SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K

Transcription

1 ~ SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1980 Commission file number PHILADELPHIA SUBURBAN CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) P.O. Box 26, Radnor, Pa. (Address of principal executive offices) Registrant's telephone number, including area code: (I.R.S. Employer Identification No.) (Zip Code) I Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $1 per share Securities registered pursuant to Section 12(g) of the Act: None Name of each exchange on which registered New York Stock Exchange, Inc. Philadelphia Stock Exchange, Inc. Indicate by check mark whether the registrant (1) has filed all reports, required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 2, $440,838,000 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 2, ,856,550 Documents incorporated by reference Notice of and Proxy Statement for Annual Meeting of Shareholders to be Held May 28, 1981

2 Item 1, Continued and gas wells and operates rental yards in Pearland and Corpus Christi, Texas, and in Woodward, Oklahoma. Evans manufactures equipment used in the construction of oil and gas pipelines. The industry served by the rather specialized products that Evans manufactures is relatively small and competition is limited to just a few companies. Evans believes that its market share has steadily improved since its inception in 1971 and attributes this not only to the quality of its products but to the degree of service which is provided and which is so important to customers operating in all parts of the world. Evans had approximately $476,000 in unfilled orders at the end of 1980 compared with $839,000 a year ago; all of these orders are expected to be shipped during HFT, which was formed in mid 1980 as a joint venture between the company and certain individuals with expertise in the business, rents "fishing tools" which are used to retrieve drill pipe or other equipment obstructing the drilling operation. Approximately 885 people are employed by the energy services companies. Fire Protection The Fire Protection group is composed of National Foam System, Inc. (National), a division of the company, and two subsidiaries, Hale Fire Pump Company (Hale) and Feecon Corp. (Feecon). In addition, the company is a minority (49%) shareholder of Pr oteccion Industrial de Liquidos Inflamables S. A. de C. v., manufacturers of fire protection equipment in Mexico. National manufactures an entire range of fire fighting foams which are widely used by petroleum, chemical, and other industries for control and extinguishment of fires involving flammable and combustible liquids. It also manufactures a complete line of devices used for the proportioning and dispensing of foam. In addition, National is engaged in the design and manufacture of fire trucks. Feecon manufactures a complete line of foam dispensing devices used principally in airp9rt crash trucks. Hale is a major producer of water pumps for fire apparatus. It also manufactures its own pump transmissions as well as accessory equipment. In addition to fire pumps, Hale manufactures a line of pumps for the irrigation, construction and transportation industries. The products of the Fire Protection group are marketed throughout the United States and most parts of the world. The group experiences competition in all product lines. While its sales comprise only a small percentage of the total fire protection business, it is one of the largest suppliers of foam chemicals, pumps, apparatus, and specialty mobile equipment. Price and quality are significant factors in the competitive nature of the business. Because of its diversified product lines and the many industrial and municipal markets it serves, the group is not dependent on any market segment. The group sells to petroleum companies, chemical and truck manufacturers, and municipalities. There is no customer that comprises more than 5% of total sales. The principal raw materials used by the business are iron, bronze, brass, sheet steel, steel bar stock and pipe, aluminum, copper piping, truck chassis and engines, and natural and synthetic chemicals and solvents. More than one source of supply is available for all materials, and raw materials shortages have not been a significant factor in meeting shipment commitments. At December 31, 1980, the group had approximately 610 employees. Unfilled orders were $14,693,000 at December 31, 1980 compared with $17,112,000 at the end of Shipment of 1980 unfilled orders is expected to take place in

3 ~ Item 1, Continued Specialty Services The specialty services business comprises companies which are engaged principally in construction related activities. In February 1981, the company announced that it had agreed in principle to sell three of its specialty services companies (Williard, Inc., Fire Control, Inc., and PSC Professional Services Group, Inc.). In a separate transaction, the company has agreed to sell certain assets and the business of Turnaround Maintenance, Inc. See Note 14 to the financial statements for more information regarding these transactions. l~illiard Inc. is a mechanical and electrical contractor operating principally in the Greater Philadelphia area; in addition, Williard performs air conditioning and heating service and maintenance. In the area in which Williard operates, there are several major competitors and a large number of smaller contractors with more limited capabilities. Work is usually obtained by bidding on a lump sum or cost plus basis to a general contractor. The maintenance and repair business usually operates on an annual contract basis, and several new servicing features have been designed to increase the business potential emphasizing the reduction of energy utilization by providing new techniques for adjusting and maintaining heating and air conditioning equipment. Employment at Williard depends on the level of work on hand; at year end 1980, about 450 people were employed. Of the $36,604,000 backlog at December 31, 1980, only $5,721,000 is not expected to be completed during 1981; backlog at the end of 1979 was $33,794,000. Oliver B. Cannon & Son, Inc. and Lundeen Coatings Corporation are painting contractors principally for industrial and utility companies. Their work includes the researching, testing and application of protective and decorative paints and coatings and quality control service for installed coating systems. These companies serve customers throughout the North American continent and, on specialized projects, in many foreign countries. Competition is characterized by a small number of large firms capable of undertaking significant construction projects, and a large number of small contractors having limited capabilities. Like Williard, the number of individuals employed by Cannon and Lundeen is subject to variation depending on the level of business activity. These two companies employed about 400 people at the end of Their combined backlog amounted to $14,008,000 at the end of 1980 compared with $18,169,000 a year ago; $3,400,000 of the 1980 backlog is not expected to be completed during Turnaround Maintenance, Inc. is engaged in refractory brick installation and the application of concrete and refractory materials and fiber glass linings. Customers include major refineries and chemical plants in the Gulf Coast area. At December 31, 1980 approximately 232 people were employed by Turnaround Maintenance; the number employed, like most of the other specialty services companies, varies depending on construction work on hand. Backlog at the end of the year was $3,114,000 and is expected to be completed in 1981; at the end of 1979 the backlog of this company was $1,135,000. Fire Control, Inc. designs, fabricates and installs sprinkler systems for large commercial and industrial properties throughout the Eastern United States. The sprinkler business is characterized by a large number of small concerns having modest means, and a few larger companies, some of which operate on a nation-wide basis. Only the larger companies, however, have the necessary equipment and resources to bid for large scale contracts. The company does not manufacture any of 3

4 Item 2. Properties The company believes that the facilities used in the operation of its various businesses are generally in excellent condition in terms of suitability, adequacy and utilization. The following table summarizes the principal physical properties of the company: No. of Lease Square Feet Location Bldgs. Description Expires Floor Area Energy Services Texas 7 Office and warehouse N/A 103,100 Texas 5 Office and warehouse ,787 Texas 3 Office and warehouse Month/month 36,900 Louisiana 9 Office and warehouse N/A 34,950 Mississippi 2 Office and warehouse N/A 6,560 Oklahoma 1 Office and warehouse N/A 7,500 Oklahoma 4 Office and warehouse ,222 Oklahoma 1 Office Month/month 1,156 Oklahoma 3 Office, manufacturing and warehouse N/A 43,320 Wyoming 4 Office and warehouse ,400 Canada 3 Office and warehouse Month/month 25,514 California 3 Office and warehouse ,000 Water Service Pennsylvania 8 Office and warehouse N/A 99,162 Pennsylvania 12 Pumping stations and treatment buildings N/A 124,748 Pennsylvania 17 Well stations N/A App. 600 ea. Pennsylvania 34 Booster stations N/A App. 1,100 ea. Fire Protection Pennsylvania 13 Manufacturing and office N/A 288,422 Pennsylvania 1 Manufacturing, warehouse and office ,300 Massachusetts 1 Manufacturing and office ,000 Specialty Services - Mechanical and Electrical Pennsylvania 1 Office, warehouse and plant N/A 70,240 Maryland 1 Office ,500 6

5 Item 2, Continued Location No. of Bldgs. Description Lease Expires Square Feet Floor Area Specialty Services - Coatings and Linings Pennsylvania 5 Office and warehouse Florida 1 Office and warehouse Texas 5 Office and warehouse California 4 Office and warehouse Utah 3 Office and warehouse N/A N/A N/A ,360 3,000 15,000 45,500 7,300 Specialty Services - Sprinkler Operations Pennsylvania 4 Manufacturing and office Pennsylvania 1 Office Virginia 1 Office and warehouse N/A 1985 N/A 32,200 3,240 26,000 Specialty Services - Professional Pennsylvania 2 Office and laboratory New Jersey 1 Office and laboratory Minnesota 1 Office and warehouse N/A property is owned by a subsidiary of N/A 6,000 Month/month 3, ,664 the company or the company. In addition, the water company also owns thirty-six standpipes, four impounding reservoirs and one vertical reservoir. It also owns approximately 2,430 miles of transmission and distribution mains, 214,043 active metered services and 8,728 fire hydrants. The sprinkler operations also lease ten sales offices in eight states comprising approximately 13,262 square feet of floor space. In addition, fourteen offices and warehouses comprising 59,787 square feet are rented in twelve states. The various leases expire from 1981 to The professional operations also lease nine sales offices in nine states comprising approximately 16,237 square feet of floor space. The various leases expire from 1981 to The company leases 13,450 square feet of office space in Radnor, Pennsylvania where it has its headquarters. The lease expires in 1987 and provides an option to lease the facilities for an additional ten years. Item 3. Legal Proceedings None. 7

6 Item 4. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners Beneficial owner Sole voting and sole investment power Shared voting and/or shared investment power Total and percent of class outstanding T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland ,500 48, ,000(6.1%) (b) Security ownership of management Name of individual James M. Ballengee Philip T. Bee Jack Farber Paul F. Miller, Jr. Robert L. Parker, Sr. Alan M. Rauch John R. Selby All directors and officers of the Company as a group (17 persons) 57,775 61,294 1,400 3,434 33,434 16, , ,080 1,000 8,122 58,017 (0.66%) 61,294(0.70%) 6,480 4,434 33,434 16, ,108(2.4%) (c) Changes in control None. Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The common stock of the registrant is traded on the New York Stock Exchange. The approximate number of holders of common stock was 6,494 on March 2, Certain loan agreements contain restrictions as to the payment in cash or property of dividends in common stock. As of December 31, 1980 approximately $87,800 of retained earnings were free of such restrictions. Dividends paid per share of common stock by quarter for 1980 and 1979: st Quarter $.275 $.240 2nd Quarter rd Quarter th Quarter $ $

7 Item 5, Continued 1979: Item 6. High and low closing prices of common stock by quarter for 1980 and High Low High Low 1st Quarter $4T778 $2_9_ $25 5/8 $213/4 2nd Quarter 37 3/8 30 1/ /4 3rd Quarter 52 1/ /4 26 1/2 4th Quarter 60 1/ /8 25 3/8 Selected Financial Data The information required by this section is contained in note 11 of the 1980 financial statements. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL INFORMATION Philadelphia Suburban Corporation is comprised of two groups. The water group includes a regulated public utility, a land holding company and a data processing service organization. The Enterra group (previously refered to as "commercial and industrial service") operates in three segments - energy services (the principal component of PSC's business), fire protection and specialty services. PSC has announced its plan to formally transfer the commercial and industrial operations to its subsidiary, Enterra Corporation and, effective July 1, 1981, to distribute Enterra shares to the stockholders of PSC. The businesses of the operating segments are discussed in this annual report on pages 1 through 5; segment information is shown in note 12 on pages 43 and 44; information on the effect of changing prices begins on page 47. Reference to this information will be useful to a complete understanding of this review of operations. RESULTS OF OPERATIONS WATER GROUP Sales and revenues - amount (000) $ - % of consolidated total Income before taxes - amount (000) $ - % of consolidated total (before parent charges) Operating statistics Sales and revenues Costs and expenses Operating expenses Depreciation and amortization Interest and debt expense Income before taxes Effective tax rates Year ended December 31, ,562 32,869 36,284 37,139 41, % 14.6% 14.0% 12.6% 12.1% 11,542 10, ,973 11,133 11, % 25.6% 24.3% 21.9% 15.9% 100.0% 100.0% 100.0% 100.0% 100.0% % 31.0% 32.9% 30.0% 26.9% 40.9% 40.5% 42.2% 42.6% 38.1% 9

8 Item 7, Continued Growth in revenues of the water group in the years was 6.6% compounded annually and resulted largely from rate relief. The number of customers increased approximately 1/2% per year during this period. Total consumption of water did not increase materially during the period due to above average rainfalls in summer months. In 1980, however, a higher consumption was experienced due to a hot dry summer in the area served. A deficiency in precipitation in the Delaware River Basin in the fall and winter has lead to the imposition of mandatory conservation measures, which, if continued, could adversely impact the results of the water group for Operating costs for this group have increased at a compound rate of 12.3% during the same period. The largest dollar increase (after payroll and related costs) was incurred in electricity expense which is not allowed to be automatically reflected in higher rates. The effects of inflation were compounded by the failure of the Pennsylvania Public Utility Commission (PUC), to grant adequate and timely rate relief. Return on equity has decreased during this period while costs to acquire capital have increased. Water group depreciation is computed principally on the 4% compound interest method and the assets are long lived. Because of these two factors, annual depreciation has been a relatively minor expense throughout this period despite the large fixed investment involved. Interest expense has risen gradually during the period due to increased borrowings necessary for normal plant additions and improvements which included major expenditures for improved water storage facilities and increased transmission capacity. The weighted average interest rate of First Morgage Bonds is 6.44%. This aggregate rate has been fairly constant throughout this period. Effective tax rates are lower than statutory provisions. The PUC requires that no deferred taxes be provided for certain items, including the difference between 4% compound interest method of depreciation used for financial purposes and straight line depreciation and the difference between accrued and billed revenues. These tax savings are therefore passed on to the current water users through reduced rates. ENTERRA GROUP Energy Services Year ended December 31, Sales and revenues - amount (000) $ 38,995 57,438 83,127 98, ,024 - % of consolidated total 18.8% 25.4% 32.1% 33.2% 39.4% Income before taxes - amount (000) $ 14,736 23,398 32,825 36,472 50,007 - % of consolidated total (before parent charges) 43.5% 58.8% 66.5% 71.6% 72.2% 10

9 Item 7, Continued Year ended December 31, Operating statistics Sales and revenues 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses Cost of sales and revenues Selling, general and administrative expenses Depreciation and amortization Interest and debt expense Income before taxes 37.8% 40.7% 39.5% 37.2% 37.6% Revenues and earnings have increased dramatically over the last five years. This is due to increased demand for the type of specialized equipment that this group rents. The company has met this demand by accelerating its expenditure program and improving the quantity and quality of its equipment. At the same time it has also established or acquired new locations to service the geographic regions where its equipment is most needed. Because of demand (coupled with inflation), the company has been able to increase the pricing for its goods, although it believes that in the aggregate, the cost of goods acquired has increased more rapidly than rental rates charged. Aside from personnel and service capability, the expansion of locations and the availability of equipment are the most significant factors in this segment's growth, and are summarized below: Number of rental locations at end of year Minimum Projected (1) Oil Field Rental 'Service Company Key Oilfield Supply & Rentals Ltd. Whiting Oil Rental, Inc. Houston Fishing Tools Company (2) Cost of rental equipment in service at end of year (in millions) $ (1) Represents the company's estimate of the minimum number of rental locations I to be in operation at the end of (2) Includes two yards acquired at the end of 1980 in a purchase transaction which contributed no rental revenue during

10 Item 7, Continued Energy services now represents approximately 72% of total PSC operating group earnings before taxes. It represents 86% of the Enterra group. The expansion of business during 1980 has absorbed the slack in demand for rental goods that existed at the end of 1979 and early The current all time high level of drilling activity is expected to further increase. Although there are no major commitments, it is anticipated that increased capital expenditures will occur in 1981 to meet customer demands. Increases in annual depreciation naturally follow the increased capital additions during the last five years and provide an important source of funds for this business. Direct costs are relatively fixed in nature and do not necessarily fluctuate in proportion to revenues. Other costs and expenses have remained comparable to revenue growth. Overall, pre-tax margins have remained fairly constant during the five year period. While no business is immune to the effects of inflation, reference to the operating results adjusted for inflation on page 47 provides insight into the ability of this business to suffer less than many others from price inflation. Fire Protection Year ended December 31, Sales and revenues - amount (000) $ 27 '077 28,286 30,252 38,430 46,039 - % of consolidated total 13.0% 12.5% 11.7% 13.0% 13.6% Income before taxes - amount (000) $ 3,740 3,631 3,592 5,762 5,983 - % of consolidated total (before parent charges) 11.0% 9.1% 7.3% 11.3% 8.6% Operating statistics Sales and revenues 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses Cost of sales and revenues Selling, general and administrative expenses Depreciation and amortization Interest and debt expense Income before taxes 13.8% 12.8% 11.9% 15.0% 13.0% --- The period 1976 to 1978 was one of little growth for Enterra's fire protection business. In fact, unit volume decreased. In 1979 and 1980, however, sales increased 27% and 20%, respectively and profits improved. The sales increase was attributable primarily to increased international equipment and chemical volumes. Pre-tax margins improved somewhat in 1979 due to a larger percentage of sales of higher margin chemical products. Overall, as the value of petroleum products has increased, demand for fire protection products has increased~ This relationship is expected to continue. Backlog at December 31, 1980 was $14.7 million compared with $17.1 million at the end of the prior year. 12

11 Item 7, Continued Specialty Services Year ended December 31, 'J Sales and revenues - amount (000) $ 110, , , , ,868 % of consolidated total 53.0% 47.5% 42.2% 41.0% 34.9% Income before taxes - amount (000) $ 3,858 2, I (2,441) 2,311 % of consolidated total (before parent charges) 11.4% 6.5% 1. 9% (4.8)% 3.3% Operating statistics Sales and revenues 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses Cost of sales and revenues Selling, general and administrative expenses Depreciation and amortization Interest and debt expense Income before taxes 3.5% 2.4%.9% (2.0)% 2.0% 1/ The trend in specialty services through 1979 has been one of relatively flat revenues with decreasing pre-tax earnings. This poor performance was primarily attributable to three unprofitable companies whose operations were discontinued in Pre-tax losses of the discontinued companies (including goodwill write-off) amounted to $6.4 million in 1979 on revenues of $19 million. The 1980 results reflect a full year without these companies and show improved earnings for the group as a whole. However, earnings of the continuing companies in specialty services declined in 1980 from their 1979 levels. This was due principally to poor performance in a joint venture affecting one subsidiary which offset good results in the other companies in Bookings of continuing companies were $111 million in 1980 which is up from the $103 million booked in Backlogs at the end of 1980 were $70.6 million which is about the same as the prior year. Income Taxes The effective Federal and state income tax rates of the Enterra companies during the period are as follows: % % % % % These rates are lower than the statutory rates principally due to the use of the flow through method of accounting for investment tax credits on capital additions. 13

12 Item 7, Continued Cash Flow, Capital Expenditures and Financing An analysis of the n~t operating cash flow (defined as net income, depreciation and other non-cash operating items less dividends) and capital expenditures for the five years ended December 31, 1980 follows: (in thousands of dollars) Water group Enterra group Net operating Capital Cash flow Net operating Capital Cash flow cash flow expenditures deficit cash flow expenditures deficit 1976 $ 3, 985 5,336 1,351 16,394 18,217 1, ,228 5,092 1,864 22,137 35,619 13, ,335 5,728 1,393 33,058 44,018 10, ,553 7,547 2,994 39,770 41,529 1, ,588 6,938 2,350 48,107 43,215 (4,892) $ 20,689 30,641 9, , ,598 23,132 The water group has generally financed its cash flow deficits through the issuance of First Mortgage Bonds. In 1980, $8 million of these bonds were issued at 8 7/8%. Although $30.6 million of capital additions were made during the last five years, the water group's long term debt to equity ratio has improved from 58:42 at December 31, 1975 to 57:43 at December 31, The Enterra group has invested $183 million for capital additions during this period of which approximately $140 million (77%) was for rental equipment. Cash requirements have been satisfied by approximately $33 million of long term financing (made from 1976 through 1978) at rates ranging from 9% to 9 3/4%. Funds are also borrowed as needed through use of a $20 million revolving credit line at the prime rate; $4 million was borrowed under this line at December 31, Principally through earnings retention, equity in the Enterra group has increased $86.3 million and long term debt (including redeemable preferred stock) has increased $9.2 million in the last five years. Long term debt to equity ratios have improved as a result thereof to 28:72 from 57:43- at the beginning of Financing Costs Financing for the Enterra group is arranged principally by the parent. Funds required by subsidiary companies are borrowed at the prime rate of interest. During 1980, interest costs related to loans fluctuating with market conditons were only 31% of the interest expense for the Enterra group for the year. At year end 11% of long term borrowings are subject to money market rates. Enterra's fixed charge coverage is 11 times. The company believes that Enterra has considerable ability to attract additional funds as corporate opportunities become available. 14

13 Item 7, Continued Dividends Recent dividend history for the company is as follows: Cash dividend per common share Water Enterra Consoligroup group dated Primary earnings per share Pay out ratio Water Enterra Consoli- Water Enterra Consoligroup group dated group group dated 1976 $ % 14% 36% Water group dividends to the parent have averaged approximately 75% of its earnings throughout this period. This amount, together with increasing amounts of dividends from the Enterra group has allowed PSC to improve its annual cash dividend and at the same time reduce the overall percentage of profits paid out. It has been demonstrated for the past five years that the water group can continue a level of dividend payment in the 70-80% range, make normal improvement to its utility plant and continue to maintain a satisfactory capitalization. The Enterra group, with a lower pay out ratio, has reinvested its equity capital and relied on borrowings to only a small extent in funding its aggressive growth over this period. Item 8. Financial Statements and Supplementary Data Attached hereto and filed as part of this report are the financial statements and supplementary data listed on the Index to Financial Statements, Supplementary Information, Schedules and Exhibits. Item 9. Item 10. Directors and executive officers of the registrant Management remuneration and transactions The information called for in items 9 and 10 is hereby incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A. Item 11. Exhibits, Financial Statement Schedules and Reports on Form 8-K Attached hereto,and filed as part of this report are the exhibits and financial statement schedules listed on the Index to Financial Statements, Supplementary Information, Schedules and Exhibits. No report on Form 8-K was filed during the quarter ended December 31,

14 SIGNATURES Pursuant to the requirements of Section 13 or ls(d} of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Corporation Date March 30, 1981 James M. Ballengee President and Chai Pursuant to the requiremen the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date March 30, 1981 By Date March 30, 1981 By Treasurer (Chief Accounting Officer) Date March 30, 1981 By ;; Philip T. Bee <=== Director Date March 30, 1981 By Date March 30, 1981 B y Q../ Gr'afi"am Berwi'net" Director ~M_ Arthur ~. Director Cannon 16

15 Date March 30, 1981 By Date March 30, 1981 By Date March 30, 1981 By Date March 30, 1981 By Director Date March 30, 1981 By 17

16 PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS ACCOUNTANTS' REPORT The Stockholders and Board of Directors Philadelphia Suburban Corporation: We have examined the financial statements and related schedules of Philadelphia Suburban Corporation and of Philadelphia Suburban Corporation and subsidiaries as listed in the accompanying index. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the aforementioned financial statements present fairly the financial position of Philadelphia Suburban Corporation at December 31, 1980 and 1979, the results of its operations and the changes in its financial position for each of the years in the three-year period ended December 31, 1980, and the financial position of Philadelphia Suburban Corporation and subsidiaries at December 31, 1980 and 1979, the results of their operations and the changes in their financial position for each of the years in the three-year period ended December 31, 1980, all in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules, in our opinion, present fairly the information set forth therein. PEAT, MARWICK, MITCHELL & CO. Philadelphia, Pennsylvania February 12,

17 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Index to Financial Statements, Supplementary Information, Schedules and Exhibits Financial statements - company only Balance sheets, December 31, 1980 and 1979 Statements of income, years ended December 31, 1980, 1979 and 1978 Statements of changes in financial position, years ended December 31, 1980, 1979 and 1978 Note to company only financial statements Financial statements - consolidated Balance sheets, December 31, 1980 and 1979 Statements of income, years ended December 31, 1980, 1979 and 1978 Statements of changes in financial position, years ended December 31, 1980, 1979 and 1978 Notes to financial statements Supplementary information on effects of changing prices (Unaudited) Schedules submitted, years ended December 31, 1980, 1979 and 1978 III - Investments in securities of subsidiaries IV - Indebtedness of related parties - non-current V - Property, plant and equipment VI - Accumulated depreciation and amortization of property, plant and equipment VIII - Valuation and qualifying accounts IX - Short-term borrowings X - Supplementary income statement information Exhibits submitted I - Subsidiaries and Divisions of the Company (Unaudited) II - Computation of net income per share, years ended December 31, 1980, 1979 and

18 PHILADELPHIA SUBURBAN CORPORATION Balance Sheets December 31, 1980 and 1979 (In thousands of dollars) Current assets Cash Accounts receivable, net of allowances (Schedule VIII) Inventories, materials and supplies Prepayments and other current assets Total current assets $ 113 8, 994 4, ,673 $ 166 5,214 4, ,373 Property, plant and equipment at cost Less accumulated depreciation and amortization 4,123 2,135 4,550 2,019 Net property, plant and equipment 1,988 2,531 Investments in and advances to subsidiaries, at equity Investments (Schedule III) Advances (Schedule IV) Deferred charges and other assets 208,454 3, , $ 228, , ' , $ 204,046 Current liabilities Current portion of long term debt Current maturities of redeemable preferred stock Loans payable Advances from wholly owned subsidiaries Accounts payable Federal and state income taxes Accrued interest Other accrued liabilities Total current liabilities $ 528 $ 775 3,000 2,467 (1,210) 714 5, ' ,000 1,500 2,589 1, ,590 11,645 Deferred income taxes Long term debt, excluding current portion Redeemable preferred stock Common stock and other stockholders' equity ,179 6, ,961 $ 228 ' '709 6, ,545 $ 204,046 See accompanying note to company only financial statements. 20

19 PHILADELPHIA SUBURBAN CORPORATION Statements of Income Years Ended December 31, 1980, 1979 and 1978 (In thousands of dollars, except per share amounts) Sales and revenues $ 26,302 $ 21,415 $ 15,786 Costs and expenses Cost of sales and revenues Selling, general and administrative expenses Depreciation and amortization Interest (income) expense net of amounts charged to subsidiaries ($4,143 in 1980, $5,185 in 1979 and $3,632 in 1978) 18,826 10, (21) 30,023 13,592 5, (930) 18,840 10,240 6, ,860 Income (loss) before provision for income taxes and net income of subsidiaries Provision for income taxes (3,721) (1,178) 2,575 1,073 (1,074) ( 581) Income (loss) before net income of subsidiaries Net income of subsidiaries, less amortization of goodwill ($136 in 1980, $2,513 in 1979 and $1,140 in 1978) (Schedule III) (2,543) 38,531 1,502 26,234 ( 493) 27,583 Net income $ 35,988 $ 27,736 $ 27,090 Average common and common equivalent shares outstanding during the period For primary net income per share 8,792,000 Assuming full dilution 8,868,000 Net income per share Primary $ 4.05 Assuming full dilution $ ,650,000 8,836,000 $ 3.16 $ ,446,000 8,753,000 $ 3.16 $ 3.07 See accompanying note to company only financial statements. 21

20 PHILADELPHIA SUBURBAN CORPORATION Statements of Changes in Financial Position Years Ended December 31, 1980, 1979 and 1978 (In thousands of dollars) Source of funds Net income Charges (credits) not requiring current funds Depreciation and amortization Net income of subsidiaries, net of dividends received (Schedule III) Other, principally deferred taxes Funds available from operations Proceeds from long term borrowings Conversion of subordinated notes Investments in and advances to subsidiaries Other, net Decrease in working capital Application of funds Additions to property, plant and equipment Investments in and advances to subsidiaries Decrease in long term debt Dividends Other, net Increase in working capital $ 35,988 $ 27 '736 $ 27, (26,976) 253 9, ,861 1,387 $ 16, (16 '938) ,325 2,500 8, ( 18' 337) 73 9,049 15, $ 23,425 $ 24,312 $ 701 $ 668 $ ,701 1,530 10, ,908 12,200 9,138 1,419 3,438 $ 16,607 $ 23, $ 24,312 Changes in working capital Increase (decrease) in current assets Cash Receivables Inventories Other current assets $ (53) $ 3,780 (393) (34) 3, $ 1,194 2,301 (32) 3,485 (400) 1,284 8 (36) 856 Increase (decrease) in current liabilities Current portion of long term debt Loans payable Accounts payable and advances Federal and state income taxes Other current liabilities 427 2,000 (1,622) (2' 438) 1,495 ( 138) 3 1,426 1,171 1,678 4, (2,016) (58) 2, Increase (decrease) in working capital $ 3, 438 $ ( 793) $ ==14=0 See accompanying note to company only financial statements. 22

21 PHILADELPHIA SUBURBAN CORPORATION Note to Company Only Financial Statements (In thousands of dollars) Note 1 -Company amounts, included in Notes 3 through 6 of the accompanying financial statements of Philadelphia Suburban Corporation and subsidiaries are summarized below: Provision for income taxes is composed of the following: Year Ended December 31, Current: Federal $ (224) $ 709 $ (115) State ( 82) (306) 815 (93) Deferred: Federal (793) 159 (396) State (79) 99 ( 92) (872) 258 ( 488) $(1,178) $ 1,073 $ (581) Total Federal tax expense amounted to $(1,017), $ 868 and $ (511) in 1980, 1979 and 1978, respectively, whereas the amounts which would be computed by applying the u. S. Federal income tax rate of 46% (48% in 1978) to income before Federal tax are $ (1,638), $1,090 and $ (482) for the respective years. These differences result primarily from the company's method of not allocating certain portions of the consolidated Federal income tax expense to its subsidiaries. Accounts receivable, net of allowances comprise: December 31, Fire Protection, net of allowances for doubtful accounts of $310 in 1980 and $266 in Amounts due from affiliates $ 4,787 $ 3,404 4,207 1,810 $ 8,994 $ 5,214 Property, plant and equipment comprise: December 31, Land Buildings and improvements Machinery and equipment Furniture and fixtures Accumulated depreciation and amortization $ $ 96 $ 160 1,932 2,406 1,419 1, ,123 4,550 2,135 2,019 1,988 $ 2,531 23

22 Note 1 - Continued Long term debt is summarized as follows: December 31, Note payable to banks under revolving credit and term loan agreement, with interest at prime (21-1/2% at December 31, 1980) 9 3/4% convertible subordinated notes, due /2% senior promissory notes, due % senior promissory notes, due 1998 Other long term debt, principally mortgage indebtedness at rates ranging from 5% to 8 1/2% Current portion of long term debt Long term debt, excluding current portion $ 4,000 $ 4,250 10,000 15,000 4,000 5,000 10,000 15, ,707 34, ~-- $ 33,179 $ 34,709 24

23 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands of dollars) December 31, 1980 December 31, 1979 Water Enterra Water Enterra Group Group Consolidated Group Group Consolidated Current assets Cash $ 206 Accounts receivable and unbilled $ 3,712 $ 3,918 $ 359 $ 1,529 $ 1,888 revenues, net of allowances 9, '305 81,650 8,473 63,960 72,433 Inventories, materials and supplies 1, ,522 1,245 15, Costs and estimated earnings in excess of billings on uncompleted contracts - 4,655 4,655-4,807 4,807 Prepayments and other current assets 171 1,725 1, ,192 ~352 Total current assets 10,957 97, ,641 10,237 90, ,973 N VI Property, plant and equipment at cost 180, , , , , ,175 Less accumulated depreciation and amortization 15,813 64,733 80,546 14,518 45,276 ~794 Net property, plant and equipment 164, , , , , 381 Goodwill - 5,910 5,910-4,535 4,535 Deferred charges and other assets 5,990 1,695 ~85 2, ,495 $ 181,191 $ 243,279 $ 424,470 $ 172,083 $ 212,301 $ 384,384 See accompanying notes to financial statements.

24 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands of dollars) December 31, 1980 December 31, 1979 Water En terra Water En terra Group Group Consolidated Group Group Consolidated Current liabilities Current portion of long term debt $ 719 $ 1,349 $ 2,068 $ 715 $ 1,696 $ 2,411 Current maturities of redeemable preferred stock Loans payable 1,900 3,000 4,900 4,200 1,000 5,200 Accounts payable 1,566 17,119 18,685 1,656 18,059 19,715 Federal and state income taxes ,598 25; ,562 18,111 Accrued interest 1, ,035 1,243 1,013 2,256 Billings in excess of costs and estimated earnings on uncompleted contracts - 5,384 5,384-4,708 4,708 Other accrued liabilities 1,500 19,304 20,804 1,251 12,382 13,633 Total current liabilities 7,519 72,275 79,794 9,614 57,195 66,809 N 0'1 Deferred cfedits Customer advances for construction 10,945-10,945 10,299-10,299 Contributions in aid of construction 6,799-6,799 6,523-6,523 Other, principally deferred income taxes 5,982_ 16,683 22,672 5,091 12,661 17,752 Total deferred credits 23,733 16,683 40,416 21,913 12,661 34,574 Long term debt, excluding current portion 84,842 36, ,099 77,311 48, ,481 Redeemable preferred stock, net of current maturities - 6,200 6,200-6,975 6,975 Common stock and other stockholders' equity 65, , ,961 63, ,545 $ 181,191 $ 243,279 $ 424,470 $ 172,083 $ 212,301 $ 384,384 See accompanying notes to financial statements.

25 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (In thousands of dollars, except per share amounts) Year Ended December 31, 1980 Year Ended December 31! 1979 Year Ended December 31, 1978 Water Group Enterra Group Water Enterra Consolidated Group Group Consolidated Water Enterra Group Group Canso 11 dated Sales and revenues $ 41,029 $ 296,933 $ 337,962 $ 37,139 $ 258,470 $ 295,609 $ 36,284 $ 222,670 $ 258,954 Costs and expenses Cost of sales and revenues Selling, general and administrative expenses Water group operating expenses Depreciation and amortization Interest and debt expense ,370 1,800 5, , , ,220 4, , , ,650 52,568-43,560 43,560 22,370 18,970-18,970 23,020 1, J ,390 10,418 5,328 5,841 11, , ,021-36,777 36,777 17,443-17,443 1,586 11,730 13,316 5,282 4,589 9, R 71 30, , ,136 26, , ,739 24, , ,428 N... Income before provision for income taxes Provision for income taxes 11,023 4,200 51,803 22,638 62,826 11,133 37,737 48,870 26,838 4,739 16' ,134 11,973 33,553 45,526 5, ,436 Net income $ 6,823 $ 29,165 $ 35!988 $ 6,394 $ 21,342 $ $ 6,925 $ 20,16 5 $ 27,090 Average common and common equivalent shares outstanding. during the period For primary net incom~ per share 8,792,000 8,650,000 8,446,000 Assuming full dilution 8,868,000 8,836,000 8, 7 53,000 Net income per share Primary $ 4.05 $3.16 $3.16 Assuming full dilution $ 4.02 $3.11 $3.07 See accompanying notes to financial statements.

26 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Financial Position (In thousands of dollars) Source of funds Net income Charges not requiring current funds Depreciation and amortization Other, principally deferred income taxes Funds available from operations Proceeds from long term borrowings Conversion of subordinated notes Net change in customers' advances for, and contributions in aid of, construction Other, net Application of funds Additions to property, plant and equipment Decrease in long term debt Dividends Non-current assets (net) of company acquired in a purchase transaction, principally property, plant and equipment Other, net Increase (decrease) in working capital Years Ended December 31, $ 35,988 $ 27,736 $ 27,090 23,020 4,625 63,633 8, ,488 50,153 13,260 10,938 18,390 7,335 53,461 9,312 2,500 1,4 70 5,577 72,320 49,076 15,994 9,138 4, ,805 74,208 $ (5,317) $ (1,888) $ 13,316 4,895 45,301 17,589 1,898 2,684 67,472 49,746 1,216 7,908 60,870 6,602 Changes in working capital Increase (decrease) in current assets Cash Receivables Inventories Costs in excess of billings Other current assets $ 2,030 9, (152) (3,456) 7,668 $ (2,290) $ 9,892 1,232 (454) 3,966 12,346 (987) 12,133 1,569 1, ,056 Increase (decrease) in current liabilities Current portion of long term debt Loans payable Accounts payable Federal and state income taxes Billings in excess of costs Other current liabilities (343) (300) (1,030) 7, ,950 12,985 (436) 1,600 2,341 6, ,547 14,234 (1,981) 2,744 1,733 2,240 (7 86) 4,504 8,454 (\ Increase (decrease) in working capital $ (5,317) $ (1,888) $ 6,602 See accompanying notes to financial statements. 28

27 PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES Notes to Financial Statements (In thousands of dollars, except per share amounts) (1) Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of the company and all of its majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The financial statements have been prepared to conform with the expected future structure of the company as more fully discussed in note 2. Recognition of Revenues Water related utility revenues include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the latest meter reading to the end of the accounting period. Revenues for tax reporting purposes include only amounts billed to customers. Income on Construction Contracts Income on long term contracts is generally reported on the percentage of completion basis. As these long term contracts extend over one or more years, revisions in cost and profit estimates are reflected in the accounting period in which the facts which require the revision become known. Income on short term contracts is recorded on the substantial completion of each contract. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss on both short term and long term contracts is accrued. Depreciation, Amortization, Maintenance and Repairs Water Group The 4% compound interest method is used to compute depreciation on utility plant; this is an increasing charge method which is intended to provide a fixed rate of return on utility plant. The straight line method is used with respect to transportation and mechanical equipment. 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 Pennsylvania Public Utility Commission. Costs of new units of property and betterments are capitalized. When units of property are replaced, retired or abandoned, the recorded value thereof is credited to the asset account and such value, together with cost of removal less salvage, is charged to accumulated depreciation. 29

28 (1), Continued Organization expense, franchises and water rights are carried at original cost and are not amortized. Deferred debt expense is amortized by the straight line method over the life of the related debt issue. Enterra Group Depreciation on property, plant and equipment is generally computed by the straight line method. Expenditures for maintenance and repairs are charged to costs and expenses. Costs of significant improvements are capitalized. Deferred debt expense is amortized by the straight line method over the life of the related debt issue. Goodwill is being amortized on a straight line basis over its estimated life, but not in excess of forty years. Income Taxes Water Group - The company accounts for certain income and expense items in different time periods for financial reporting purposes than for income tax purposes. Deferred income taxes with respect to this practice are provided to the extent permitted by regulatory authorities in determining rates for water service. Investment tax credits resulting from utility plant additions are deferred and amortized to income over the estimated service lives of the related property to the extent permitted by regulatory authorities. Enterra Group - The energy services subsidiaries report for income tax purposes principally on the cash basis of accounting. For financial statement purposes, these companies report such income on the accrual basis. The specialty services subsidiaries report for income tax purposes principally on the completed contract basis of accounting for long term construction contracts. For financial statement purposes, these companies report such income principally on the percentage of completion method. Deferred taxes, which are generally included in current liabilities, are provided for these differences. Deferred taxes provided on all other material timing differences, principally depreciation, are included in long term deferred credits. Investment tax credits are taken directly into income as a reduction of the provision for current income taxes. Customer Advances for Construction Advances are received from customers for construction of utility plant and are refundable as operating revenues are earned at the completion of construction. After all refunds to which the customer is entitled are made, any remaining baiance is transferred to contributions in aid of construction. 30