Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2002, for Philadelphia Suburban Corporation (PSC), a holding company for regulated utilities providing water and wastewater services to approximately 2 million people across Pennsylvania, Ohio, Illinois, New Jersey, Maine, and North Carolina. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Operating Revenues | $71,669 | $70,193 |
| Operating Income | $28,637 | $28,944 |
| Net Income | $11,890 | $13,112 |
| Net Income Available to Common Stock | $11,875 | $13,085 |
| Diluted EPS | $0.17 | $0.19 |
| Operating Cash Flow | $19,488 | $8,973 |
| Capital Expenditures | $24,955 | $19,809 |
| Total Debt (Long-term + Current) | $534,973 | $531,455 |
| Cash and Cash Equivalents | $4,586 | $2,539 |
Note: All figures in thousands of dollars except per share amounts.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 2.1% ($1,476) driven by the Distribution System Improvement Charge (DSIC) in Pennsylvania ($1,333), acquisitions, and rate increases. This was partially offset by reduced water consumption due to drought conditions.
- Profitability Decline: Net income decreased 9.2% ($1,210). The primary driver was the absence of a $2,791 gain on the sale of land recorded in Q1 2001, which was replaced by a smaller $349 gain on the sale of marketable securities in Q1 2002.
- Expense Increases: Operations and maintenance expenses rose 4.2% due to acquisition costs, higher insurance, and wage increases. Depreciation increased 10.5% due to new utility plant assets.
- Cash Flow Improvement: Operating cash flow more than doubled to $19,488 from $8,973, aided by a net decrease in receivables and the absence of a $11,465 Competitive Transition Charge payment made in the prior year.
Outlook, Risks, and Management Commentary
- Acquisition Activity: PSC entered a definitive merger agreement on April 29, 2002, to acquire Pennichuck Corporation for approximately $79 million in stock and $27 million in assumed debt. The deal is expected to close before year-end pending regulatory and shareholder approvals. Additionally, four smaller acquisitions were completed in Q1 2002 for $2,739 in cash.
- Drought Risk: A drought emergency declared in February 2002 in Pennsylvania service territories reduced water consumption and revenues. Management expects this to continue affecting revenues through the spring and potentially into the summer.
- Liquidity and Capital: Management believes internally generated funds, credit facilities, and proceeds from debt/equity issuances are adequate for financing needs. Capital expenditures of $24,955 were funded through a mix of debt issuance, stock issuance, and internal funds.
- Accounting Changes: The company adopted SFAS No. 144 (Impairment of Long-Lived Assets) with no material impact. SFAS No. 143 (Asset Retirement Obligations) is expected to be adopted in 2003 with no anticipated material effect.
Investor Verification Checklist
- Verify the closing status and regulatory approval of the Pennichuck Corporation merger announced in late April 2002.
- Monitor the duration and severity of the drought emergency in Pennsylvania and its impact on second-quarter water consumption and revenues.
- Review the integration costs and synergies associated with the four Q1 acquisitions and the pending Pennichuck deal.
- Assess the impact of the DSIC charge on future revenue stability once the charge period concludes.
- Confirm the company's ability to service its debt load ($534.9 million total) given the reduction in operating income and the absence of one-time asset sale gains.