WTRG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999, for Philadelphia Suburban Corporation (PSC), a holding company for regulated water utilities. The reporting period is significantly impacted by the completion of a merger with Consumers Water Company (CWC) on March 10, 1999. The merger was accounted for as a pooling-of-interests, and financial statements have been restated to include CWC's results as if the merger occurred at the beginning of the earliest period presented. The combined entity serves approximately 528,000 customers across Pennsylvania, Ohio, Illinois, New Jersey, and Maine.

Key Financial Metrics

Note: All figures in thousands of dollars except per share amounts.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by 1.1% ($664) due to rate increases, acquisitions, and higher water volume, partially offset by the sale of CWC's New Hampshire operations in 1998.
• Profitability Decline: Net income available to common stock plummeted by 96% ($7,536 decrease). This was primarily driven by $6,334 in merger transaction costs and $3,787 in restructuring costs recorded in Q1 1999, which were absent in the prior year.
• Effective Tax Rate: The effective income tax rate spiked to 92.4% in 1999 compared to 39.8% in 1998 due to the non-deductible portion of merger costs. Excluding these costs, the rate would have been 39.2%.
• Capital Expenditures: Investing cash outflows decreased significantly to $20.8 million from $36.6 million, largely due to a reduction in acquisition spending ($145k vs $22.6M in 1998).
• Debt Structure: Total debt increased slightly. The company issued $25 million in First Mortgage Bonds in Q1 and Q2 1999 to reduce reliance on revolving credit facilities.

Guidance, Outlook, and Risks

• Merger Integration: The company is incurring restructuring costs related to closing CWC's corporate office and integrating systems. Management expects internally generated funds and credit facilities to be adequate for future financing needs.
• Capital Projects: Construction of the Shenango water treatment plant (expected cost $34 million) is ongoing, with completion anticipated in Q1 2000. Q1 capital expenditures were $19.4 million.
• Rate Cases: CWC subsidiaries settled rate cases resulting in a $390 annual revenue increase. A new application in Illinois seeks a $558 annual increase, with a decision expected in Q1 2000.
• Year 2000 (Y2K) Readiness: The company estimates total Y2K remediation costs at approximately $8.2 million ($5.5 million spent to date). Critical water treatment systems are deemed not significantly affected, but financial and office systems are being remediated with completion expected by summer 1999. Risks remain regarding third-party supplier compliance.
• Regulatory Risks: The Distribution System Improvement Charge (DSIC) resumed in Q2 1999 at 3.05% of base rates, subject to future regulatory benchmarks.

Investor Verification Checklist

• Merger Cost Impact: Verify the sustainability of earnings once the one-time $10.1 million in merger and restructuring charges are excluded.
• Debt Maturity Profile: Review the specific maturity dates of the $427 million debt load, noting the recent shift from short-term revolving credit to long-term bonds.
• Y2K Contingency: Assess the status of third-party supplier compliance, particularly for electric power, which is critical to operations.
• Shenango Plant Progress: Monitor the $34 million Shenango water treatment plant project for cost overruns or delays beyond the Q1 2000 completion target.
• Rate Case Outcomes: Track the outcome of the pending Illinois rate case and the continuation of the DSIC surcharge in Pennsylvania.