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 nine months ended September 30, 2000.
Key Operational Context: The company operates primarily through two subsidiaries: Philadelphia Suburban Water Company (PSW) and Consumers Water Company (CWC). The period was marked by a significant rate settlement in Pennsylvania and ongoing capital projects, including a new treatment plant.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30) | 2000 (in thousands) | 1999 (in thousands) |
|---|---|---|
| Operating Revenues | $206,340 | $194,289 |
| Operating Income | $90,991 | $78,345 |
| Net Income | $40,430 | $26,785 |
| Net Income Available to Common Stock | $40,350 | $26,681 |
| Diluted EPS | $0.97 | $0.65 |
| Operating Cash Flow | $49,480 | $46,752 |
| Capital Expenditures | ($81,651) | ($67,723) |
| Total Debt (Long-term + Current) | $472,449 | $425,946 |
| Cash and Equivalents | $3,642 | $4,658 |
Liquidity: As of September 30, 2000, the company had $100,250 available under short-term lines of credit and other facilities totaling $190,000.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.2% ($12,051) year-over-year, driven by a 13.5% base rate increase in Pennsylvania (effective April 2000) and acquisitions, partially offset by lower water consumption due to cool, wet weather.
- Profitability: Net income increased 51% ($13,645) compared to the prior year. This surge was significantly aided by the recovery of $2,905 in merger transaction costs and $1,136 in restructuring costs, which were expensed in 1999 but recovered in 2000 via the rate settlement.
- Expense Trends: Interest expense rose 20.7% ($5,159) due to increased borrowings for acquisitions and capital projects. Operations and maintenance expenses increased 3.8%, largely due to acquisition-related costs.
- Debt Levels: Total debt increased by approximately $46.5 million, reflecting new long-term bond issuances ($15,000 and $11,000 in 2000) and tax-exempt bonds ($18,360) used to refinance short-term debt.
Guidance, Outlook, and Risks
- Rate Outlook: Pending rate applications in Illinois, New Jersey, and Ohio request an additional $6,352 in annual revenue, with decisions expected in Q1 2001. The company agreed not to file for a base rate increase in Pennsylvania prior to April 29, 2001.
- Capital Projects: A $35,000 water treatment plant in Pennsylvania was completed in July 2000. Future capital requirements are expected to be met by internally generated funds, credit facilities, and debt/equity issuances.
- Dividends: The quarterly cash dividend on common stock was increased from $0.18 to $0.19375 per share, effective December 1, 2000. A 25% stock dividend (5-for-4 split) was declared for distribution on December 1, 2000.
- Risks and Contingencies:
- Weather Sensitivity: Cool, wet weather reduced water consumption and revenues in 2000.
- Regulatory Risk: Future earnings depend on regulatory approvals for rate increases.
- Accounting Changes: The company plans to adopt SFAS No. 133 (Derivatives) on January 1, 2001, though it currently holds no derivative instruments.
- Accountant Change: KPMG LLP was dismissed on October 3, 2000, and replaced by PricewaterhouseCoopers LLP; no accounting disagreements were reported.
Investor Verification Checklist
- Rate Settlement Impact: Verify the sustainability of the 13.5% Pennsylvania rate increase and the timing of recoveries for merger costs.
- Weather Normalization: Assess the impact of the "cool, wet weather" on 2000 consumption volumes versus historical norms to gauge organic growth.
- Debt Service Coverage: Review the impact of the 20.7% increase in interest expense on future cash flows, given the rising debt load.
- Stock Split Mechanics: Confirm the adjustment of share counts and per-share data following the 25% stock dividend distribution on December 1, 2000.
- Acquisition Integration: Monitor the revenue contribution from the four water systems and one wastewater system acquired in the first nine months of 2000.