WTRG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for Philadelphia Suburban Corporation (PSC), a holding company for regulated water utilities. The reporting period includes the results of a merger with Consumers Water Company (CWC) completed on March 10, 1999, which was accounted for as a pooling-of-interests. The company serves approximately 530,000 customers across Pennsylvania, Ohio, Illinois, New Jersey, and Maine.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4.2% to $124.8 million compared to the prior year, driven by rate increases, higher water volumes due to hot weather, and the CWC merger, partially offset by the prior year's sale of New Hampshire operations.
• Profitability Decline: Net income available to common stock decreased 44.9% to $12.3 million. Diluted EPS fell from $0.55 to $0.30.
• Unusual Items: The decline in earnings was primarily due to $6.3 million in merger transaction costs and $3.8 million in restructuring costs (severance and office closures) recorded in the first quarter. Additionally, the prior year included a $6.7 million gain on the sale of New Hampshire operations not present in the current period.
• Expense Trends: Operations and maintenance expenses decreased 1.4% due to the prior year's asset sale and electric deregulation savings, though offset by higher maintenance costs from main breaks. Depreciation increased 12.1% due to new plant assets.
• Debt Structure: The company issued $27.2 million in long-term debt during the period to reduce revolving credit facilities and fund capital projects. The current portion of long-term debt increased significantly to $56.0 million from $3.0 million year-over-year.

Outlook, Risks, and Management Commentary

• Capital Projects: The company is constructing the Shenango water treatment plant in Sharon, Pennsylvania, with a total projected cost of $34 million. Completion is anticipated in Q1 2000. Total capital expenditures for the first half of 1999 were $43.7 million.
• Dividends: The quarterly dividend on common stock was increased from $0.17 to $0.18 per share, effective September 1, 1999.
• Regulatory Environment: Pennsylvania declared a drought emergency in July 1999, imposing mandatory bans on nonessential water usage. Management does not expect this to materially impact operating results as consumption has returned to normal summer levels.
• Year 2000 (Y2K) Readiness: The company estimates total Y2K remediation costs at approximately $8.8 million ($6.5 million incurred to date). Critical water treatment systems are deemed compliant, though financial and office systems are undergoing remediation. Risks remain regarding third-party supplier compliance.
• Liquidity: Management believes internally generated funds and existing credit facilities (approximately $80 million available across the company and subsidiaries) are adequate to meet financing requirements.

Investor Verification Checklist

• Verify the impact of the $10.1 million in one-time merger and restructuring costs on the true operating performance of the combined entity.
• Monitor the progress and cost overruns of the Shenango water treatment plant construction, a major capital commitment.
• Assess the potential revenue impact of the Pennsylvania drought emergency and any future water usage restrictions.
• Review the status of Year 2000 compliance for critical third-party suppliers, particularly electric power providers.
• Track the execution of pending acquisitions, including the proposed purchase of Bensalem Township assets for approximately $36.5 million.