Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, for Philadelphia Suburban Corporation (PSC), a holding company for regulated water and wastewater utilities serving approximately 2.5 million people across 15 states. The filing notes that the company will change its name to Aqua America, Inc. effective October 10, 2003, with a ticker symbol change to "WTR."
Key Financial Metrics
Performance for the Six Months Ended June 30, 2003 (in thousands, except per share):
- Operating Revenues: $163,868
- Operating Income: $67,736
- Net Income: $28,564
- Net Income Available to Common Stock: $28,559
- Diluted Earnings Per Share (EPS): $0.41
- Operating Cash Flow: $45,323
- Capital Expenditures: $58,562
- Total Debt (Long-term + Current): $605,921
- Cash and Cash Equivalents: $6,600
- Stockholders' Equity: $541,762
Material Changes vs. Prior Period
Compared to the six months ended June 30, 2002:
- Revenue Growth: Operating revenues increased by $15,584 (10.5%), driven by rate increases in Pennsylvania, New Jersey, Ohio, and Maine, and a larger customer base from acquisitions. This was partially offset by lower water consumption due to wet weather conditions.
- Profitability: Net income available to common stock increased by $1,866 (7.0%). Diluted EPS rose from $0.38 to $0.41.
- Expenses: Operations and maintenance expenses rose 9.8% due to higher postretirement benefits, maintenance costs from harsh winter weather, and acquisition-related costs. Interest expense increased 8.1% due to additional borrowings for capital projects.
- Non-Operating Items: Gains on the sale of other assets decreased significantly from $1,758 in 2002 to $220 in 2003, primarily due to fewer sales of marketable securities and land.
Guidance, Outlook, and Risks
Recent Acquisitions and Divestitures: On July 31, 2003, PSC completed the acquisition of AquaSource, Inc. operations for $195,533 in cash, adding 130,000 customer accounts. Concurrently, the company agreed to sell the Connecticut and New York portions of the AquaSource acquisition for $5,000, subject to regulatory approval.
Financing and Liquidity: In July 2003, the company issued $135,000 in unsecured notes (4.87%) and a $90,000 unsecured note to fund the AquaSource acquisition and refinance debt. Management believes internally generated funds and existing credit facilities are adequate for future requirements. The quarterly cash dividend on common stock was increased from $0.14 to $0.15 per share.
Risks and Contingencies:
- Environmental Compliance: The AquaSource acquisition includes facilities with compliance issues requiring an estimated $65,000 in capital expenditures over several years. Potential fines are not expected to be material.
- Regulatory Changes: Compliance with new EPA rules regarding radon, radionuclides, and arsenic is expected to cost less than $1,000 in aggregate and will not materially impact operations.
- Weather Sensitivity: Above-average rainfall in Q2 2003 reduced water consumption, a trend continuing into July 2003, which may negatively impact operating results.
- Legal/Regulatory: The City of Fort Wayne, Indiana, is considering acquiring a portion of PSC's assets (approx. 1% of customer base) via eminent domain.
Investor Verification Checklist
- Verify the final purchase price and closing balance sheet adjustments for the AquaSource acquisition.
- Monitor the regulatory approval status for the sale of the Connecticut and New York AquaSource operations.
- Track the impact of wet weather conditions on water consumption and revenue in the third and fourth quarters.
- Confirm the timeline and costs associated with the $65,000 environmental compliance capital expenditures for acquired facilities.
- Review the implementation of the 5-for-4 common stock split (25% stock distribution) scheduled for December 1, 2003.