 6.6 % 6.6 % 6.8 % 7.0 %
Interest expense* 12.9 % 13.2 % 12.7 % 13.8 % 17.1 %
Allowance for funds used during
construction (0.2)% (0.3)% (0.1)% (0.8)% (0.3)%
- ------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 72.5 % 73.6 % 75.0 % 76.0 % 80.0 %
- ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 27.5 % 26.4 % 25.0 % 24.0 % 20.0 %
========================================================================================================================
Effective tax rates 41.4 % 41.7 % 42.5 % 43.0 % 43.1 %
========================================================================================================================
Income from continuing operations
as a percentage of average
stockholders' equity 11.7 % 12.0 % 11.2 % 11.4 % 11.0 %
========================================================================================================================
*Includes dividends on preferred stock of PSW with mandatory redemption
requirements.
Following are selected five-year operating and sales statistics for PSW:
Years ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Daily sendout
(Million gallons Maximum 109.5 121.8 110.4 120.7 101.3
per day) Average 94.2 92.6 89.8 89.1 85.4
========================================================================================
Metered Residential 265,765 248,500 234,624 232,684 230,740
customers Commercial 13,449 12,019 11,071 11,014 10,841
Industrial 753 554 539 538 543
Other 4,174 3,792 3,299 2,959 2,664
----------------------------------------------------------------------------------------
Total 284,141 264,865 249,533 247,195 244,788
========================================================================================
Consumption
per customer
in gallons Average 103,206 109,084 109,001 110,368 108,258
========================================================================================
Revenues from Residential $ 79,056 $ 77,744 $ 69,483 $ 66,656 $ 60,239
water sales Commercial 26,504 24,368 23,431 20,506 19,600
Industrial 4,823 4,512 4,737 4,207 4,135
Other 9,950 9,249 9,151 8,092 7,577
----------------------------------------------------------------------------------------
Total $ 120,333 $ 115,873 $ 106,802 $ 99,461 $ 91,551
========================================================================================
General Information
Philadelphia Suburban Corporation ("PSC" or the "Company"), a
Pennsylvania corporation, is the holding Company of Philadelphia Suburban Water
Company ("PSW"), a regulated water utility. PSW provides water to approximately
284,000 customers in 93 municipalities within its 463 square mile service
territory. PSW's service territory is located in Pennsylvania, north and west of
the City of Philadelphia.
Results of Operations
Income from continuing operations of the Company has grown at an annual
compound rate of approximately 14.2% during the five-year period ended December
31, 1996. During this same period, revenues and total expenses, other than
income taxes, have grown at compound rates of 6.7% and 4.5%, respectively.
Earned Revenues
The growth in revenues over the past five years is a result of
increases in the customer base and in water rates. The number of customers
increased at an annual compound rate of 3.8% in the past five years primarily as
a result of acquisitions of local water systems. In the past three years,
acquisitions have provided water revenues of approximately $8,210, $5,550 and
$2,480 in 1996, 1995 and 1994, respectively. Excluding the effect of
acquisitions, the customer base increased at a five-year annual compound rate of
.8%. This increase represents normal growth in the number of households and
businesses within PSW's 463 square mile service territory. Water rates have
increased at an annual compound growth rate of 4.3% over the five-year period.
2
Rates charged by PSW for water service are subject to the
approval of the Pennsylvania Public Utility Commission ("PUC"). PSW continuously
reviews the necessity of filing applications with the PUC for increases in rates
charged for water service. Among the factors considered by management in
determining the need to apply for increased rates are: the amount of utility
plant additions and replacements made since the previous rate decision; changes
in the cost of capital and the capital structure of PSW; and increases in
operating expenses (including wages, fringe benefits, electric and chemical
expenses), depreciation and taxes experienced since the previous rate decision.
Based on these assessments, PSW will periodically file a request with the PUC to
increase its rates. Typically, the PUC will suspend the rate request for up to
nine months during which time hearings on the merits of the request are held.
During these hearings, the views of PSW as well as the PUC staff, the Consumer
Advocate and other interested parties are presented and evaluated. In the five
years presented above, rates were increased 5.3%, 9.1% and 7.4% in 1995, 1994,
and 1993, respectively. In recent years, the most significant factor in
determining the need for a rate increase and the actual rate increases granted
has been the amount of utility plant additions that PSW has made and the costs
of the capital used to finance these additions.
The return allowed on PSW's common equity is a major factor in
the determination of rates and is also evaluated before applying for a rate
increase. The 1991 rate increase of 7.7%, in which a 12% return on common equity
was allowed, was the most recent decision in which the PUC specified a return on
common equity for PSW. The rate increases that were effective since 1991
resulted from settlements, with PUC approval, between the Company and the
opposing parties and, as such, no determination of the rate of return on common
equity was made by the PUC.
In addition to increases in base rates, the PUC has adjusted
rates by means of a surcharge or credit to reflect changes in the tax laws,
which were not reflected in the base rates approved by the PUC. These
adjustments are eliminated when the tax changes are reflected in base rates.
During 1995 and 1994, rates were reduced by various credits as a result of
reductions in Pennsylvania's taxes. These credits resulted in revenue reductions
of $504 in 1995 and $97 in 1994. During the period from August 1991 to May 1993,
various surcharges were in effect which increased revenues by $706 in 1993 and
$2,281 in 1992. The rate increase that became effective in October 1995
reflected the tax rates that are currently in effect and the rate credit of
1.04%, which was in effect just prior to the rate increase, was eliminated.
In August 1996, the PUC approved PSW's request to add a surcharge to its
water bills to offset the additional depreciation and capital costs associated
with certain non-revenue producing, non-expense reducing capital expenditures
related to replacing and rehabilitating its distribution system. In its
approval, the PUC indicated that it would allow PSW, as well as other water
utilities, to implement a "Distribution System Improvement Charge" or "DSIC"
starting in January 1997 for qualified capital additions placed in service from
September 1, 1996 to November 30, 1996. In January 1997, PSW began billing a
DSIC of .5%. PSW is permitted to request adjustments to the DSIC quarterly to
reflect subsequent capital expenditures and it is reset to zero when new base
rates that reflect the costs of those additions become effective. The maximum
DSIC that can be in effect at any time is 5%.
"Sendout" represents the quantity of treated water delivered to the
distribution system and is used by management as an indicator of customer
demand. Consumption per customer is the sendout that was used by metered
customers and is based on the actual bills rendered during the year adjusted for
the estimated unbilled customer usage. Water consumption tends to be impacted by
weather conditions, particularly during the late spring and summer months when
nonessential and recreational use of water is at its highest. Consequently, a
higher proportion of annual operating revenues is realized in the second and
third quarters. It is difficult to establish an exact correlation between the
weather and water consumption, since conservation and even day-to-day variations
in weather patterns can have an effect. Conservation efforts, construction codes
which require the use of low flow plumbing fixtures as well as mandated water
use restrictions in response to drought conditions have also had an effect on
water consumption.
3
Over the past five years, sendout has increased primarily as a result of
the growth in customers. The average annual consumption per customer declined by
5.4% in 1996 but has only varied slightly in the previous four years. The
decline in the average consumption per customer in 1996 is due to rainfalls,
that were well above average, and the cooler weather experienced during the
year.
Operating Expenses
Operating expenses for 1996, 1995 and 1994, totaled $51,615, $51,702 and
$50,296, respectively. All elements of cost are subject to the effects of
inflation, as well as the effects of changes in water consumption and the degree
of treatment required due to variations in the quality of the raw water. The
principal elements of operating costs are labor, electricity, chemicals and
maintenance expenses. Electricity and chemical expenses vary in relationship to
water consumption and raw water quality. Maintenance expenses are sensitive to
extreme cold weather, which can cause water mains to rupture.
Operating expenses decreased slightly in 1996 over 1995 primarily as a
result of reductions in pension, employee medical insurance premiums and general
liability insurance costs offset in part by the additional operating expenses
associated with the acquisitions made in the past two years. Pension expense
declined as a result of the investment returns in the past two years on the
pension assets. Medical insurance costs declined as a result of favorable claims
experience with the carriers and the movement of a majority of employees from
indemnity health plans to managed care plans.
Operating expenses increased in 1995 over 1994 by 2.8% reflecting
additional expenses associated with the acquisition of other water systems
completed during the year, increased wages and employee benefit costs and the
increased sendout, offset by a decline in maintenance expense. Expenses related
to the operations of the water systems acquired in 1995 were $1,445. Wage
increases reflect normal merit increases, while employee benefit costs increased
primarily as a result of $411 of additional costs for postretirement benefits
other than pensions computed under SFAS 106, which were recognized commencing in
June 1994 in conjunction with the rate settlement that became effective at that
time. Maintenance expenses declined compared to 1994 due to the less severe
winter.
For the past three years, corporate costs were less than 1% of the
Company's operating expenses. Such expenses include those unallocated general
and administrative expenses associated with maintaining a publicly-held company.
Depreciation and Amortization
Depreciation expense was $13,068, $11,572 and $10,468 in 1996,
1995 and 1994, respectively, and has increased principally as a result of the
significant capital expenditures made to expand and improve the water utility
facilities and to acquire water systems. Depreciation expense was approximately
2.4% of the average utility plant in service for all years. Amortization was a
charge of $265 as compared to a credit of $15 in 1995 and a credit of $138 in
1994. The change in 1996 is due to the amortization of the costs of the 1995
rate case as well as the amortization of debt issuance costs, including premiums
paid on the early retirement of certain First Mortgage Bonds. The change in
amortization in 1995 is primarily due to a reduction in the amortization of
acquisition adjustments offset by a decline in the amortization of rate case
costs.
Taxes Other than Income Taxes
Taxes other than income taxes increased by 8% in 1996 and by 7%
in 1995 over the previous year. The majority of the increase in both years was
associated with increases in the bases on which the Pennsylvania Public Utility
Realty Tax (PURTA) and the Capital Stock Tax are calculated. The increase in
taxable base for the PURTA is due to the increases to utility plant, including
increases associated with acquisitions completed in the last two years. The
increase in the Capital Stock Tax is due to the increases in the Company's
common equity over the past three years.
4
Interest Expense
Interest expense was $15,311, $14,852 and $12,896 in 1996, 1995
and 1994, respectively, and has increased in 1996 and 1995 primarily as a result
of higher levels of borrowing offset in part by a reduction in interest rates.
The level of debt increased in order to finance acquisitions and other capital
expenditures made since 1994.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") was
$264, $305 and $126 in 1996, 1995 and 1994, respectively, and has varied over
the years as a result of changes in the average balance of utility plant
construction work in progress ("CWIP"), to which AFUDC is applied, and to
changes in the AFUDC rate.
The average balance of CWIP to which AFUDC is applied was $4,441,
$4,848 and $2,820 in 1996, 1995 and 1994, respectively. The increases in 1995 in
the average balance of CWIP were due to a $4,600 operations center that was
placed in service in December 1995. AFUDC is no longer applied to projects after
they are placed in service, but is applied to an ever-increasing base during the
period they are under construction.
The AFUDC rate has varied due to changes in the interest rate on PSW's
revolving credit facility. The average AFUDC rate was 6.1%, 6.3% and 4.6% in
1996, 1995 and 1994, respectively.
Income Taxes
The Company's effective income tax rate was 41.4% in 1996 as compared to
41.7% in 1995 and 42.5% in 1994. The decrease in the effective tax rate in 1996
is due to differences between tax deductible expenses and book expenses. The
decline in the effective tax rate in 1995 compared to 1994 was primarily due to
a 2% reduction in the Pennsylvania Corporate Net Income Tax.
Discontinued Operations
In 1993, the Company completed the sale of the last of the nonregulated
businesses that the Board of Directors authorized in 1990 and 1991. These
businesses are accounted for as discontinued operations. In connection with the
decision to sell these businesses, the Company established reserves to cover
future costs and contingencies that the Company could be required to pay.
In 1996 and 1995, the Company reversed $965 and $370, net of related
income taxes, of these reserves. The reversals were made as a result of the
receipt of contingent sales proceeds from two of the businesses that were sold;
the passage of time, which reduced certain potential lease obligations; and the
assessment of current information on asserted and unasserted legal claims
related to these businesses. The balance of the reserves for discontinued
operations of $1,003 at December 31, 1996 consists primarily of reserves for
future and contingent costs including potential lease, legal and insurance costs
associated with these businesses.
Summary
Operating income in 1996, 1995 and 1994 was $49,290, $46,109 and
$40,845, respectively, and income from continuing operations was $19,778,
$18,030 and $15,638, respectively, for the same periods. Net income available to
common stock was $20,722 in 1996 and $18,400 in 1995 and was higher than income
from continuing operations as a result of the reversals of reserves for
discontinued operations as described above. On a per share basis, income from
continuing operations in 1996, 1995 and 1994 was $1.04, $1.00 and $.90,
respectively. The increases in the per share income in 1996 and 1995 over the
previous years were due to the aforementioned improvements in profits offset in
part by a 5.7% and 3.9% increase in the average number of common shares
outstanding during 1996 and 1995, respectively.
5
Although the Company has experienced increased income in the recent
past, continued adequate rate increases reflecting increased operating costs and
new capital investments are important to the future realization of improved
profitability.
Fourth Quarter Results
Income from continuing operations for the fourth quarter of 1996
increased over the same period in 1995 by $358 to $4,682 primarily as a result
of a $1,549 increase in revenues offset in part by an increase in operating
expenses, depreciation, taxes, and interest expense. The increase in revenues
was a result of the acquisitions made during the past two years and the 5.3%
rate increase which took effect October 27, 1995. Operating expenses increased
due to costs associated with the acquisitions. Depreciation increased due to
utility plant additions made since the fourth quarter of 1995. Taxes other than
income taxes increased primarily because of the increase in the base on which
the PURTA and Capital Stock Tax are computed. Interest increased in the fourth
quarter primarily as a result of higher borrowing levels.
Effects of Inflation
The effects of inflation on the Company during the past several years
have not been significant. As a regulated enterprise, PSW's rates are
established to provide recovery of costs and a return on its investment.
Recovery of the effects of inflation through higher water rates is dependent
upon receiving adequate and timely rate increases. However, rate increases are
not retroactive and often lag increases in costs caused by inflation. During
periods of moderate to low inflation, as has been experienced for the past
several years, the effects of inflation on PSW's operating results are not
significant.
6
Financial Condition
Cash Flow and Capital Expenditures
Net operating cash flow, dividends paid on common stock and capital
expenditures, including allowances for funds used during construction, for the
five years ended December 31, 1996 are as follows:
- ---------------------------------------------------------------------------------------------------
Net Operating Common Capital
Cash Flow Dividends Expenditures
- ---------------------------------------------------------------------------------------------------
1992 $ 23,928 $ 8,866 $ 21,719
1993 27,049 11,629 27,958
1994 29,730 12,637 27,379
1995 32,954 13,546 33,182
1996 37,422 14,795 31,389
- ---------------------------------------------------------------------------------------------------
$ 151,083 $ 61,473 $ 141,627
===================================================================================================
Included in capital expenditures are: $17,865 for the construction of a
surface water treatment plant; $11,128 for the modernization of existing
treatment plants; $9,383 for new water mains; $24,720 for the rehabilitation of
existing water mains; $18,482 for water meters and $4,945 for the construction
of a divisional operations center. During this five year period, PSW received
$10,950 of advances and contributions in aid of construction to finance new
water mains. In addition to its capital program, PSW has made sinking fund
contributions aggregating $4,242, retired $63,100 of debt and $4,357 of
preferred stock, and has refunded $12,037 of customer advances for construction.
PSW has also expended $79,536 related to the acquisition of 18 water systems
since 1992.
Since net operating cash flow to PSW plus advances and contributions in
aid of construction have not been sufficient to fully fund its cash
requirements, PSW issued approximately $112,777 of First Mortgage Bonds, and
received $32,495 of equity investments from the Company during the past five
years.
7
The Company has funded its investment in PSW with the proceeds from the
sale of stock and the sale of its discontinued operations. In April 1993, the
Company sold 1,650,000 shares of common stock in a public offering for net
proceeds of $18,331. The Company has also sold 5,165,447 shares of common stock
for net proceeds of $59,047 since 1992 through three programs that allow
existing shareholders and customers of PSW to purchase shares of common stock
directly from the Company as described in the following table:
Customer Optional
Stock Dividend Stock
Purchase Reinvestment Purchase
Program Program Program Total
- -----------------------------------------------------------------------------------------------------------------
Net proceeds:
1992 $ 24,185 $ 742 $ 264 $ 25,191
1993 5,465 1,491 583 7,539
1994 3,541 2,047 603 6,191
1995 4,680 2,324 842 7,846
1996 7,953 3,111 1,216 12,280
- -----------------------------------------------------------------------------------------------------------------
$ 45,824 $ 9,715 $ 3,508 $ 59,047
=================================================================================================================
Shares issued:
1992 2,503,739 76,715 25,738 2,606,192
1993 448,410 130,056 47,786 626,252
1994 301,035 175,530 49,662 526,227
1995 383,183 199,365 68,503 651,051
1996 483,113 199,597 73,015 755,725
- -----------------------------------------------------------------------------------------------------------------
4,119,480 781,263 264,704 5,165,447
=================================================================================================================
Proceeds from the customer stock purchase program increased
dramatically in 1992 and, in order to better match future equity additions with
the need for additional capital, the Company amended this program in 1993 to
eliminate the 5% discount it previously offered to customers and limited future
stock sales under this program to approximately 100,000 shares in each of the
four subscription periods during the year. The dividend reinvestment program
("DRP") continues to offer a 5% discount on the purchase of Company Stock with
reinvested dividends. As of the December 1996 dividend payment, holders of 22%
of the common shares outstanding participated in the DRP.
PSW's 1997 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $35,000, which is expected to be financed, along with $12,000 of debt
maturities, $444 of sinking fund obligations and $1,429 of preferred stock
redemptions through internally-generated funds, the revolving credit facility,
equity investments from the Company, and issuance of new long-term debt. In
addition, PSW continues to hold acquisition discussions with several water
systems that are near or adjacent to PSW's service territory. The cash needed
for acquisitions would be funded initially with short-term debt with subsequent
repayment from the proceeds of long-term debt or equity investments from the
Company. Equity investments from the Company will be financed primarily from the
issuance of its stock through the three programs discussed above or possibly
through an underwritten public offering.
8
Future utility construction in the period 1998 through 2001, including
recurring programs, such as the ongoing replacement of water meters, the
rehabilitation of water mains and additional transmission mains to meet customer
demands, exclusive of the costs of new mains financed by advances and
contributions in aid of construction, is estimated to require aggregate
expenditures of approximately $120,000. The Company anticipates that
approximately 50% of these expenditures will require external financing. The
estimates discussed above do not include any amounts for possible future
acquisitions of water systems or the financing necessary to support them.
PSW's ability to finance its future construction programs, as well as
its acquisition activities, depends on its ability to attract the necessary
external financing and maintain or increase internally-generated funds. Rate
orders permitting compensatory rates of return on invested capital and timely
rate adjustments will be required to allow PSW to achieve an adequate level of
earnings to enable it to secure the capital it will need and to maintain
satisfactory debt coverage ratios.
Operating cash flow from PSW, along with external financings, will
enable the Company to pursue its capital expenditure programs, pay dividends and
supply the working capital required by the Company in 1997. Management believes
that with continued regulatory support, it will be able to obtain the external
financing that it will need.
Capitalization
The following table summarizes PSC's capitalization during the past
five years:
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Long-term debt* 55.3% 53.5% 49.9% 50.7% 58.1%
Preferred stock * 2.1% 2.0% 3.3% 3.4% 3.6%
Common stockholders' equity 42.6% 44.5% 46.8% 45.9% 38.3%
- ----------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
====================================================================================================
*includes current portion.
The changes in the capitalization ratios result from the issuance of
common stock over the past five years, particularly in 1992 and 1993 and the
issuance of debt by PSW to finance its acquisitions and capital program. The
Company and PSW intend to maintain an equity ratio adequate to maintain PSW's
current Standard and Poors debt rating of "A" and may issue common stock in an
underwritten public offering during 1997 in order to increase its common equity
ratio.
9
Dividends on Common Stock
Following is a recent history, adjusted for the 1996 common stock split
of income from continuing operations and dividends of the Company:
---------------------------------------------------------------
Income per
share from
Cash dividend continuing Payout
per common share operations ratio
---------------------------------------------------------------
1992 $ 0.69 $ 0.82 84%
1993 0.71 0.85 84%
1994 0.73 0.90 81%
1995 0.76 1.00 76%
1996 0.79 1.04 76%
---------------------------------------------------------------
Dividends have averaged approximately 80% of income from continuing
operations during this period. In 1996, the annual dividend increased by 4.7% to
$.81 beginning with the September 1996 dividend.
10
MANAGEMENT'S REPORT
-------------------
The consolidated financial statements and related information for the
years ended December 31, 1996, 1995 and 1994 were prepared by management in
accordance with generally accepted accounting principles and include
management's best estimates and judgments, as required. Financial information
included in other sections of this annual report is consistent with that in the
consolidated financial statements.
The Company has an internal accounting control structure designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly authorized and recorded in accordance with established policies and
procedures. The internal control structure is supported by the selection and
training of qualified personnel, the delegation of management authority and
responsibility and dissemination of policies and procedures.
The Company's independent auditors, KPMG Peat Marwick LLP, provide an
independent review of management's reporting of results of operations and
financial condition. KPMG has audited the financial statements by conducting
tests as they deemed appropriate and their report follows.
The Board of Directors through the Audit Committee selects the
Company's independent auditors and reviews the scope and results of their
audits. The Audit Committee also reviews the adequacy of the Company's internal
control structure and other significant matters. The Audit Committee is
comprised of four outside Directors who meet periodically with management and
the independent auditors. The Audit Committee held two meetings in 1996.
Nicholas DeBenedictis Michael P. Graham
Chairman & Senior Vice President - Finance
President & Treasurer
INDEPENDENT AUDITORS' REPORT
----------------------------
The Stockholders and Board of Directors
Philadelphia Suburban Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Philadelphia Suburban Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Philadelphia
Suburban Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 3, 1997
2
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31, 1996, 1995 and 1994
===============================================================================
1996 1995 1994
-------------------------------------------------
Earned revenues $ 122,503 $ 117,044 $ 108,636
Costs and expenses:
Operating expenses 51,615 51,702 50,296
Depreciation 13,068 11,572 10,468
Amortization 265 (15) (138)
Taxes other than income taxes 8,265 7,676 7,165
-------------------------------------------------
73,213 70,935 67,791
Operating income 49,290 46,109 40,845
Interest expense 15,311 14,852 12,896
Dividends on preferred stock of subsidiary 494 631 866
Allowance for funds used during construction (264) (305) (126)
-------------------------------------------------
Income from continuing operations before income taxes 33,749 30,931 27,209
Provision for income taxes 13,971 12,901 11,571
-------------------------------------------------
Income from continuing operations 19,778 18,030 15,638
Reversal of reserve for discontinued operations, net of
income tax of $520 and $200, in 1996 and 1995 965 370 -
-------------------------------------------------
Net income 20,743 18,400 15,638
Dividends on preferred stock
21 - -
-------------------------------------------------
Net income available to common stock $ 20,722 $ 18,400 $ 15,638
=================================================
Net income per common share:
Continuing operations $ 1.04 $ 1.00 $ 0.90
Discontinued operations 0.05 0.02 -
-------------------------------------------------
Total $ 1.09 $ 1.02 $ 0.90
=================================================
Average common and common equivalent
shares outstanding during the period 19,053 18,024 17,346
=================================================
See accompanying notes to consolidated financial statements.
3
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 1996 and 1995
===============================================================================
1996 1995
--------------------------------
Assets
------
Property, plant and equipment, at cost $ 612,812 $ 529,364
Less accumulated depreciation 109,874 92,459
--------------------------------
Net property, plant and equipment 502,938 436,905
--------------------------------
Current assets:
Cash 1,518 2,387
Accounts receivable, net 21,914 22,112
Inventory, materials and supplies 1,943 1,878
Prepayments and other current assets 660 537
--------------------------------
Total current assets 26,035 26,914
--------------------------------
Regulatory assets 48,491 48,757
Deferred charges and other assets, net 5,480 5,475
--------------------------------
$ 582,944 $ 518,051
================================
Liabilities and Stockholders' Equity
------------------------------------
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ -
Common stock at $.50 par value, authorized 40,000,000 shares,
outstanding 19,198,579 and 18,283,122 in 1996 and 1995 9,731 6,224
Capital in excess of par value 121,439 110,987
Retained earnings 49,272 43,345
Treasury stock, 262,230 and 259,125 shares in 1996 and 1995 (3,647) (3,580)
-------------------------------
Total stockholders' equity 180,015 156,976
--------------------------------
Preferred stock of subsidiary with mandatory
redemption requirements 4,214 5,643
Long-term debt, excluding current portion 217,518 175,395
Commitments
- -
Current liabilities:
Current portion of long-term debt and preferred stock of subsidiary 13,873 15,090
Loans payable 5,560 6,455
Accounts payable 9,659 9,785
Accrued interest 3,660 3,601
Accrued taxes 3,363 2,851
Other accrued liabilities 8,924 10,136
--------------------------------
Total current liabilities 45,039 47,918
--------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 75,949 70,980
Customers' advances for construction
23,524 25,880
Other
12,826 12,064
--------------------------------
Total deferred credits and other liabilities 112,299 108,924
--------------------------------
Contributions in aid of construction 23,859 23,195
--------------------------------
$ 582,944 $ 518,051
================================
See accompanying notes to consolidated financial statements.
4
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 1996 and 1995
===============================================================================
1996 1995
-------------------------------
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ -
Common stock, $.50 par value 9,731 6,224
Capital in excess of par value 121,439 110,987
Retained earnings 49,272 43,345
Treasury stock (3,647) (3,580)
-------------------------------
Total stockholders' equity 180,015 156,976
-------------------------------
Preferred stock of subsidiary with mandatory
redemption requirements 5,643 7,143
Current portion of preferred stock of subsidiary 1,429 1,500
-------------------------------
4,214 5,643
-------------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
5.500% Series, due 1996 - 4,000
7.875% Series, due 1997 - 5,000
8.440% Series, due 1997 12,000 12,000
8.400% Series, due 2002* - 4,150
5.950% Series, due 2002* 2,400 2,800
6.830% Series, due 2003 10,000 -
7.470% Series, due 2003 10,000 -
6.820% Series, due 2005 10,000 10,000
6.990% Series, due 2006 10,000 -
10.650% Series, due 2006* - 10,000
9.890% Series, due 2008 5,000 5,000
7.150% Series, due 2008* 22,000 22,000
9.120% Series, due 2010 20,000 20,000
6.500% Series, due 2010* 3,200 3,200
9.170% Series, due 2011 5,000 5,000
9.930% Series, due 2013 5,000 5,000
6.890% Series, due 2015 12,000 12,000
9.970% Series, due 2018 5,000 5,000
9.170% Series, due 2021* 8,000 8,000
6.350% Series, due 2025 22,000 22,000
7.720% Series, due 2025 15,000 15,000
9.290% Series, due 2026 12,000 12,000
-------------------------------
Total First Mortgage Bonds 188,600 182,150
Note payable to bank under revolving credit agreement, due March 1998 39,727 5,160
Installment note payable, 9%, due in equal annual payments through 2013 1,635 1,675
-------------------------------
229,962 188,985
Current portion of long-term debt 12,444 13,590
-------------------------------
Long-term debt, excluding current portion 217,518 175,395
-------------------------------
Total capitalization $ 401,747 $ 338,014
===============================
*Trust indentures relating to these First Mortgage Bonds require annual sinking
fund payments.
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands of dollars)
Years ended December 31, 1996, 1995 and 1994
================================================================================
1996 1995 1994
------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 19,778 $ 18,030 $ 15,638
Adjustments to reconcile income from
continuing operations to net cash
flows from operating activities:
Depreciation and amortization 13,333 11,557 10,330
Deferred taxes, net of taxes on
customers' advances 2,628 2,573 2,693
Net increase in receivables,
inventory and prepayments (517) (2,037) (1,209)
Net increase in payables, accrued interest
and other accrued liabilities 1,748 4,604 2,144
Other 452 (1,773) 134
------------------------------------------
Net cash flows from operating activities 37,422 32,954 29,730
------------------------------------------
Cash flows from investing activities:
Property, plant and equipment additions,
including allowance for funds used during
construction of $264, $305 and $126 (31,389) (33,182) (27,379)
Acquisitions of water and wastewater systems (42,122) (26,351) (612)
Other 24 (91) (10)
-------------------------------------------
Net cash flows used in investing activities (73,487) (59,624) (28,001)
-------------------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of
construction, net of income tax payments 470 1,600 3,149
Repayments of customers' advances (2,142) (2,104) (2,219)
Net proceeds (repayments) of short-term debt (895) 2,405 3,231
Proceeds from long-term debt 64,256 57,906 7,722
Repayments of long-term debt including
premium on early retirement (24,094) (23,585) (4,884)
Redemption of preferred stock of subsidiary (1,500) (2,857) -
Proceeds from issuing common stock 14,651 9,060 6,916
Repurchase of common stock (760) (733) (2,230)
Dividends paid on preferred stock
(4) - -
Dividends paid on common stock (14,795) (13,546) (12,637)
Other (167) (154) (45)
-------------------------------------------
Net cash flows from (used in) financing activities 35,020 27,992 (997)
-------------------------------------------
Net cash flows from (used in) discontinued operations 176 (178) 123
------------------------------------------
Net increase (decrease) in cash (869) 1,144 855
Cash balance beginning of year 2,387 1,243 388
------------------------------------------
Cash balance end of year $ 1,518 $ 2,387 $ 1,243
==========================================
See Acquisitions footnote for description of non-cash investing and financing
activities.
See accompanying notes to consolidated financial statements.
6
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
================================================================================
Summary of Significant Accounting Policies
Nature of Operations
The business of Philadelphia Suburban Corporation (the "Company") is
conducted through its subsidiary Philadelphia Suburban Water Company ("PSW").
PSW is a regulated public utility which supplies water to approximately 284,000
customers. The customers are residential, commercial and industrial in nature,
and no single customer accounted for more than one percent of PSW's sales. The
service territory of PSW covers a 463 square mile area located west and north of
the City of Philadelphia. PSW is subject to regulation by the Pennsylvania
Public Utility Commission ("PUC") which has jurisdiction with respect to rates,
service, accounting procedures, issuance of securities, acquisitions and other
matters.
Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All material
intercompany accounts and transactions have been eliminated.
Recognition of Revenues
Revenues include amounts billed to customers on a cycle basis and
unbilled amounts based on estimated usage from the latest billing to the end of
the accounting period.
Property, Plant and Equipment and Depreciation
Property, plant and equipment consist primarily of utility plant. The
cost of additions includes contracted cost, direct labor and fringe benefits,
materials, overheads and, for certain utility plant, allowance for funds used
during construction. Water systems acquired are recorded at estimated original
cost of utility plant when first devoted to utility service and the applicable
depreciation is recorded to accumulated depreciation. The difference between the
estimated original cost, less applicable depreciation, and the purchase price is
recorded as an acquisition adjustment within utility plant. At December 31,
1996, utility plant includes a credit acquisition adjustment of $7,177 which is
being amortized over 20 years. Consistent with PSW's rate settlements, $526 was
amortized during 1996, $529 was amortized during 1995 and $822 was amortized
during 1994.
Utility expenditures for maintenance and repairs, including minor
renewals and betterments, are charged to operating expenses in accordance with
the Uniform System of Accounts prescribed by the PUC. The cost of new units of
property and betterments are capitalized. When units of utility property are
replaced, retired or abandoned, the recorded value thereof is credited to the
asset account and such value, together with the net cost of removal, is charged
to accumulated depreciation.
The straight-line remaining life method is used to compute depreciation
on utility plant. The straight-line method is used with respect to
transportation and mechanical equipment.
7
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
=============================================================================
In accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of", the long-lived
assets of the Company, which consist primarily of Utility Plant in Service, have
been reviewed for impairment. There has been no change in circumstances or
events that have occurred that require adjustments to the carrying values of
these assets.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") represents
the estimated cost of funds used to finance the construction of utility plant.
AFUDC is applied to construction projects requiring more than one month to
complete. No AFUDC is applied to projects funded by customer advances for
construction or contributions in aid of construction. AFUDC includes the net
cost of borrowed funds and a rate of return on other funds when used, and is
recovered through water rates as the utility plant is depreciated. There was no
AFUDC related to equity funds in 1996, 1995 and 1994.
Deferred Charges and Other Assets
Deferred bond and preferred stock issuance expenses are amortized by
the straight-line method over the life of the related issues.
Call premiums related to the early redemption of long-term debt, along
with the unamortized balance of the related issuance expense, are deferred and
amortized over the life of the long-term debt used to fund the redemption.
Expenses associated with filing for rate increases are deferred and
amortized over the estimated period the rates will be in effect, approximately
one year. Other costs, for which PSW has received or expects to receive
prospective rate recovery, are deferred and amortized over the period of rate
recovery.
Income Taxes
The Company accounts for certain income and expense items in different
time periods for financial reporting than for tax reporting purposes. Deferred
income taxes are provided on the temporary differences between the tax bases of
the assets and liabilities and the amounts at which they are carried in the
financial statements. These deferred income taxes are based on the enacted tax
rates expected to be in effect when such temporary differences are projected to
reverse.
Customers' Advances for Construction
Water mains or, in some instances, cash advances to reimburse PSW its
costs to construct water mains, are contributed to PSW by customers, real estate
developers and builders in order to extend water service to their properties.
The value of these contributions is recorded as Customers' Advances for
Construction. PSW makes refunds on these advances over a specific period of time
based on operating revenues related to the main or as new customers are
connected to the main. After all refunds are made, any remaining balance is
transferred to Contributions in Aid of Construction.
8
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
================================================================================
Contributions in Aid of Construction
Contributions in aid of construction include direct contributions and
the portion of customers' advances for construction that become non-refundable.
Inventories, Materials and Supplies
Inventories are stated at cost, not in excess of market value.
Beginning in 1996, cost is determined using the first-in, first-out method.
Prior to 1996, cost was determined using the average cost method. The effect of
this change was not material to the results of operations.
Employee Stock Plans
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", electing the provision of the statement allowing it to continue
its practice of not recognizing compensation expense related to granting of
stock options to the extent that the option price of the underlying stock was
equal to, or greater than, the market price on the date of option grant.
Disclosure of the impact on the results of operations, had the Company elected
to recognize compensation expense, is provided in the Employee Stock and
Incentive Plans footnote as required by the Statement.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year's presentation.
Acquisitions
In October 1996, PSW purchased the franchise rights and the water
utility assets of Hatboro Borough Authority. The Hatboro system covers a one and
one-half square mile service area in Montgomery County and is contiguous to
PSW's service territory. In November 1996, PSW acquired the water systems of
Utility Group Services Corporation ("UGS") in a purchase transaction. The UGS
system consisted of three water utilities, with a 49 square mile service
territory, and one wastewater utility with a one square mile territory, all in
Chester County and in close proximity to PSW's existing territory. In December
1996, PSW purchased the franchise rights and the water utility assets of Bristol
Borough Water and Sewer Authority serving the entire Borough and parts of
Bensalem and Bristol Townships in Bucks County. The Bristol system covers a 12
square mile service area in close proximity to PSW's existing territory. In
addition, PSW purchased the franchise rights and the water utility assets of
three smaller water systems in 1996 with a combined service territory of one and
one-half square miles.
9
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The total purchase price for the eight water systems and wastewater
system acquired in 1996 was $47,889, including the issuance of $3,220 of the
Company's preferred stock and the assumption of $2,547 in liabilities. The
annual revenues from these systems approximates $6,000, and revenues included in
the consolidated financial statements during the period owned by PSW were $466.
PSW continues to hold acquisition discussions with several water systems that
are near or adjacent to it's service territory.
In May 1995, PSW purchased the franchise rights and the water utility
assets of Media Borough ("Media"). The Media system covers a 23 square mile
service area contiguous to PSW's service territory. In addition, PSW purchased
the franchise rights and the water utility assets of four smaller water systems
in 1995 that cover a combined service territory of four square miles. PSW paid
$26,351 for the water systems acquired in 1995. These systems serve customers
within or contiguous to the boundaries of PSW's existing service territory.
Revenues included in the consolidated financial statements related to the water
supply systems acquired in 1995 were $4,470 in 1996 and $2,820 in 1995.
In December 1994, PSW acquired the franchise rights and the water
utility assets of two privately-owned water companies. These water supply
systems cover a service territory of two square miles and are located adjacent
to PSW's existing service territory. Revenues included in the consolidated
financial statements related to the water supply systems acquired in 1994
amounted to approximately $93 and $95 in 1996 and 1995, respectively.
Income Taxes
- ------------
Total income tax expense is allocated as follows:
Years Ended December 31,
----------------------------------------------
1996 1995 1994
----------------------------------------------
Income from continuing operations $ 13,971 $ 12,901 $ 11,571
Common stockholders' equity related
to stock option activity which
reduces taxable income (126) (44) (25)
Discontinued operations 520 200 -
----------------------------------------------
$ 14,365 $ 13,057 $ 11,546
==============================================
10
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
Income tax expense attributable to income from continuing operations
consists of:
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Current:
Federal $ 8,084 $ 7,688 $ 6,670
State 2,600 2,514 2,685
------------------------------------------
10,684 10,202 9,355
------------------------------------------
Deferred:
Federal 3,002 2,565 2,303
State 285 134 (87)
--------------------------------------------
3,287 2,699 2,216
------------------------------------------
Total tax expense $ 13,971 $ 12,901 $ 11,571
==========================================
The significant components of deferred income tax expense are as
follows:
Years Ended December 31,
-------------------------------------
1996 1995 1994
-------------------------------------
Excess of tax over financial
statement depreciation $ 2,458 $ 2,323 $ 2,791
Amortization of deferred investment
tax credits (115) (151) (151)
Current year investment tax credits
deferred 40 90 75
Differences in basis of fixed
assets due to variations in tax and
book accounting methods that reverse
through depreciation 770 819 902
Customers' advances for construction,
net 196 (443) (657)
Adjustment to deferred tax assets and
liabilities for enacted changes in
tax rates - - (4,220)
Adjustment to recognize future rate
recovery - - 4,220
Other, net (62) 61 (744)
--------------------------------------
Total deferred income tax expense $ 3,287 $ 2,699 $ 2,216
=====================================
The statutory Federal tax rate is 35% for all years presented. The
Pennsylvania Corporate Net Income Tax rate was 11.99% in 1994, and 9.99% in 1995
and 1996.
11
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
================================================================================
The reasons for the differences between amounts computed by applying
the statutory Federal income tax rate to income from continuing operations
before Federal tax and the actual Federal tax expense are as follows:
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Computed Federal tax expense at
statutory rate $ 10,795 $9,899 $8,614
Increase (decrease) in tax expense for
items to be recovered in future rates:
Depreciation expense 179 132 154
Losses on asset disposals (12) (35)
(10)
Amortization of deferred investment
tax credits (115) (151) (151)
Preferred stock dividend 180 221 303
Adjustment to deferred tax assets and
liabilities for enacted changes
in tax rates - - (4,220)
Adjustment to recognize future rate
recovery - - 4,220
Other, net 59 187 63
--------------------------------------
Actual Federal tax expense $11,086 $10,253 $8,973
======================================
The tax effects of temporary differences between book and tax
accounting that give rise to the deferred tax assets and deferred tax
liabilities are as follows:
December 31,
-----------------------------
1996 1995
-----------------------------
Deferred tax assets:
Customers' advances for construction $ 9,753 $ 9,950
Costs expensed for book not deducted
for tax, principally accrued expenses
and bad debt reserves 2,638 1,502
Other 389 363
-----------------------------
Total gross deferred tax assets 12,780 11,815
-----------------------------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and differences in the basis
of fixed assets due to variation in tax
and book accounting 65,666 59,722
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences 17,801 17,980
Deferred investment tax credit 4,288 4,363
Other 974 730
-----------------------------
Total gross deferred tax liabilities 88,729 82,795
-----------------------------
Net deferred tax liability $ 75,949 $ 70,980
=============================
12
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The Company made income tax payments, which include amounts related to
discontinued operations, of $10,199, $9,730 and $8,818 in 1996, 1995 and 1994,
respectively. The Company's Federal income tax returns for all years through
1992 have been closed.
Property, Plant and Equipment
- -----------------------------
December 31,
-------------------------------
1996 1995
-------------------------------
Utility plant and equipment $ 604,298 $ 524,445
Utility construction work in progress 6,232 2,645
Non-utility plant and equipment 2,282 2,274
-------------------------------
Total property, plant and equipment $ 612,812 $ 529,364
===============================
Depreciation is computed based on estimated useful lives of 5 to 110
years for utility plant and 3 to 10 years for both utility transportation and
mechanical equipment and all non-utility plant and equipment.
Accounts Receivable
- -------------------
December 31,
---------------------------
1996 1995
---------------------------
Billed water revenue $ 9,760 $ 9,594
Unbilled water revenue 11,764 12,450
Other 690 368
---------------------------
22,214 22,412
Less allowance for doubtful accounts 300 300
---------------------------
Net accounts receivable $ 21,914 $ 22,112
===========================
All of the Company's customers are located in southeastern
Pennsylvania. No single customer accounted for more than one percent of the
Company's sales in 1996 or 1995 and no account receivable from any customer
exceeded one percent of the Company's total stockholders' equity.
Regulatory Asset
- ----------------
The regulatory asset represents costs which have been prudently
incurred and are expected to be fully recovered in future rates. The two
components of this asset are deferred income taxes and postretirement benefits
other than pensions. Items giving rise to deferred state income taxes, as well
as a portion of deferred Federal income taxes related to certain differences
between tax and book depreciation expense, are recognized in the rate setting
process on a cash or flow through basis and will be recovered as they reverse.
The portion of the asset related to postretirement benefits other than pensions
represents costs that were deferred during the period that the accrual method of
accounting for these benefits was adopted in 1993 and the recognition of the
accrual method in the Company's rates in 1994. Amortization of the amount
deferred for postretirement benefits other than pensions began in 1994 and is
currently being recovered in rates.
13
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
December 31,
----------------------------
1996 1995
----------------------------
Income taxes $ 46,381 $ 46,510
Postretirement benefits other than pensions 2,110 2,247
----------------------------
$ 48,491 $ 48,757
============================
Commitments
- -----------
PSW maintains agreements with the Chester Water Authority and the Bucks
County Water and Sewer Authority for the purchase of water to supplement its
water supply, particularly during periods of peak demand. The agreements
stipulate purchases of minimum quantities of water to the year 2017. The
estimated annual commitments related to such purchases total approximately
$2,852 through 2001. PSW purchased approximately $2,889, $2,839 and $3,322 of
water under these agreements during the years ended December 31, 1996, 1995 and
1994, respectively.
PSW leases motor vehicles and other equipment under operating leases
which are noncancelable and expire on various dates through 2001. During the
next five years, $2,258 of future minimum lease payments are due: $913 in 1997,
$699 in 1998, $504 in 1999, $129 in 2000 and $13 in 2001. PSW leases parcels of
land on which its Media treatment plant and other facilities are situated and
adjacent parcels that are used for watershed protection. The operating lease is
noncancelable, expires in 2045 and contains certain renewal provisions. The
lease is subject to an adjustment every five years based on changes in the
Consumer Price Index. During each of the next five years, $292 of lease payments
for land are due.
Rent expense was $1,332, $1,067 and $979 for the years ended December
31, 1996, 1995 and 1994, respectively.
Long-term Debt and Loans Payable
- --------------------------------
The Consolidated Statements of Capitalization provides a listing of
long-term debt and loans outstanding as of December 31, 1996 and 1995. The
supplemental indentures with respect to certain issues of the First Mortgage
Bonds restrict the ability of PSW to declare dividends, in cash or property, or
repurchase or otherwise acquire PSW's stock. As of December 31, 1996,
approximately $100,000 of retained earnings were free of these restrictions.
Certain supplemental indentures also prohibit PSW from making loans to or
purchasing the stock of the Company.
Excluding amounts due under PSW's revolving credit agreement, the
Company's sinking fund payments and debt maturities for the next five years are
as follows:
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Sinking fund payments $ 444 $ 2,448 $ 2,452 $ 2,457 $ 2,462
Maturities 12,000 - - - -
----------------------------------------------------------------
Total $ 12,444 $ 2,448 $ 2,452 $ 2,457 $ 2,462
================================================================
14
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
In March 1995, PSW established a two-year $100,000 medium-term note
program providing for the issuance of long-term debt with maturities ranging
between one and 30 years at fixed rates of interest, as determined at the time
of issuance. This program is expected to be replaced by a similar program in
1997. The notes issued under this program are secured by the Twenty-ninth
Supplement to the trust indenture relating to PSW's First Mortgage Bonds. During
1996, issuances through this program were as follows: $10,000 in April 1996,
6.99% Series due 2006; $10,000 in July 1996, 7.47% Series due 2003; and $10,000
in November 1996, 6.83% Series due 2003. During 1995, issuances were as follows:
$15,000 in May 1995, 7.72% Series due 2025; $10,000 in June 1995, 6.82% Series
due 2005; and $12,000 in December 1995, 6.89% Series due 2015. The proceeds from
these issuances were used to fund acquisitions, the retirement of the First
Mortgage Bonds noted below and PSW's ongoing capital program.
In August 1995, PSW issued $22,000 First Mortgage Bonds 6.35% Series
due 2025 as security for an equal amount of bonds issued by the Delaware County
Industrial Development Authority. The proceeds from these bonds were restricted
to funding the costs of certain capital projects. As of December 31, 1995, the
Trustee for this issue held $1.8 million in an interest bearing account pending
completion of the remainder of the projects financed with this issue. The amount
held by the Trustee was included in the balance sheet as cash. During 1996,
these projects were completed and all funds were released by the trustee.
In January 1996, PSW retired $5,000 of First Mortgage Bonds, 7.875%
Series due 1997, at a premium of .331% or $17 and $4,150 of First Mortgage
Bonds, 8.4% Series due 2002, at a premium of 2.1% or $87. In April 1996, PSW
retired $10,000 of First Mortgage Bonds, 10.65% Series due 2006, at a premium of
5.04% or $504. In August 1995, PSW retired $8,000 of First Mortgage Bonds, 13%
Series due 2005, at a premium of 6.1% or $488. The unamortized bond issuance
expenses related to the retirements in 1996 and 1995 were $25 and $35,
respectively. The premiums paid on the early retirement of debt, along with the
related unamortized bond issuance expense, are capitalized and amortized, in
accordance with the Uniform System of Accounts prescribed by the PUC, over the
life of the long-term debt used to fund the redemption.
In February 1994, PSW entered into a $30,000 revolving credit agreement
due March 1998 with four banks. The agreement was amended to temporarily
increase the available borrowings under this facility by $20,000 during a
one-year period beginning in December 1996 as interim financing for the Bristol
acquisition. The agreement had previously been increased by $10,000 during the
period May 1995 to August 1995 as interim financing for the Media acquisition.
Interest under this facility is based, at PSW's option, on the prime rate, an
adjusted federal funds rate, an adjusted certificate of deposit rate
corresponding to the interest period selected, an adjusted Euro-Rate
corresponding to the interest period selected or at rates offered by the banks.
This agreement restricts the total amount of short-term borrowings of PSW. A
commitment fee of 1/8 of 1% is charged on the unused portion of the loan. The
average cost of borrowing under this facility was 6.02% and 6.42%, and the
average borrowing was $14,326 and $22,755, during 1996 and 1995, respectively.
The maximum amount outstanding at the end of any one month was $39,727 in 1996
and $36,800 in 1995.
15
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
At December 31, 1996 and 1995, the Company and PSW had combined
short-term lines of credit of $10,000. Funds borrowed under these lines are
classified as loans payable and are used to provide working capital. The average
borrowing under the lines was $5,123 and $5,720 during 1996 and 1995,
respectively. The maximum amount outstanding at the end of any one month was
$6,820 in 1996 and $8,615 in 1995. Interest under the lines is based at the
Company's option, depending on the line, on the prime rate, an adjusted
Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The
average cost of borrowings under all lines during 1996 and 1995 was 6.1% and
6.8%, respectively.
The total amount of interest paid on all borrowings, net of amounts
capitalized, was $15,503, $14,923 and $13,729 in 1996, 1995 and 1994,
respectively. The proforma weighted cost of long-term debt at December 31, 1996
and 1995 was 7.7% and 8.0%, respectively.
Preferred Stock of Subsidiary with Mandatory Redemption Requirements
- --------------------------------------------------------------------
PSW is authorized to issue up to 1,000,000 shares of preferred stock,
with stated par value, in one or more series. In 1991, PSW issued 100,000 shares
of 8.66% Series 1 Cumulative Preferred Stock, at par value of $100 per share in
a private placement. Dividends on this issue are payable quarterly and are
cumulative. PSW may not pay dividends on its common stock unless provision has
been made for payment of the preferred dividends. As of December 31, 1996, all
preferred dividends have been provided for. These shares are subject to
mandatory annual redemption equal to the par value of 14,285 shares plus accrued
dividends. In addition, PSW has exercised its right to call 14,285 shares per
year starting in 1995, up to a maximum of 15,000 shares over the life of the
issue, at par. The balance may be called, beginning in 1998, at a specified
price above par.
In December 1996, PSW provided notice to the holder of the preferred
stock of its intention to call 14,285 shares at par in January 1997 as required
by the share purchase agreement and, therefore, $1,429 has been classified as
the current portion of preferred stock as of December 31, 1996. In January 1996,
PSW called 715 shares at par value in addition to the mandatory redemption of
14,285 shares required by the share purchase agreement.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as of the dates
presented. The carrying amounts and estimated fair values of the Company's
long-term financial liabilities as of December 31, 1996 are as follows:
Estimated
Carrying fair
amount value
----------------------------------
Long-term debt $ 229,962 $ 241,074
Preferred stock of subsidiary
with mandatory redemption requirements $ 5,643 $ 5,762
16
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The fair value of long-term debt and mandatorily redeemable preferred
stock has been determined by discounting their future cash flows using current
market interest or dividend rates for similar financial instruments of the same
duration. The Company's customers' advances for construction and related tax
deposits have carrying values of $23,524 and $6,426, respectively at December
31, 1996. Their relative fair values cannot be accurately estimated since future
refund payments depend on several variables, including new customer connections,
customer consumption levels and future rate increases. Portions of these
non-interest bearing instruments are payable annually through 2018 and amounts
not paid by the contract expiration dates become non-refundable. The fair value
of these amounts would, however, be less than their carrying value due to the
non-interest bearing feature.
Stockholders' Equity
- --------------------
At December 31, 1996, the Company had 1,770,819 shares of Series
Preferred Stock with a $1.00 par value authorized, of which 100,000 shares are
designated as Series A Preferred Stock. During 1996, the Company designated
32,200 shares as Series B Preferred Stock, $1.00 par value. The Series A
Preferred Stock, as well as the undesignated shares of Series Preferred Stock,
remains unissued. In November 1996, the Company issued all of the 6.05% Series B
Preferred Stock in connection with the acquisition of UGS. The Series B
Preferred Stock is recorded on the balance sheet at its liquidation value of
$100 per share. The dividends, payment of which commenced December 1, 1996, are
cumulative and payable quarterly. PSC may not pay dividends on Common Stock
unless provision has been made for payment of the preferred dividends. Under the
provisions of this issue, the holders may redeem the shares, in whole or in
part, at the liquidation value beginning December 1, 1998 and the Company may
redeem up to 20% of this issue each year beginning December 1, 2001 and, at the
holders' option, this redemption may be made in cash or through the issuance of
debt with a five year maturity at an interest rate of 6.05% . As of December 31,
1996, all dividends have been provided for.
In May 1996, the Company's shareholders approved an increase in the
number of shares of common stock authorized from 20,000,000 shares to 40,000,000
shares and the Company's Board of Directors declared a three-for-two common
stock split effected in the form of a 50% stock distribution for all common
shares outstanding, to shareholders of record on June 18, 1996. Common shares
outstanding do not include shares held by the Company in treasury. The new
shares were distributed on July 10, 1996. The Company's par value of $.50 per
share remained unchanged and $3,140 was transferred from Capital in Excess of
Par Value to Common Stock to record the split. All share and per share data for
all periods presented have been restated to give effect to the stock split.
Shares outstanding at December 31, 1996, 1995 and 1994 were 19,198,579,
18,283,122 and 17,576,985, respectively. Treasury shares held at December 31,
1996, 1995 and 1994 were 262,230, 259,125 and 240,737, respectively.
17
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
- -------------------------------------------------------------------------------
The following table summarizes the activity of common stockholders'
equity:
Capital in
Common Treasury excess of Retained
stock stock par value earnings Total
--------------------------------------------------------------------------------
Balance at December 31, 1993 $ 5,783 $ (1,257) $ 95,918 $ 35,490 $ 135,934
Net income - - 15,638 15,638
Dividends - - - (12,637) (12,637)
Sale of stock 175 248 6,022 6,445
Repurchase of stock - (2,230) - - (2,230)
Equity Compensation Plan 5 - 174 - 179
Exercise of stock options 16 - 450 - 466
--------------------------------------------------------------------------------
Balance at December 31, 1994 5,979 (3,239) 102,564 38,491 143,795
--------------------------------------------------------------------------------
Net income - - - 18,400 18,400
Dividends - - - (13,546) (13,546)
Sale of stock 217 392 7,621 - 8,230
Repurchase of stock - (733) - - (733)
Equity Compensation Plan 1 - 31 - 32
Exercise of stock options 27 - 771 - 798
--------------------------------------------------------------------------------
Balance at December 31, 1995 6,224 (3,580) 110,987 43,345 156,976
--------------------------------------------------------------------------------
Net income - - - 20,722 20,722
Dividends - - - (14,795) (14,795)
Stock split 3,140 - (3,140) - -
Sale of stock 298 693 11,546 - 12,537
Repurchase of stock - (760) - - (760)
Equity Compensation Plan 1 - 38 - 39
Exercise of stock options 68 - 2,008 - 2,076
--------------------------------------------------------------------------------
Balance at December 31, 1996 $ 9,731 $ (3,647) $ 121,439 $ 49,272 $ 176,795
================================================================================
The Company has a Customer Stock Purchase Program for PSW's customers,
and a Dividend Reinvestment and Optional Stock Purchase Program for existing
shareholders. Reinvested dividends can be used to purchase shares of common
stock at a five percent discount from the current market value under the
Dividend Reinvestment Program. Under these programs, 755,725, 651,051 and
526,227 shares of common stock were sold providing the Company with $12,280,
$7,846 and $6,191 of additional capital, after expenses, during 1996, 1995 and
1994, respectively.
In 1993, the Board of Directors approved a resolution authorizing the
Company to purchase, from time to time, up to 250,000 shares of its common stock
in the open market or through privately negotiated transactions. The remaining
number of shares authorized for purchase was adjusted as a result of the 1996
stock split so that the total number of shares originally authorized for
purchase is 277,615. The number of shares purchased by the Company, if any, is
limited to the number of shares sold under its employee stock option and stock
purchase plans, Customer Stock Purchase Program and
18
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Dividend Reinvestment Program and Optional Stock Purchase Program. The purchase
of shares has been authorized in order to offset the dilutive effect on earnings
per share of issuances of additional shares under the programs described above.
Funding for any stock purchases is not expected to have a material impact on the
Company's financial position. During 1996, 1995 and 1994, 3,254, 59,184 and
178,301 shares have been purchased at a net cost of $52, $733 and $2,230,
respectively. For comparative purposes the number of shares purchased is
presented as if they were adjusted for the effect of the 1996 stock split. As of
December 31, 1996, 79,879 shares remain available for purchase by the Company.
Net Income per Common Share and Equity per Common Share
- -------------------------------------------------------
Net income per common share is based on the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Common
equivalent shares arise from stock options. All share and per share data has
been adjusted to reflect the 1996 stock split described in the Stockholders'
Equity Footnote.
Equity per common share was $9.21 and $8.59 at December 31, 1996 and
1995, respectively. These amounts were computed by dividing common stockholders'
equity by the number of shares of common stock outstanding at the end of each
year.
Shareholder Rights Plan
- -----------------------
The Company has a Shareholder Rights Plan designed to protect the
Company's shareholders in the event of an unsolicited unfair offer to acquire
the Company. Each outstanding common share is entitled to one Right which is
evidenced by the common share certificate. In the event that any person acquires
25% or more of the outstanding common shares or commences a tender or exchange
offer which, if consummated, would result in a person or corporation owning at
least 30% of the outstanding common shares of the Company, the Rights will begin
to trade independently from the common shares and, if certain circumstances
occur, including the acquisition by a person of 25% or more of the outstanding
common shares, each Right would then entitle its holder to purchase a number of
common shares of the Company at a substantial discount. If the Company is
involved in a merger or other business combination at any time after the Rights
become exercisable, the Rights will entitle the holder to acquire a certain
number of shares of common stock of the acquiring company at a substantial
discount. The Rights are redeemable by the Company at a redemption price of $.02
per Right at any time before the Rights become exercisable. The Rights will
expire on March 1, 1998, unless previously redeemed.
Employee Stock and Incentive Plans
- ----------------------------------
Under the 1994 Equity Compensation Plan ("1994 Plan"), as amended, the
Company may grant qualified and non-qualified stock options to officers, key
employees and consultants. Officers and key employees may also be granted
dividend equivalents and restricted stock. Restricted stock may also be granted
to non-employee members of the Board of Directors. In May 1996, the Shareholders
authorized an increase to the number of shares from 675,000 shares to 1,425,000
shares of common stock for issuance under the 1994 plan, with the maximum number
of restricted stock grants limited to 37,500 shares. Awards under this plan are
made by the Board of Directors ("Board") or a committee of the Board.
19
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
Options under the 1994 plan, as well as the earlier 1988 Stock Option
Plan and 1982 Stock Option Plan for which 12,000 options are still outstanding,
were issued at the market price of the stock on the day of the grant. Options
are exercisable in installments ranging from 20% to 33% annually, starting one
year from the date of the grant and expire 10 years from the date of the grant.
The following table summarizes stock option transactions for the three
plans:
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Options granted 190,500 180,750 173,250
Options terminated (28,602) - (10,500)
Options exercised (180,151) (79,968) (48,704)
Net change (18,253) 100,782 114,046
==========================================
Balance of shares under option 773,026 791,279 690,497
==========================================
Options exercised during 1996 ranged in price from $8.63 per share to
$11.96 per share. The shares under option at December 31, 1996 are exercisable
at prices ranging from $8.63 to $16.37 per share. At December 31, 1996, 309,542
shares were exercisable, and 874,152 options under the 1994 Plan were still
available for grant.
In 1996, the Company adopted SFAS No.123, "Accounting for Stock-Based
Compensation" electing to continue to apply the provisions of APB Opinion No. 25
and to provide the proforma disclosure provisions of this statement.
Accordingly, no compensation cost has been recognized in the financial
statements for stock options that have been granted. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income available to common stock
and net income per share would have been reduced to the proforma amounts
indicated below:
Years Ended December 31,
----------------------------------
1996 1995
----------------------------------
Net income available to common stock:
As reported $ 20,722 $ 18,400
Proforma 20,337 18,048
Net income per share:
As reported $ 1.09 $ 1.02
Proforma 1.07 1.00
20
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The per share weighted-average fair value at the date of grant for
stock options granted during 1996 and 1995 was $2.02 and $1.95 per option,
respectively. The fair value of options at the date of grant was estimated using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1996 1995
-------------------------
Expected life (years) 10 10
Interest rate 6.4% 7.4%
Volatility 14.0% 12.5%
Dividend yield 5.2% 6.3%
Dividend equivalents provide the grantee with an amount equal to the
dividends paid on a share of common stock over a specified period of time, not
to exceed four years, multiplied by the number of dividend equivalents awarded.
Payments of these awards are deferred until the completion of certain objectives
during a performance period established by a Committee of the Board at the time
of grant. A performance period is generally four years but may be adjusted by
the Committee to as long as eight years or as short as two years depending on
the Company's success in completing the objectives. Dividend equivalents are
"compensatory" and, as such, are charged to operating expense over the
performance period. The effect of changes to the performance period are accrued
when known or projected. The Board granted 74,250, 68,250 and 65,250 dividend
equivalents in 1996, 1995 and 1994, respectively, and costs associated with
these awards were $234 in 1996, $197 in 1995 and $77 in 1994. During 1996,
payments under the 1994 award began and $124 was paid to recipients during the
year.
Restricted stock awards provide the grantee with the rights of a
shareholder, including the right to receive dividends and to vote such shares,
but not the right to sell or otherwise transfer the shares during the
restriction period. During 1996 and 1995, 2,400 and 2,700 shares of restricted
stock were granted with a restriction period of six months and during 1994,
15,000 shares of restricted stock were granted with restriction periods of one
to three years. The value of restricted stock awards, which are "compensatory",
is equal to the fair market value of the stock on the date of the grant less
payments made by the grantee and this amount is amortized ratably over the
restriction period.
Pension Plans and Other Postretirement Benefits
- -----------------------------------------------
The Company has defined benefit pension plans which cover its full-time
employees. Retirement benefits under the plans are generally based on the
employee's total years of service and compensation during the last five years of
employment. The Company's policy is to fund these plans annually at a level
which is deductible for income tax purposes and which provides assets sufficient
to meet its pension obligations. As a result of certain limitations imposed by
the Internal Revenue Code with respect to payments under qualified plans, the
Company, in 1989, adopted a non-qualified Excess Benefit Plan for Salaried
Employees in order to prevent certain employees from being penalized by these
limitations. The Company also has non-qualified Supplemental Executive
Retirement Plans for one current and one retired employee. The net pension costs
and obligations of the qualified and non-qualified plans are included in the
tables which follow.
21
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The Company's pension expense includes the following components:
Years Ended December 31,
-------------------------------------
1996 1995 1994
-------------------------------------
Benefits earned during the year $ 1,373 $ 905 $ 1,183
Interest cost on projected benefit obligation 3,523 3,304 3,161
Actual return on plan assets (6,784) (9,256) 1,218
Net amortization and deferral 2,904 6,029 (4,679)
Capitalized costs (34) (133) (74)
Rate-regulated adjustment (707) (311) (386)
-------------------------------------
Net pension cost $ 275 $ 538 $ 423
====================================
The rate-regulated adjustment set forth above is required in order to
reflect pension expense for PSW in accordance with the method used in
establishing water rates.
The assets and obligations of the plans are as follows:
December 31,
---------------------------------
1996 1995
---------------------------------
Accumulated benefit obligation:
Vested $ 38,991 $ 38,096
Non-vested 2,210 2,312
---------------------------------
Total $ 41,201 $ 40,408
=================================
Projected benefit obligation $ 51,321 $ 50,585
Plan assets at fair value, primarily equity and fixed
income commingled funds 51,249 46,698
---------------------------------
Plan assets less than projected benefit obligation 72 3,887
Unrecognized net gain (loss) from past experience
different from that assumed and effects of
changes in assumptions 3,522 (1,151)
Unrecognized prior service cost (1,378) (1,465)
Rate-regulated adjustment (1,095) (388)
Unrecognized net obligation (453) (541)
---------------------------------
Accrued pension costs included in other
current liabilities $ 668 $ 342
=================================
The accumulated and projected benefit obligations were calculated using
the projected unit credit method and reflect the following assumptions: discount
rates of 7.25% for 1996, 7% for 1995 and 8.5% for 1994; increase in future
compensation levels of 5.5% for all years presented; and long-term rate of
return on assets of 9% for all years presented.
In addition to providing pension benefits, PSW offers certain
Postretirement Benefits other than Pensions ("PBOPs") to employees retiring with
at least 15 years of service. These PBOPs include continuation of medical and
prescription drug benefits for all eligible retirees and a life insurance policy
for eligible union retirees.
22
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
The Company's costs for postretirement benefits other than pensions
includes the following components:
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Benefits earned during the year $ 296 $ 208 $ 359
Interest cost 872 994 1,077
Return on plan assets (173) (101) -
Net amortization and deferral 567 655 743
Amortization of regulatory asset 136 136 74
--------------------------------------
Gross PBOP cost 1,698 1,892 2,253
Capitalized costs (79) (94) (45)
Adjustment to recognize future rate recovery - - (760)
--------------------------------------
Net PBOP cost $ 1,619 $ 1,798 $ 1,448
======================================
The assets and liabilities of the plans for postretirement benefits
other than pensions are as follows:
December 31,
-----------------------------
1996 1995
-----------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees $ 6,246 $ 8,011
Fully eligible active employees 3,325 4,075
Other employees 3,045 2,699
-----------------------------
Total APBO 12,616 14,785
Fair value of plan assets 3,500 2,267
-----------------------------
APBO in excess of plan assets 9,116 12,518
Unrecognized net transition obligation (11,894) (12,638)
Unrecognized net gain 4,974 2,367
-----------------------------
Accrued PBOP cost included in other liabilities $ 2,196 $ 2,247
=============================
The APBO is calculated utilizing the following assumptions: discount
rate of 7.25%; medical inflation rates of 5% for those employees not eligible by
December 31, 1993, and 9%, reducing to 4.5% by 2002 for all others; a 9% return
on plan assets in 1996 and 1995, and, in 1994, no return on plan assets. The
effect of a 1% increase in the assumed medical inflation rates would be to
increase the APBO and the 1996 PBOP costs by $906 and $72, respectively. The
Company funds its gross PBOP cost through various trust accounts.
Water Rates
- -----------
PSW was permitted by the PUC to increase its base rates by 5.3% and
9.05% effective October 27, 1995 and June 17, 1994, respectively. These rate
increases were calculated to provide additional annual revenues of approximately
$6,150 and $9,050, respectively.
23
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
===============================================================================
In addition to its base rates, PSW has utilized a surcharge or credit
on its bills to reflect certain changes in Pennsylvania State taxes until such
time as the tax changes are incorporated into base rates. In October 1995, the
existing credit of 1.04% was eliminated with the adoption of new base rates. PSW
was required to initiate a revenue credit in 1994 in order to provide its
customers with the savings associated with Pennsylvania tax rate decreases. The
credit decreased revenues in 1995 and 1994 by $504 and $97, respectively.
In August 1996, the PUC approved PSW's request to add a "Distribution
System Improvement Charge" or "DSIC" to its water bills. The DSIC will enable
PSW to add a surcharge to customer bills beginning January 1, 1997 reflecting
the capital costs and depreciation related to certain distribution system
improvement projects completed and placed into service during the period
September 1 through November 30, 1996. PSW is permitted to request adjustments
to the DSIC quarterly to reflect subsequent capital expenditures and it is reset
to zero when new base rates that reflect the costs of those additions become
effective. The maximum DSIC that can be in effect at any time is 5%. The initial
charge effective January 1, 1997 is .5% (one half of one percent).
Discontinued Operations
- -----------------------
The Board of Directors had authorized the sale of substantially all of
the Company's non-regulated businesses and the last of these businesses was sold
in 1993. At the time the Board of Directors authorized the sale of these
businesses, the Company established reserves for: projected operating losses of
these businesses subsequent to their sale authorizations; estimated losses on
the sale transactions; and certain future costs, including administrative and
legal services related to the sales, contingent legal and lease obligations and
certain employee costs. These reserves were recorded on the balance sheet net of
related income tax benefits. During 1996 and 1995, $18 and $178 of payments
associated with discontinued operations were charged to the reserve and
contingent sale proceeds of $337 received in 1996 were credited to the reserve.
As a result of the continuing assessment of asserted and unasserted
legal claims related to these businesses, the passage of time, which reduced
certain lease contingencies, and the receipt of contingent sale proceeds, the
Company has determined that, the net reserves were in excess of estimates of
potential costs. In 1996 and 1995, the Company reversed $965 and $370 net of
related income taxes, of these reserves. At December 31, 1996 there remains a
balance in the reserve for discontinued operations of $1,003 which is included
in other accrued liabilities.
24
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts
===============================================================================
Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(in thousands of dollars, except per share amounts)
Total
First Second Third Fourth Year
-----------------------------------------------------------------------
1996
- ---------------------------------------------------------------------------------------------------------------------
Earned revenues $ 29,290 $ 30,683 $ 30,831 $ 31,699 $ 122,503
Operating expenses 13,070 12,614 11,757 14,174 51,615
Income, continuing operations 3,968 5,281 5,847 4,661 19,757
Income per share, continuing
operations 0.21 0.28 0.31 0.24 1.04
Income, discontinued operations - - 365 600 965
Income per share, discontinued
operations - - 0.02 0.03 0.05
Net income available to common
stock 3,968 5,281 6,212 5,261 20,722
Net income per common share 0.21 0.28 0.33 0.27 1.09
Dividend paid per common share 0.193 0.193 0.2025 0.2025 0.791
Price range of common stock
- high 15.42 16.75 17.25 19.88 19.88
- low 13.67 15.00 15.50 16.50 13.67
1995
- ---------------------------------------------------------------------------------------------------------------------
Earned revenues $ 25,712 $ 28,827 $ 32,355 $ 30,150 $ 117,044
Operating expenses 11,766 12,357 13,793 13,786 51,702
Income, continuing operations 3,315 4,659 5,732 4,324 18,030
Income per share, continuing
operations 0.19 0.26 0.32 0.23 1.00
Income, discontinued operations - - - 370 370
Income per share, discontinued
operations - - - 0.02 0.02
Net income available to common
stock 3,315 4,659 5,732 4,694 18,400
Net income per common share 0.19 0.26 0.32 0.25 1.02
Dividend paid per common share
0.186 0.186 0.193 0.193 0.758
Price range of common stock
- high 12.17 12.50 12.42 14.33 14.33
- low 11.59 11.75 11.75 12.00 11.59
All per share data as presented has been adjusted for the 1996 common
stock split effected in the form of a stock distribution. High and low prices of
the Company's common stock are as traded on the New York Stock Exchange.
25