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 period ended June 30, 2002.
Share Count: 68,858,761 shares of common stock outstanding as of July 30, 2002.
Key Financial Metrics
All figures in thousands of dollars, except per share amounts.
| Metric | Six Months Ended June 30, 2002 | Six Months Ended June 30, 2001 |
|---|---|---|
| Operating Revenues | $148,284 | $147,433 |
| Operating Income | $60,740 | $64,020 |
| Net Income | $26,720 | $28,570 |
| Net Income Available to Common Stock | $26,693 | $28,517 |
| Diluted EPS | $0.38 | $0.42 |
| Operating Cash Flow | $42,765 | $32,494 |
| Capital Expenditures | ($56,470) | ($50,959) |
| Total Debt (Long-term + Current) | $587,336 | $546,455 |
| Cash and Equivalents | $876 | $1,010 |
Liquidity: Short-term lines of credit total $180,000, with $82,264 available as of June 30, 2002.
Material Changes vs. Prior Period
- Revenue: Increased 0.6% ($851) driven by the Distribution System Improvement Charge (DSIC) in Pennsylvania and acquisitions, partially offset by decreased water consumption due to drought restrictions and unfavorable weather.
- Expenses: Operations and maintenance expenses rose 6.7% ($3,552) due to acquisition costs, higher insurance, and wage increases. Depreciation increased 8.1% ($1,518) reflecting new utility plant.
- Profitability: Net income available to common stock decreased 6.4% ($1,824). Diluted EPS declined 9.5% ($0.04) due to lower net income and a 1.5% increase in average shares outstanding.
- Debt: Long-term debt increased significantly due to new issuances ($25,000 tax-exempt bonds and $25,000 First Mortgage Bond) used to fund capital projects and reduce short-term debt.
Guidance, Outlook, and Material Events
Acquisitions and Mergers
- AquaSource Acquisition: Entered into an agreement on July 29, 2002, to acquire three operating subsidiaries of AquaSource for a target cash price of approximately $205 million (subject to adjustments). Funding will likely involve a mix of debt and equity. Regulatory approval is not expected before the second half of 2003.
- Pennichuck Merger: Definitive merger agreement signed April 29, 2002, to acquire Pennichuck Corporation via stock exchange. Expected to close in early 2003 pending shareholder and regulatory approval.
- Recent Acquisitions: Completed eight acquisitions in the first half of 2002 for a total purchase price of $8,420.
Shareholder Activity
- Vivendi Environnement: Major shareholder (16.1% ownership) announced plans to sell its investment. PSC agreed to repurchase up to 2,500,000 shares at the public offering price, funded by short-term credit facilities.
- Dividends: Quarterly cash dividend on common stock increased from $0.1325 to $0.14 per share, effective December 1, 2002.
Risks and Contingencies
- Drought Conditions: Ongoing drought emergencies in Pennsylvania and restrictions in New Jersey have reduced water consumption and revenues. Restrictions were partially relaxed in July 2002.
- Pension Liability: Decline in plan asset values may require recognition of an additional minimum liability by December 31, 2002, potentially reducing common stockholders' equity by approximately $1,400 (after-tax). This will not affect 2002 net income or cash flow.
- Regulatory Risk: Profitability depends on timely approval of rate increases to cover capital investments. S&P placed PSW on Creditwatch with negative implications regarding the AquaSource acquisition funding.
Investor Verification Checklist
- Verify the final purchase price and funding structure for the AquaSource acquisition ($205M target).
- Monitor the status of regulatory approvals for both the AquaSource acquisition and the Pennichuck merger.
- Assess the impact of the Vivendi Environnement share repurchase agreement on liquidity and share count.
- Track the resolution of drought conditions in Pennsylvania and New Jersey and their effect on Q3/Q4 water consumption.
- Confirm the final calculation of the pension plan minimum liability adjustment expected by year-end 2002.
- Review the impact of the 15.4% total base rate increase approved for Pennsylvania Suburban Water Company effective August 1, 2002.