WTRG

Business Context and Reporting Period

Company: Philadelphia Suburban Corporation (PSC), a holding company for regulated water and wastewater utilities serving approximately 2 million people across Pennsylvania, Ohio, Illinois, New Jersey, Maine, and North Carolina.

Reporting Period: Quarterly report (Form 10-Q) for the three months ended March 31, 2003.

Key Operational Context: PSC is the largest U.S.-based investor-owned water utility by customer count. The company is currently pursuing the acquisition of four operating subsidiaries of AquaSource, Inc., with a target purchase price of approximately $205 million, subject to regulatory approvals expected in mid-2003.

Key Financial Metrics

Note: All figures in thousands of dollars unless otherwise specified.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $8,820 (12.3%) driven by rate increases in Pennsylvania, New Jersey, and Ohio, higher water consumption, and acquisitions. This was partially offset by the sale of a water system in 2002.
• Expense Increases: Operations and maintenance expenses rose $3,379 (12.4%) due to higher postretirement benefits (pension costs), acquisition-related costs, and increased maintenance from harsh winter weather causing main breaks.
• Depreciation: Increased $1,454 (14.7%) reflecting new utility plant placed in service and assets from acquisitions.
• Interest Expense: Rose $832 (8.5%) due to additional borrowings for capital projects and acquisitions, partially offset by lower interest rates on some borrowings.
• Net Income: Increased $1,449 (12.2%) to $13,324 available to common stock. Diluted EPS increased $0.02 (11.8%) aided by a 1.0% decrease in average shares outstanding due to share repurchases.

Outlook, Risks, and Management Commentary

• Acquisition Status: The AquaSource acquisition is pending regulatory approval, expected mid-2003. Funding will likely involve a mix of short-term debt, long-term debt, and equity issuance.
• Liquidity: Management believes internally generated funds, existing credit facilities ($180 million total, with $42.77 million available), and potential debt/equity issuances are adequate to meet financing needs.
• Capital Expenditures: Q1 2003 capital expenditures were $24,001, focused on treatment plant improvements, new mains, and rehabilitation of existing infrastructure.
• Rate Adjustments: Seven rate adjustments were granted in Q1 2003, expected to increase annual revenues by approximately $5,600.
• Accounting Pronouncements: Adoption of SFAS No. 143 (Asset Retirement Obligations), SFAS No. 145, SFAS No. 146, and FASB Interpretation No. 45 in Q1 2003 did not have a material impact on financial position or results.
• Risks: Forward-looking statements are subject to uncertainties including regulatory approvals, abnormal weather, changes in capital requirements, and market conditions affecting the funding of the AquaSource acquisition.

Investor Verification Checklist

• AquaSource Acquisition: Verify the status of regulatory approvals and the final purchase price adjustments for the $205 million target deal.
• Rate Case Outcomes: Confirm the full annual impact of the seven rate adjustments granted in Q1 2003.
• Weather Impact: Assess the extent of infrastructure damage from the "harsh winter weather" cited as a driver for increased maintenance expenses.
• Debt Structure: Review the specific terms of the short-term credit facilities and the planned mix of debt vs. equity for funding the AquaSource acquisition.
• Share Count: Monitor the net effect of share repurchases versus issuances (dividend reinvestment, employee plans, acquisition consideration) on future EPS dilution.