Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1997, for Philadelphia Suburban Corporation (PSC), a holding company for Philadelphia Suburban Water Company (PSW). PSW is a regulated utility serving approximately 287,000 customers across 94 municipalities in a 465-square-mile territory north and west of Philadelphia.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 1997 | Nine Months Ended Sep 30, 1996 |
|---|---|---|
| Earned Revenues | $101,090 | $90,804 |
| Operating Income | $43,149 | $36,958 |
| Net Income Available to Common Stock | $17,561 | $15,461 |
| Diluted EPS (Common) | $0.89 | $0.82 |
| Operating Cash Flow | $26,189 | $23,041 |
| Capital Expenditures | $22,580 | $17,343 |
| Long-Term Debt (Excl. Current) | $205,391 | $217,518 |
| Cash and Equivalents | $1,449 | $1,518 |
Liquidity: As of September 30, 1997, the Company had $4,930 available under short-term lines of credit, and PSW had $16,292 available under its revolving credit agreement.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11.3% ($10.3 million) year-over-year, driven by hot, dry weather increasing water sales, revenues from 1996 acquisitions ($4.3 million), and the Distribution System Improvement Charge ($0.9 million).
- Expense Increases: Operating expenses rose 9.0% due to higher production costs from increased volume, costs associated with acquired systems, and higher wage/insurance expenses. Interest expense increased 18.1% due to higher borrowing levels to finance acquisitions and capital projects.
- Profitability: Net income available to common stock increased 13.6% ($2.1 million). Earnings per share rose 8.5% to $0.89, partially offset by a 4.3% increase in average shares outstanding.
- Balance Sheet: Net property, plant, and equipment increased to $516.7 million. Total stockholders' equity grew to $192.2 million.
Guidance, Outlook, and Risks
- Rate Settlement: On October 23, 1997, the Pennsylvania PUC approved a rate settlement increasing PSW's annual revenue by $9.3 million (7.3%) over prior levels, with a total base rate increase of $10.6 million (8.3%). The company agreed not to file for another base rate increase before April 1999.
- Acquisitions: The company acquired three water systems and one wastewater system for $1.09 million during the period. Discussions are ongoing for additional systems with potential combined revenues of $4.7 million and a purchase price exceeding $22 million, though closings are not guaranteed.
- Debt Management: In October 1997, PSW issued $10 million in First Mortgage Bonds to repay revolving credit facility borrowings. The company intends to renew its credit facility and continue refinancing short-term debt with long-term bonds.
- Risks: A drought warning was issued for the Delaware River Basin in late October 1997. Management does not expect a significant revenue impact as the warning coincides with seasonal decreases in non-essential water use, and current supplies are adequate.
- Accounting Changes: The company plans to adopt SFAS 128 (EPS), SFAS 130 (Comprehensive Income), and SFAS 131 (Segment Reporting) effective January 1, 1998. These are not expected to materially affect financial results.
Investor Verification Checklist
- Verify the impact of the October 1997 rate settlement on future cash flows and the $10.6 million revenue increase.
- Monitor the status of pending water system acquisitions, specifically the potential $22 million+ capital outlay and regulatory approvals required.
- Assess the company's ability to refinance the $33.7 million revolving credit facility balance due in March 1998.
- Review the effectiveness of the drought warning on water sales volumes in the fourth quarter and subsequent periods.
- Confirm the execution of the new two-year $150 million medium-term note program for future capital funding.