Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, for Philadelphia Suburban Corporation (PSC), a holding company for regulated water and wastewater utilities serving approximately 2.5 million people across 13 states. The company announced plans to change its name to AquaAmerica, Inc., effective mid-January 2004.
Key Financial Metrics
Performance for the Nine Months Ended September 30, 2003 (in thousands, except per share):
- Operating Revenues: $266,021
- Operating Income: $114,038
- Net Income: $52,187
- Net Income Available to Common Stock: $52,179
- Diluted Earnings Per Share (EPS): $0.74
- Net Cash Flows from Operating Activities: $92,028
- Net Cash Flows Used in Investing Activities: $(283,577)
- Net Cash Flows from Financing Activities: $206,431
- Cash and Cash Equivalents (Ending): $20,797
- Total Stockholders' Equity: $637,593
- Long-term Debt (excluding current portion): $695,811
- Current Ratio: 0.41 (Current Assets $100,826 / Current Liabilities $246,831)
Material Changes vs. Prior Period
Compared to the nine months ended September 30, 2002:
- Revenue Growth: Operating revenues increased 10.7% ($25,819), driven by rate increases in Pennsylvania, Ohio, New Jersey, and Maine, and the acquisition of AquaSource. Growth was partially offset by lower water consumption due to wet weather.
- Profitability: Net income available to common stock increased 7.6% ($3,671). Diluted EPS rose 5.7% to $0.74.
- Expense Increases: Operations and maintenance expenses rose 12.7% due to acquisition costs and higher postretirement benefits. Depreciation increased 16.3% due to new utility plant and acquired assets.
- Acquisition Impact: The July 31, 2003 acquisition of AquaSource added $11,747 in operating revenues for the period. Pro forma results (as if acquired at the start of the period) would have shown revenues of $306,416 and net income of $55,854.
- Balance Sheet: Net property, plant, and equipment increased significantly from $1,490,841 to $1,793,640. Long-term debt increased from $582,910 to $695,811 to fund the acquisition and capital projects.
Outlook, Risks, and Management Commentary
Management Commentary:
- Capital Strategy: Management believes internally generated funds, credit facilities, and proceeds from debt/equity issuances are adequate for future financing needs.
- Dividends: The quarterly cash dividend on common stock was increased from $0.14 to $0.15 per share, effective December 1, 2003. A 5-for-4 stock split was declared for distribution on December 1, 2003.
- Rate Increases: Thirteen rate adjustments in the first nine months are expected to increase annual revenues by approximately $9,001.
- Environmental Compliance: The AquaSource acquisition includes facilities with environmental compliance issues. Estimated capital expenditures to address these are approximately $65,000 over five years. Fines are not expected to be material, and indemnity claims may be pursued against the seller for pre-acquisition incidents.
- Regulatory Risks: The City of Fort Wayne, Indiana, is considering acquiring a portion of PSC's assets (approx. 1% of customer base) via eminent domain. PSC believes it is entitled to fair market value.
- Pension Liability: Declining market interest rates may require an increase in the additional minimum pension liability at year-end 2003, though the exact amount is undetermined.
- Weather: Unfavorable weather (above-average rainfall) reduced water consumption in several service territories during the third quarter.
- Gain on Sale of Assets: A gain of $4,414 was recorded for the nine months, primarily from the sale of land.
- Asset Sales: PSC agreed to sell Connecticut and New York operations acquired from AquaSource for $5,000. The Connecticut sale closed in October 2003; the New York sale is pending regulatory approval.
Investor Verification Checklist
- Verify the final purchase price and working capital adjustments for the AquaSource acquisition, which are subject to change over a six-month period.
- Monitor the status of the New York regulated operations sale, expected to close in early 2004.
- Track the implementation of the 5-for-4 stock split and the impact on share count and per-share metrics in future filings.
- Assess the potential impact of the City of Fort Wayne's eminent domain proceedings on asset valuation.
- Review the final determination of the pension plan's additional minimum liability at December 31, 2003.
- Confirm the timeline and costs associated with the $65,000 estimated environmental compliance expenditures for AquaSource facilities.