Essential Utilities, Inc. Q3 FY2020 Earnings Call

Good day, and welcome to the Essential Utilities Q3 2020 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead.

Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter 2020 Earnings Call. I'm Brian Dingerdissen, Vice President Chief of Staff and Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides that we will be referencing and a webcast of this event can also be found on the site. Here is our forward-looking statement. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also on our Investor Relations section of our website. After the presentation, we will open the call up for questions. Here's the agenda for our call today. We will start with Chris Franklin, our Chairman and CEO, who will provide a company update. Mike Huwar will then provide a Peoples update before turning the call back over to Chris to provide the third quarter highlights and talk about our ESG program. Dan Schuller, our CFO will then discuss our financial results. After that, we will turn it back to Chris for our municipal acquisition program and then conclude with a review of our guidance. At the conclusion of the call, we will open it up for questions. With that, I will turn the call over to Chris Franklin.

Hey, thanks Brian, and good morning, everyone. Hopefully, you got some sleep last night after a long election night. It's been nearly nine months now since we closed the transaction with Peoples. And as many of you recall, it has been the same amount of time since we activated our business continuity plan to deal with the pandemic. I want to start today's call by letting you know that our company and its workforce are as strong as ever. I continue to be in awe of our dedicated workforce and the accomplishments we've been able to achieve despite the challenges of 2020. Let's talk a little bit about the integration of the Peoples company. Each of my direct reports, whether he or she is from Peoples or from Aqua, now have teams that include leaders and employees from both legacy organizations leveraging the best practices and approaches from both utilities. Our functional leaders, such as HR and IT, now support both water and natural gas. Our operations teams have come together quite nicely in the spring to resolve the challenges associated with COVID, and they've been working very closely ever since. We're sharing best practices related to operations and construction, safety, to name a few, and our engineers have been collaborating to accelerate the pipeline replacement program at Peoples, which ultimately improves safety and reduces methane emissions. We're also leveraging our scale for the purchasing of vehicles, equipment and technology. We're building efficient backbone infrastructure, systems, and applications to support both utilities and better serve our customers. And we're using our larger platform to attract a more diverse workforce; hopefully, that gives you a quick sense of our integration process. Overall, it's going well. Now, let's address our stock price here for a moment. There are some micro and macro issues likely at play. I want to point out that over the summer we entered into a forward agreement to issue $300 million in equity, and it took some time for this equity offering to be understood in the market. All in all, I think you'd agree that the $300 million forward went very well. On the macro level, I'll point out the obvious. We've been in the midst of one of the most contentious elections in our country's history, and natural gas was one of the central themes. We continue to hear concern about the progress of our DELCORA transaction, which is also impacting the stock price. So let's talk about a few of these issues. I'll address DELCORA for a second and then we'll discuss our view on natural gas. On DELCORA, we remain confident that we will close the DELCORA transaction in early 2021. The pandemic-related issues have pushed our court date that was due to happen today at least a week out. Hopefully, we'll know that probably this afternoon, but it's only a week out. We remain confident that the central question before the court, which is whether there is a valid and enforceable contract between the parties, is critical. We hope the results from our time in court will yield a positive outcome for the company. We see this as a straightforward question for the court and we hope to get an answer in about 60 days following the hearing. Either way, there is no expected impact on EPS in 2021 from the DELCORA acquisition. We've been saying that for some time. I would guide against including any pluses or minuses in your short-term model for DELCORA, but it will be accretive in coming years, although it will not impact 2020 or 2021 earnings per share. Now, let's turn to natural gas. First, I want to acknowledge that natural gas companies have traded off recently. Some investors have even begun to speculate that the future of natural gas in the United States is in doubt. I want to clarify a couple of important points. Number one let's ground ourselves in the projections from the non-partisan U.S. Energy Information Administration. It's expected that natural gas consumption will remain nearly constant in the United States through at least 2050. The declines in nuclear and coal generation will give way to renewables, but natural gas consumption is expected to be stable, which is really important. I think many are missing that. Secondly, we have said this many times; Peoples is situated over the Marcellus Shale region, and all the natural gas we provide comes from local sources. The takeaway is that plentiful and inexpensive natural gas will be available for a long time in the Pittsburgh Pennsylvania area. If you haven't been to Pittsburgh, you might not know that Pittsburghers are proud of their natural gas history and understand its significance not only to their local economy but also to national energy independence. Our natural gas service territory is primarily middle-class America. To switch a home from natural gas to electric, solar, or wind would cost around $8,000 and would also mean higher monthly energy costs. It’s fair to say that our customers are unlikely to consider switching. If we aggregate all the greenhouse gas emissions from residential natural gas consumption in the country, it would only account for about 4% of the nation's total greenhouse gas emissions, which is minor in the scheme of things. Sometimes, that gets lost in the discussion. Those familiar with us know that at Aqua America, we have been an environmental leader for many years, demonstrating our commitment to being responsible stewards of the environment. We specialize in rehabilitating underground infrastructure, and Peoples Gas is no different than Aqua America was prior to our merger. We believe as the new owner of the business, we can modernize its infrastructure and apply industry best practices to aggressively reduce emissions and adopt advanced technologies. As Essential Utilities, we plan to set credible and aggressive intermediate-term emission reduction targets by early next year and will continue to evaluate technologies and strategies to further reduce emissions in the long term. In summary, while the media may suggest that natural gas will be phased out over the next decade, that does not align with the reality of energy use in the United States. In fact, it's quite the opposite. We are very pleased with our purchase of Peoples; it's performing extremely well, and we anticipate a long and successful future with Peoples and Aqua, as Essential. Now, I’m pleased to introduce Mike Huwar, our new President of the Peoples Gas Company. Mike joined us in August, coinciding with the retirement of Joe Gregorini, who was our long-time leader of Peoples operations. Joe did a great job, and we wish him well in his retirement. Mike, please share some of your early observations about Peoples and your perspective on the natural gas business in Pennsylvania, where 690,000 of our 740,000 customers reside.

Thanks, Chris. It's really a pleasure to be with you today. As a native of Pittsburgh, I must tell you that I have long respected the Peoples Gas Company for its leadership in the community, and I'm absolutely thrilled to have the opportunity to lead the utility. Although I joined Peoples just three months ago, I've been in the natural gas business for several years now. While there is always room for improvement, I'm happy to say that I'm impressed with our management, our safety culture, and our safety record at Peoples. The team is well-trained, and more importantly, they are committed to both employee and customer safety. In fact, Peoples was honored by the American Gas Association in 2019, receiving an industry leader Accident Prevention Award for achieving a DART Rate lower than the industry average. The depth of management here is remarkable; counting the years of service for my senior team alone, we have nearly 263 combined years of experience in the natural gas industry. Our team is prepared to elevate the company, including ramping up our capital plan. We expect to invest nearly $1.4 billion in the replacement of aging gas distribution infrastructure over the next three years. Over the next 15 years, we will replace nearly 2,700 miles of distribution facilities. Merging two companies will involve a melding of cultures, requiring care and effort, but my initial observations show that the cultures of Aqua and Peoples under Essential are quite similar, which makes integration easier. I'm pleased with the spirit of cooperation among the teams and the full integration of management teams. I believe we are developing a strong combined culture that will yield a resilient company. Peoples has always been an integral part of the Pittsburgh community, and its visibility, along with its assistance programs, has been especially important during the pandemic. Customers have access to nearly $27 million in customer assistance through programs like LIHEAP, the Low-Income Heating Energy Assistance Program, and CAP, the Customer Assistance Program, ensuring that customers in need can receive help with bill payment and remain safely in their homes. Natural gas is the most effective energy source for heating homes and businesses in colder climates. Our Local Distribution Company, Peoples, has access to both an abundant and low-cost supply of natural gas from the Marcellus/Utica supply basin. The affordability of commodities in this region has also allowed Peoples to modernize our distribution system with minimal impact on our customers' total bills while enhancing safety and reliability. As a native of Southwestern Pennsylvania, it's important to acknowledge how much natural gas is woven into the fabric of this community. I see a region where business leaders, legislators, regulators, and communities come together to protect the environment and sustain a vibrant economy. While some regions of the country may accelerate the move away from natural gas, like the West Coast, Peoples is located in an area where I expect natural gas to remain essential to our energy landscape for generations to come. Regarding sustainability, I won't delve into every point on the slide since you can read those, but I firmly believe natural gas will continue to be a vital part of our nation's long-term energy solution. It remains an affordable, abundant, safe, and reliable solution to our energy needs. The United States is rich in natural gas and can meet our energy requirements for the next century. Eliminating the direct use of natural gas in homes and businesses would be costly and impractical in addressing greenhouse gas emissions. In fact, demand for natural gas has reached an all-time high, with one new customer connecting to the natural gas distribution system every minute, providing services to 179 million Americans, which is roughly half of our country. Converting to alternatives is expensive and would lead to an increase in utility bills of approximately $1,000 annually per household. Overall, considering the costs of equipment conversions, higher operational expenses, and the implications of moving away from natural gas, the impact would be substantial on every household. Furthermore, existing technologies have drastically reduced the emissions profile of the natural gas industry in recent years, and there are opportunities for future improvements. For instance, renewable natural gas (RNG)—climate-neutral, pipeline-compatible gas derived from renewable sources—is an area we're exploring further. Currently, Peoples acquires over 1.5 billion cubic feet of renewable natural gas annually and aims to expand this further. In closing, I look forward to leading the Peoples team and am confident in our joint potential to provide quality service to the communities we serve. With that, I'll hand it back to you, Chris.

Thanks, Mike, great job. It's fantastic to have you on the team. I want to leave you with one final thought on this topic before we move on. Given our natural gas utility, Peoples, its rate base growth, geographic position, and access to gas, among many other reasons, it should be considered differently than many other gas LDCs across the country. It especially should be viewed differently than natural gas utilities in coastal areas. Now, let’s take a look at the highlights for the quarter. We have already invested $607.6 million in infrastructure in the communities we serve during the first nine months of the year, with $377 million allocated to our regulated water segment and $230.6 million invested in our regulated natural gas segment. Just to note, about $53 million was invested by Peoples in the first quarter pre-closing. So bottom line, we remain on track for record capital spending of $950 million in 2020. Additionally, on a non-GAAP basis, adjusted income per share decreased to $0.23 from $0.48 compared to the same period last year, and Dan will provide you with more detail on those financial results shortly. Our municipal acquisition program remains strong with signed municipal transaction agreements totaling over $360 million in expected rate base and over 212,000 customers. Recently, we closed the water and wastewater acquisition of Rockwell Utilities in Illinois and announced the signing of Lower Makefield in Bucks County, Pennsylvania, which is a $53 million acquisition with 11,000 wastewater customers. Finally, I want to highlight that our latest ESG report was just published a few weeks ago, and I encourage you to check it out; it can be found on our website. It's a strong ESG site, I would say. With that, let's discuss ESG for a moment. Sustainability has always been a cornerstone of our corporate culture and a personal priority. Since I became CEO in 2015, we have made ESG a priority. We started with Board refreshment; our board consists of nine members, with one-third being women and two members being black. Our diversity aids in better discussion and better outcomes, a fact I firmly believe in. We've been increasing our ESG communications since last February. Even before the Peoples transaction, our ESG team published the first ESG tearsheet and significantly enhanced our proxy last spring. To ensure transparent and comprehensive reporting of our work, we hired a full-time in-house ESG manager. Recently, we issued a more detailed ESG report, which I just mentioned, in a digital microsite format that's easy to navigate. Our ESG website will be where all future-related news and disclosures reside. On the water side, we've made significant announcements this year, including our commitment to sourcing 60% of energy from renewable sources by 2022. We also believe we stand out as a multistate water utility in our commitment to test every source of water in our eight states and treat any source that detects PFOS above 13 parts per trillion, a significant reduction from the Federal Health Advisory level of 70 parts per trillion. This is a major commitment. Regarding the natural gas side, as stated earlier, in Q1 2021, we will announce an aggressive but achievable set of emissions reduction targets. I intend to do this before we reach the one-year mark of ownership, likely in January. Keep in mind that we have significant pipe to replace at Peoples, and each segment of pipe that we repair will substantially reduce methane emissions. We aim to report these reductions in future ESG reports. For context, replacing each mile of pipe is expected to decrease fugitive methane emissions by the equivalent of 50 metric tons of CO2 per year, which is akin to taking 11 cars off the road for each mile. It's crucial. Don’t forget that while this effort minimizes methane emissions, the pipe replacement program also contributes about 8% to 10% rate base growth annually over the next 15 years. With that, let me pass the floor to Dan for the financial results.

Thank you, Chris. Good morning everyone. Let's review the financials for the quarter. We ended the third quarter with revenue of $348.6 million, up $105 million from $243.6 million last year. The natural gas business contributed $92.1 million of this revenue growth, while the remainder was due to rate increases, volume, and growth in the regulated water segment. We're also reporting adjusted revenue of $352.7 million, which excludes approximately $4.1 million of rate credits issued to water utility customers as part of the Pennsylvania PUC approval for the Peoples acquisition. O&M increased to $136.2 million, up from $82 million in the third quarter of last year, primarily due to the addition of natural gas operations and maintenance expenses, which we'll delve into further when we discuss the O&M waterfall. Net income decreased year-over-year from $88.5 million to $55.7 million, and GAAP EPS fell from $0.38 to $0.22. We're again providing adjusted income and adjusted income per share figures, which account for the transaction-related water rate credits I mentioned. Adjusted income decreased $27 million to $58.6 million, and adjusted income per share dropped from $0.48 to $0.23. This result aligns with the adjusted income per share guidance of $1.53 to $1.58 for the full year. Next, we'll walk through the details with the revenue waterfall slide. The $105 million revenue increase for Q3 is primarily driven by the natural gas segment, which contributed $92.1 million. Increased volume, growth from our regulated water segment, and various rate and surcharge adjustments provided another $17 million towards the revenue increase, offset by the $4.1 million rate credits provided to water utility customers in Q3. The $3.9 million growth component stems mainly from the acquisition of Wastewater Systems. In Q4, we will provide nearly $19 million in rate credits to natural gas customers to satisfy the rate concessions included in Pennsylvania's regulatory approval. Let's now turn to the water consumption slide. During Q3, we experienced a materially positive impact on volume, with year-over-year water usage up 5.5% due to many customers working from home and favorable weather. Residential usage was strong at over 10%, offsetting declines in most other segments. Although commercial usage fell, it rebounded significantly from Q2. As we previously discussed, we are closely monitoring our bad debt expense as states lifted shut-off moratoria when COVID-19 hit in March; progressively, all states have lifted their moratoria, except for Pennsylvania, which is expected in the coming days, and New Jersey, which should end in March 2021. As these moratoria are lifted, we will resume our regular delinquency procedures. During the quarter, we increased our bad debt reserves by $6.8 million across water and gas and identified potential regulatory asset filings for much of this, as we expect to seek recovery of COVID-related increases in bad debt in several key states. Now, let's delve into the O&M waterfall. O&M expenses were $136.2 million for Q3, in comparison to $82 million in Q3 2019. The main driver was the addition of Peoples O&M, which contributed $62.2 million. Other factors included COVID-related expenses for our water segment, including employee costs, growth in normal employee-related costs, which were offset by other costs arising from last year's Peoples acquisition-related expenses. The middle bar on the page represents a combination of overhead savings, reduced insurance reserves, and a mixture of beneficial one-time items this year and detrimental one-time items last year. For our regulated water segment, Q3 O&M expenses decreased by 2.2% relative to last year. Let’s now focus on earnings per share. The third quarter GAAP EPS in 2019 was $0.38, but when adding back nearly $0.10 from the dilutive effect of the equity offering and Peoples-related transaction costs, it came to $0.48 per share when adjusted for Q3 last year. Volume, expenses, regulated water segment rates, surcharges, and growth contributed almost $0.07, offset by $0.23 from the Peoples contribution along with $0.086 from other items such as increased depreciation, amortization, interest, and a decrease in Aqua Pennsylvania repair benefit compared to last year, leading to the adjusted income per share of $0.23 for Q3 2020. As mentioned earlier, the $0.23 impact of Peoples includes dilution from the share issuance, the financial performance of the gas business in this low usage quarter, and other one-time impacts. The decrease of $0.011 due to water rate credits to utility customers in Q3 brings us to GAAP EPS of $0.22 for Q3 2020. As mentioned, Q4 2020 will include additional rate credits of approximately $19 million to be issued to natural gas utility customers. Let's move on to rate activity. As of now, we've completed rate cases or surcharges for our regulated water segment in several states totaling $21 million in annualized revenue. Our regulated natural gas segment completed surcharge filings in Kentucky and Pennsylvania with total annualized revenue of $1 million. In the coming months, we expect to obtain new base rates or surcharges in New Jersey, Virginia, and Indiana for our regulated water segment. At this time, we do not anticipate any pending base rates or surcharges for our regulated natural gas segment. Our limited rate-related activity is on track despite COVID, and we continue to hold regular virtual interactions with our regulators and counterparties. As announced in August, we filed a petition with the Pennsylvania PUC requesting accounting treatment for the approximately $380 million catch-up deduction for tax-eligible capital investments made before Essential's ownership of Peoples. The proceeding has been assigned to an administrative law judge as is customary, and we are currently in the discovery phase. If required, evidentiary hearings are scheduled for late January. At this point, I'd like to turn the call back to Chris for an update on our municipal acquisition initiative.

Thank you, Dan. Many of you are already familiar with this slide, which outlines our acquisitions for the regulated water segment. So far this year, we've closed the Campbell Water System in Ohio, East Norriton Wastewater System in Pennsylvania, and Rockwell Utilities in Illinois. We continue to advance transactions involving New Garden and Cummins Water as well as DELCORA. Recently, we announced a signed agreement with Lower Makefield in Bucks County, Pennsylvania, to acquire their wastewater assets for $53 million, serving roughly 11,000 customers. These signed agreements are expected to generate approximately $18 million of incremental annual earnings. We expect to formalize asset purchase agreements for two or three additional transactions by year's end, totaling over 10,000 EDUs or equivalent dwelling units, alongside a purchase price exceeding $70 million. We are performing well this year with our wastewater acquisitions. I mentioned DELCORA's status earlier in the call, and I’d like to take your questions in a moment instead of reiterating. However, I want to reaffirm our confidence in having a valid contract and that we're set to close the transaction in early 2021. Beyond the signed municipal acquisitions we've just mentioned, we maintain a robust pipeline of potential municipal deals. This pipeline includes active opportunities, alongside significant discussions with prospective sellers. As this slide illustrates, we are actively pursuing acquisition opportunities totaling around 360,000 customers, presenting a very strong pipeline across multiple states. Finally, before wrapping up our strategy discussion, it's worth noting our involvement in a joint venture that owned a raw water pipeline, aimed at delivering water to the Marcellus Shale region. The pipe was initially intended to reduce trucking activity linked to bringing well water to fracking sites. Some of you may recall that this venture did not achieve expected success, resulting in a write-down upon my appointment as CEO. We sold our interest in that joint venture last month, putting that matter behind us. Let me conclude with our guidance update. We believe the company's current position will enable us to deliver at the top end of our adjusted income range of $1.53 to $1.58 per share on a pro forma basis for 2020. The remainder of our guidance remains unchanged, and we anticipate announcing new annual guidance early in 2021, along with an additional three years of guidance as we have done previously. With that, I’ll open the line for questions.

Thank you. Our first question comes from Julien Dumoulin-Smith with Bank of America.

Hi, Julien.

Thanks so much, Chris and the whole team here. Perhaps I wasn't going to start here, but in light of your commentary, I'd be curious to hear your thoughts on what you think this strategically means for the gas LDC space. Your observations are definitely insightful, but I am curious if there are implications that you, obviously you've been more on the acquisition side, I would like to know your opinion across the broader sector.

Yes. As I mentioned, we're in a hyperbolic situation with the elections, and that further contributes to the situation. Notably, there’s an ESG movement, and we are part of it, contributing to the effort to make our country—and the world—greener. I truly believe that natural gas has a prominent role in this endeavor for a long time. I believe, Julien, that as people ground themselves in the facts, we will see improvement. However, not all gas LDCs are the same; that's why I wanted to take some time today to differentiate the gas LDC that we purchased, which sits atop the Marcellus Shale region and has low-cost gas for a substantial amount of time, from areas where legislation is prohibiting new natural gas opportunities. Pittsburgh is very different, and as I said earlier, it has a deep pride in its heritage. All in all, I think you'll notice recognition returning regarding the significance of natural gas—not only for our energy independence but as a key player in the overall greening process. We cannot simply switch to a nuclear plant when it's not sunny or windy; you will rely on natural gas for efficiency in household heating. So I hope that gives you further insight into how we are approaching this.

Okay. Fair enough. It doesn't seem like there are too many strategic implications, but I want to pivot back to the strategic actions you already have ongoing. With regard to DELCORA, do you expect it to close in 1Q? Could you walk through the timeline for clarity? I know you touched on this already, but I would appreciate any additional insight.

Yes, let's think about this. First, on the acquisition of DELCORA, there are many moving parts. There's a court date coming up that was supposed to occur this week; we're hopeful it will be next week, and we should have news on that later today. The Public Utility Commission process will follow, and the pandemic will impact matters slightly. I would hesitate to lock us firmly into the first quarter, but it would be reasonable to think of the March-April timeframe for completion. Regarding equity, I'll turn it over to Dan shortly. The $300 million equity offering we discussed wasn't solely for DELCORA, as we have several projects ongoing, including sizable municipal acquisitions. We will need to leverage that equity to finance these acquisitions as we proceed. Dan, do you want to add something on the equity aspect?

Certainly, Julien. The equity timing was driven by our strategy to close transactions effectively. We wanted a favorable share price and aimed to avoid volatility, coming out of the election cycle, and we were very pleased with the timing of our equity forward. Post the last earnings call, we are now well-positioned to close DELCORA and other transactions as required. Maintaining flexibility is key; if there is a material price movement, those shares won't contribute to our total EPS denominator. We're content with our position.

Got it. If I can sneak another question in here. Currently on the water side, especially with residential and larger residential, it appears they are curbing some of the other impacts. Could you briefly discuss the gas LDC side coming into the influence of COVID as we approach the later part of the year?

It's early to provide precise insights, and as noted, we are transitioning from Q2 to Q3, which are typically low gas usage months. We didn’t see significant COVID-related impacts during those months. Weather ultimately drives gas usage far more than anything else. We are confident that as we enter fall, usage will correlate with weather patterns. Through conversations, we’ve noted that there is no significant load impact from manufacturing or heating loads with operations in Western Pennsylvania.

Thank you for your time.

Absolutely.

Thank you.

Hi, guys. Good morning.

Hi, Ryan.

Yes, good morning. It seems like you have a knack for timing this year. I remember the Dow was down about 4,000 points the week of the Analyst Day, and then here we are again on another interesting day. My first question was to appreciate the waterfall, Dan, on the earnings and revenue; it’s very helpful. O&M expenses seemed to come in pretty well above expectations, and I believe that might have factored into being a little shy of consensus as well. I think given what you said, that's likely driven more by the Peoples side. So for those of us who are somewhat new to the gas sector, could you walk us through some of the moving parts on the expense side for Peoples?

Certainly, you're correct about the expenses arising primarily from Peoples, which didn’t provide a comparative value in previous quarters. If you review the O&M section among the regulated water segment, you’ll note that it's down roughly 2.2% compared to last year. We’re comfortable with that. The key point is we're simply adding in the Peoples expenses this year with no previous baseline for comparison. Perhaps we can have that conversation further offline.

Sure, sure. A couple of other high-level questions. NAWC had their major annual meeting last week, albeit virtually. One subject that caught my attention was NARUC discussing potential greater federal involvement in water utilities, such as supporting a so-called water grid investment and strategies against LIHEAP for water. It sounds appealing on the surface; however, one great advantage for water is that it’s regulated on a closer level. Did you hear those comments, and what is your reaction to this potential increased federal involvement? If these initiatives move forward, could we get swept into regulatory constructs that ultimately are counterproductive?

Well, using LIHEAP as an example, as communities grow increasingly aware of rising service costs due to necessary capital investments, there will be a demand for customer assistance beyond what we traditionally provided. As you know, we plan to submit a Universal Service Program in this upcoming rate case, making us the first water utility in Pennsylvania to do so. Peoples currently provides around $27 million in customer assistance, with many of those programs aligned with federal support. Given the escalating water costs, such considerations ought to be discussed. While I prefer not to become mired in excessive federal red tape, there is merit to the proposal.

That makes sense. My last question pertains to the rate case in Pennsylvania. You entered COVID with a relatively light rate pipeline—perhaps fortunate timing because seeking rates now presents an image problem. We are in a K-shaped recovery, and some segments of the population will be under stress for a while. How do you intend to sequence your base rate case activities? The optics and politics surrounding this matter must be considered.

Yes. It's a significant question that we’ve considered carefully. The Pennsylvania water utility's substantial size means we must remain vigilant due to ongoing capital investments. I hope that by the time we file a rate case, we'll be in a more favorable condition, with a national vaccination campaign established for COVID-19. Of course, we will review circumstances as we proceed through spring. For now, however, I can’t say that we are modifying our plans; it will certainly remain a consideration.

I would add, too, that the proposal for the Universal Service Program can assist consumers experiencing hardships, reflecting that K-shaped recovery you mentioned, Ryan.

Thank you for your insights.

Thanks, Ryan.

Thank you.

Good morning. My first question is regarding the equity side. Hypothetically, if the DELCORA transaction does not close, how would you approach the anticipated equity to be drawn from the forward agreement? Would you still require the full amount or something less?

Let's remember—I'm going to turn this to Dan in a moment, but we have other significant transactions that require funding that are beyond DELCORA. We intend to ensure the equity supports various projects. Dan, care to elaborate?

Certainly, Chris. You’re right; we're in active discussions regarding acquisitions like Lower Makefield as well as other significant deals. We have approximately nine to ten months to settle that forward. We're confident that by this point, we’ll still require the equity for these transactions, and there are provisions for partial cash settlements if necessary.

That’s helpful to understand. Additionally, regarding the gas strategy, Chris, I realize you’ve discussed it in the past and highlighted the reasoning behind the Peoples acquisition. But long-term, is it accurate that future growth, especially regarding M&A, will primarily focus on the water side and not the gas LDC side?

Yes, absolutely! Let me be clear: we are primarily focused on ramping up the rate base by replacing pipes at Peoples, which is expected to yield growth between 8% and 10% per year. This growth ensures we don’t need to pursue M&A in the gas sector as our focus is solidly on the water sector.

Thank you very much.

You bet.

Mike, Chris, and Dan, good morning. Thank you for taking my question. Could I clarify quickly? Chris, I appreciate your insights concerning gas. But let’s revisit DELCORA. Can you detail the procedural milestones we should be monitoring as we consider the approval process? Is the timing of the court ruling first, followed by the commission order? Can you elaborate?

Of course! First, the court hearing in Common Pleas Court, the County Court in Pennsylvania was originally scheduled for this week but has been postponed. We are hopeful it will take place within a week, and we anticipate a decision soon after. The core question the judge will evaluate is whether a valid and enforceable contract exists. We are optimistic about our position. Assuming a favorable ruling, we can move to the commission's evidentiary hearing next week, setting us up for the commission's conclusion in around March. This timeline aligns us for an anticipated closing during late March or early April. Do keep in mind that there are many moving parts throughout this process.

Thanks, Chris. I appreciate your transparency. One final question—how is the catch-up provision for income taxes on Peoples Gas currently progressing? Any updates and when could we expect a decision?

Yes, we filed that around the time of the last earnings call and held a pre-hearing conference with the ALJ in early October that clarified the procedural schedule. We have evidentiary hearings scheduled for the end of January, after which we hope to receive a final decision in early Q2. This timeline involves standard processes including filings, replies, rebuttals, etc. For context, Durgesh, it’s essential to think of these provisions in terms of maintaining shareholder and customer benefits in 2024 and 2025 rather than immediate earnings impact.

Thank you, Dan. That’s helpful.

No problem.

Thanks for taking my question, everyone. Chris, I believe you mentioned the Trust's recent hearings regarding its creation and usage. How did those proceedings go?

I don't believe the decisions on those hearings have been issued just yet. The arguments were well-presented, and as you know, we are a third party in this matter. The judge's rulings were favorable up to this point. I’d suspect that we’d hear more regarding that trust matter in the future.

Is it correct to assume that the judge will issue two separate rulings—to address the trust issue and another confirming the asset purchase agreement? Or should we expect a comprehensive ruling?

Yes, it’s likely the judge will consider those rulings separately, based on the outcomes he perceives in settlement discussions as well. It’s important to keep in mind that the trust isn't a deal-breaker—it could take on a different form under various regulations.

Is there still a possibility of settlement? Is that a real path, even though we might be just a month or two away from the judge's ruling?

Settlement can always be an option, but I can’t comment specifically on any ongoing discussions.

Understood. Regarding the catch-up tax settlement, is your optimism regarding its resolution based on intervenor testimony, or how should we evaluate its prospects?

At this stage, we're working through observations, and we've received replies from various intervenors, with rebuttals still to come. It’s still early to provide specific commentary on this progression.

Thanks, looking forward to further announcements on M&A that you referenced earlier.

Absolutely. Thank you very much.

Exactly, thank you.

Thank you, this concludes today's call. Thank you for your participation.