Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, for Philadelphia Suburban Corporation (PSC), a holding company for Philadelphia Suburban Water Company (PSW). PSW is a regulated utility serving approximately 298,700 customers in 96 municipalities within a 481-square-mile territory north and west of Philadelphia. The filing includes unaudited consolidated financial statements for the six months and three months ended June 30, 1998, compared to the same periods in 1997.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|
| Earned Revenues | $71,617 | $64,336 |
| Operating Income | $31,391 | $26,340 |
| Net Income | $13,239 | $10,334 |
| Net Income Available to Common Stock | $13,141 | $10,238 |
| Diluted EPS | $0.48 | $0.39 |
| Operating Cash Flow | $16,550 | $11,336 |
| Long-Term Debt (excl. current) | $254,443 | $232,471 |
| Total Stockholders' Equity | $225,561 | $194,745 |
Liquidity: Cash balance at June 30, 1998, was $1,192. The Company and PSW had $9,280 and $1,000 available under short-term lines of credit, respectively. PSW had $18,500 available under a $50,000 revolving credit agreement.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11.3% ($7,281) year-over-year, driven by a 7.3% rate increase granted in October 1997, the acquisition of West Chester Area Municipal Authority, and normal customer growth.
- Profitability: Net income available to common stock rose 28.4% ($2,903). Diluted EPS increased 23.1% to $0.48, despite a 5.8% increase in average shares outstanding due to a February 1998 stock offering.
- Expenses: Operating expenses increased 5.0% due to West Chester integration and wage increases. Interest expense rose 5.2% due to higher borrowings for acquisitions and capital projects, partially offset by lower rates.
- Capital Structure: The Company redeemed $4,214 of subsidiary preferred stock and repurchased $3,333 of common stock. Long-term debt increased by $21,972, primarily from new bond issuances to fund the West Chester acquisition and reduce revolving credit usage.
Outlook, Risks, and Unusual Items
- Merger Activity: On June 27, 1998, PSC entered a definitive merger agreement with Consumers Water Company (Consumers) valued at approximately $275 million. The deal involves issuing ~13.2 million shares of PSC stock and is expected to close before year-end. Consumers serves ~223,000 customers across five states.
- Acquisitions: PSC acquired West Chester ($23.8M cash), Brandywine Hospital water system ($110 cash), and Flying Hills Water Company (stock transaction). A water sale agreement with Warwick Township is expected to generate ~$330 annually starting Q3 1998.
- Dividends: The quarterly common dividend was increased from $0.1625 to $0.17 per share, effective September 1, 1998.
- Year 2000 Compliance: Management information systems are compliant. A new customer information system is being installed at an estimated cost of $3,140, with completion expected in Q1 1999.
- Regulatory: A Distribution System Improvement Charge (DSIC) of 0.67% was implemented July 1, 1998. A revenue credit of 0.11% was initiated May 18, 1998, due to a decrease in Pennsylvania Capital Stock Tax.
Investor Verification Checklist
- Verify the closing conditions and timeline for the Consumers Water Company merger, including regulatory approvals and shareholder votes.
- Confirm the integration progress and financial performance of the West Chester acquisition and other recent small acquisitions.
- Monitor the Year 2000 system implementation costs and timeline to ensure no budget overruns or service disruptions.
- Review the impact of the increased dividend on future cash flow and capital expenditure plans.
- Assess the debt service coverage given the increase in long-term debt and interest expense.