WTRG

Business Context and Reporting Period

Company: Philadelphia Suburban Corporation (PSC), a holding company for regulated water and wastewater utilities serving approximately 2 million people in Pennsylvania, Ohio, Illinois, New Jersey, and Maine.

Reporting Period: Quarterly Report (Form 10-Q) for the quarter and six months ended June 30, 2000.

Key Operational Context: The company operates through two primary subsidiaries: Philadelphia Suburban Water Company (PSW) and Consumers Water Company (CWC). The period was marked by a significant rate settlement in Pennsylvania and continued capital investment in infrastructure.

Key Financial Metrics

Liquidity: As of June 30, 2000, the company had $187,000 in short-term lines of credit with $79,374 available. Cash and cash equivalents increased to $7,889 from $4,658 at year-end 1999.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 6.6% ($8,242) year-over-year, driven by a Pennsylvania rate settlement approved in April 2000, revenues from recent acquisitions (notably the Bensalem system), and Distribution System Improvement Charges.
• Profitability Surge: Net income increased 92% ($11,446) compared to the first half of 1999. This significant jump is largely attributable to the absence of a $6,334 merger transaction cost charge and a $3,787 restructuring charge recorded in Q1 1999, partially offset by a $1,059 recovery of these costs in 2000.
• Expense Increases: Operations and maintenance expenses rose 5.0% due to higher maintenance costs (main breaks) and acquisition-related costs. Interest expense increased 19.4% due to higher borrowings for acquisitions and capital projects.
• Debt Levels: Total debt increased by approximately $47.9 million, reflecting new issuances of First Mortgage Bonds and tax-exempt bonds to fund capital projects and reduce short-term debt.

Guidance, Outlook, and Risks

• Rate Settlement Impact: The April 2000 Pennsylvania rate settlement increased annual revenue by $17,000 (9.4%) and allowed for the recovery of up to $5,295 in merger costs. The company agreed not to file a new base rate increase request before April 29, 2001.
• Capital Projects: A $35,000 water treatment plant at a Pennsylvania subsidiary was completed in July 2000. Future revenue is expected from a 25-year bulk water sale agreement with Liberty Electric Power, LLC, expected to commence in Q1 2002.
• Dividends: The quarterly cash dividend on common stock was increased from $0.18 to $0.19375 per share, effective with the December 1, 2000 payment. A 25% stock dividend (5-for-4 split) was declared for distribution on December 1, 2000.
• Risks and Contingencies:
  • Regulatory: Pending rate applications in Illinois, Maine, and New Jersey requesting $6,662 in additional annual revenue; decisions expected in Q1 2001.
  • Weather: Cool, wet weather in May and June 2000 reduced water consumption and production costs, a factor that may not persist.
  • Accounting Changes: The company plans to adopt SFAS No. 133 (Derivatives) in 2001, though no derivative instruments were held as of June 30, 2000.

Investor Verification Checklist

• Rate Case Outcomes: Verify the status and approval of pending rate applications in Illinois, Maine, and New Jersey, which are critical for future revenue growth.
• Merger Cost Recovery: Confirm the final recoverability of the remaining portion of the $5,295 merger costs not yet recognized in the second quarter.
• Capital Expenditure Funding: Assess the sustainability of the $57.4 million capital expenditure run rate and the company's reliance on debt issuance versus internally generated funds.
• Stock Split Mechanics: Review the impact of the declared 25% stock dividend on share count and per-share metrics for future reporting periods.
• Weather Sensitivity: Monitor water consumption trends to determine if the cost savings from cool weather in H1 2000 were anomalous.