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 September 30, 2002.
Share Count: 67,809,954 shares of common stock outstanding as of October 30, 2002.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2002) | Value ($ in thousands) |
|---|---|
| Operating Revenues | $240,202 |
| Operating Income | $105,779 |
| Net Income | $48,547 |
| Net Income Available to Common Stock | $48,508 |
| Diluted Earnings Per Share (EPS) | $0.70 |
| Net Cash Flows from Operating Activities | $73,775 |
| Net Cash Flows Used in Investing Activities | ($98,636) |
| Net Cash Flows from Financing Activities | $27,808 |
| Total Stockholders' Equity | $494,779 |
| Long-term Debt (excluding current portion) | $575,667 |
| Total Current Liabilities | $192,963 |
| Cash and Cash Equivalents | $3,957 |
Operating Margins (Nine Months 2002): Operating margin was approximately 44.0% ($105,779 / $240,202). Net income margin was approximately 20.2%.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 3.5% ($8,043) compared to the first nine months of 2001. This was driven by rate increases in Pennsylvania, Ohio, and New Jersey, and acquisitions, partially offset by reduced water consumption due to drought restrictions.
- Profitability: Net income available to common stock increased 1.5% ($712) to $48,508. Diluted EPS remained flat at $0.70 due to a 1.2% increase in the average number of shares outstanding.
- Expenses: Operations and maintenance expenses rose 7.0% ($5,701) due to acquisition-related costs, higher insurance, and wage increases. Depreciation increased 7.5% reflecting new utility plant and acquired assets.
- Debt Structure: Long-term debt increased significantly from $516,520 (Dec 31, 2001) to $575,667 (Sep 30, 2002), driven by new bond issuances to fund capital projects and reduce short-term debt.
- Cash Position: Cash and cash equivalents increased from $1,010 to $3,957, despite heavy investing outflows of $98,636 for capital expenditures and acquisitions.
Guidance, Outlook, and Risks
Acquisitions and Strategic Moves
- AquaSource Acquisition: PSC agreed to acquire three operating water/wastewater subsidiaries of AquaSource for a target price of approximately $205 million. Closing is expected in the second half of 2003 pending regulatory approvals. Funding will likely involve a mix of debt and equity.
- Pennichuck Merger: A definitive merger agreement was signed to acquire Pennichuck Corporation via stock exchange, expected to close in early 2003.
- Asset Sale: PSC agreed to sell water utility assets in Ashtabula County, Ohio, for approximately $13,000 (in excess of book value), with closing expected by Q1 2003.
Dividend and Shareholder Actions
- Dividend Increase: The quarterly cash dividend on common stock was increased from $0.1325 to $0.14 per share, effective December 1, 2002.
- Vivendi Repurchase: PSC repurchased the remaining 1,210,620 shares held by Vivendi Environnement in October 2002, funded by a $22,000 short-term note.
Risks and Contingencies
- Drought Conditions: Ongoing drought emergencies in Pennsylvania and New Jersey have restricted water usage, negatively impacting consumption and revenues. Restrictions were reinstated in August 2002.
- Pension Liability: Due to negative equity market performance, PSC may need to recognize an additional minimum pension liability by year-end, potentially reducing common stockholders' equity by approximately $3,000 (after-tax).
- Regulatory Approvals: The AquaSource acquisition and Pennichuck merger are subject to regulatory and shareholder approvals.
- Rating Watch: Standard & Poor's placed PSC's primary subsidiary on Creditwatch with negative implications regarding the potential debt funding of the AquaSource acquisition.
Investor Verification Checklist
- Verify the final purchase price and funding mix for the AquaSource acquisition, noting the potential for price adjustments based on performance metrics.
- Monitor the status of regulatory approvals for the AquaSource acquisition and the Pennichuck merger.
- Assess the impact of continued drought restrictions on water consumption and revenue in Pennsylvania and New Jersey service territories.
- Review the final determination of the additional minimum pension liability expected to be recognized by December 31, 2002.
- Confirm the repayment terms and refinancing strategy for the $22,000 short-term note used to repurchase Vivendi shares.