Business Context and Reporting Period
This Form 10-Q covers the quarterly and nine-month periods ended September 30, 1998, for Philadelphia Suburban Corporation (PSC), a holding company for Philadelphia Suburban Water Company (PSW). PSW is a regulated utility serving approximately 300,000 customers in 96 municipalities within a 481-square-mile territory north and west of Philadelphia. The filing includes unaudited consolidated financial statements.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 1998)
- Earned Revenues: $113,273,000 (up 12.1% from $101,090,000 in 1997).
- Operating Income: $51,187,000 (up 18.6% from $43,149,000).
- Net Income: $22,309,000 (up 25.9% from $17,707,000).
- Net Income Available to Common Stock: $22,163,000.
- Diluted Earnings Per Share (EPS): $0.80 (up from $0.67).
- Effective Income Tax Rate: 40.6%.
Liquidity and Capital Structure
- Cash and Cash Equivalents: $1,391,000 (up from $680,000 at year-end 1997).
- Net Cash from Operating Activities: $33,616,000.
- Net Cash Used in Investing Activities: $(61,495,000), driven by $37.7M in capital expenditures and $23.9M in acquisitions.
- Net Cash from Financing Activities: $28,590,000, supported by $30.5M in common stock proceeds and $27.2M in long-term debt proceeds.
- Long-Term Debt (excluding current portion): $257,534,000.
- Total Stockholders' Equity: $231,351,000.
- Available Credit Facilities: $9.89M (Company) and $1.0M (PSW) in short-term lines; $15.4M available under PSW's $50M revolving credit agreement.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 7.3% rate increase granted in October 1997, the acquisition of West Chester Area Municipal Authority, and increased water sales due to hot, dry summer weather.
- Operating Expenses: Increased 3.9% due to West Chester integration, higher wages, and production costs, partially offset by savings from electric deregulation and fewer main breaks due to a mild winter.
- Acquisitions: Significant cash outflow for the West Chester acquisition ($23.8M) and other smaller systems (Flying Hills, Brandywine Hospital). The West Chester system contributed $3.27M in revenue since acquisition.
- Capital Structure: Issued 1.25 million shares of common stock in February 1998 for net proceeds of $25.8M. Redeemed $4.2M of subsidiary preferred stock. Increased quarterly common dividend from $0.1625 to $0.17 per share.
- Taxes: "Taxes other than income taxes" increased 21.2% due to higher Pennsylvania Public Utility Realty Tax (PURTA) assessments and local real estate taxes.
Guidance, Outlook, and Risks
Merger with Consumers Water Company
PSC entered a definitive merger agreement with Consumers Water Company (Consumers), subject to shareholder and regulatory approval. Shareholder votes are scheduled for November 16, 1998. Management anticipates issuing approximately 11.8 million shares of common stock. Regulatory approval from all five states is unlikely to be secured by year-end.
Year 2000 (Y2K) Compliance
The Company is actively pursuing a Y2K program to ensure critical systems remain operational.
- Costs: Estimated $2.4M spent to date; additional $2.0M expected to complete compliance.
- Timeline: Inventory completion targeted for November 1998; assessment by December 1998; remediation and testing by March 1999.
- Risks: Potential interruption of water service or financial impact if critical systems or third-party suppliers (especially electric power) fail to comply.
Rate Regulation
The Distribution System Improvement Charge (DSIC) was discontinued for the fourth quarter of 1998 due to the Company's favorable return on equity results and is expected to remain discontinued in Q1 1999.
Investor Verification Checklist
- Verify the status of regulatory approvals for the Consumers Water Company merger in Ohio, Illinois, Pennsylvania, New Jersey, and Maine.
- Confirm the timeline and budget adherence for the Year 2000 remediation program, specifically regarding third-party electric supplier compliance.
- Monitor the integration progress and revenue realization from the West Chester Area Municipal Authority acquisition.
- Review the impact of the discontinued DSIC on future rate filings and revenue stability.
- Assess the sustainability of the increased dividend payout relative to future capital expenditure requirements.