Q1 2021 Essential Utilities Inc Earnings Call
[music].
Good day and welcome to the essential utilities Q1, 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Brian singer doesn't Sir. Please go ahead.
Thank you Katie and good morning, everyone and thank you for joining us for our first quarter 2021 earnings call.
I'm Brian Day. This is vice President head of Investor Relations.
And if you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website.
The slides that we will be referencing and the webcast of this event can also be found on our website.
As a reminder, some of the matters discussed during this call may include forward looking statements that involve risk 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-Q10-K and other SEC filings for Descript.
Such risks and uncertainties during.
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 posted on the company's website. After the presentation. We will open the call up for questions.
Here's our agenda for today will start with Chris Franklin, Our chairman and CEO, who will provide a company update next Dan Schuller, our CFO will discuss our financial results. Chris will then conclude the presentation portion with an update on our municipal acquisition program and a review of our 2021 guidance.
At the conclusion of the call we will open it up for questions with that I will now turn it over to Chris Franklin.
Hey, Thanks, Brian and good morning, everyone and thanks for joining us.
Let's start out with a look at some of our first quarter highlights the first quarter marked our one year anniversary already as essential utilities and the one year closing of peoples weighted.
We had a strong a strong first quarter.
And on a GAAP basis earnings per share was <unk> 72 cents for the quarter up 19, 6% and Dan will get into the details of that in just a few moments, we invested approximately $178 million in infrastructure improvements through our systems and the.
First quarter for street, once a year as compared to $172 2 million at the same time last year.
Our seven pending acquisitions totaling $455 million in purchase price really shows the strength of our municipal acquisition strategy.
Also yesterday was our annual meeting of shareholders and I'm pleased to report that all items on the ballot were voted in accordance with the management's recommendations.
The meeting was also one of transition our long time board member and friend former CEO, Nick Debenedictis stepped down from the board to comply with the boards each policy.
And Wendy Franks, who represented CPP IB since the acquisition of peoples was replaced by Edwina Kelly.
Wendy Franks left CPP IB.
To take another position with a different firm and.
And we also then expect to add a well qualified director in the coming months to bring the board back to nine members again.
As a reminder, our current eight member board has a strong diversity, which includes three women.
Two people of color.
And our board all of which have diverse cognitive and experiential backgrounds should also note that if you haven't had a chance to review our proxy I'd encourage you to do so we spend a lot of time and energy around that proxy, it's informative and very easy to read.
Alright.
I am excited to announce that in March we opened a brand new state of the art Environmental laboratory on our Bryn Mawr campus here. The New lab is just one example of our commitment to operational excellence and our mission to protect the public health and ensure high quality water.
The new two storey building will more than double the size of the previous lab, which did cause us great service over 70 years allow this new lab that will allow us to adapt to the denial dynamic regulatory environment that requires additional sampling and equipment necessary for drinking water and wastewater operation.
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It also has the capacity to accommodate the increasing needs as we add customers and systems through acquisition.
The lab employees of professional staff of 'twenty, including microbiome biologists and chemists, who perform about 300000 tests on 30000 water samples each year.
These scientists used 50 different analytical methods for 240 different water quality parameters.
Busy group.
The lab is certified by the Pennsylvania Department of Environmental protection, and other state environmental and health regulatory agencies.
And as we've gone from measuring in parts per million, what I was doing the business to now parts per trillion one.
1 million fold increase in detection levels, we feel confident that we will be able to deliver water that is safe and that wastewater, we treat and returned to our rivers lakes and streams is pristine.
Now as announced a year ago, we set a company.
Any wide standard of 13 parts per trillion to uniformly address the presence of the contaminants <unk> PFS and <unk>, which are all part of that P fast family of chemicals.
As I think Youre aware of the Epa's non enforceable health advisory level for <unk> and <unk> is still at 70 parts per trillion.
Although unenforceable federal standard is still probably years away.
Our laboratory is one of two labs accredited and the only utility certified to test <unk> in Pennsylvania.
Our commitment to making the necessary capital investment where source water exceeds 13 parts per trillion is for the safety and health of our customers, we serve and our new lab is integral to this important work.
Now in light of the ESG guidance that we announced earlier this year I'd like to highlight two solar field projects in Illinois that are in the final stages of completion you can see the pictures here.
Tito Solar field project was completed and became operational at the end of February.
Nearly one megawatt solar field will supply approximately 85% of the power needed to operate the wastewater plant, we estimate that the project will save between 20000 and.
25000 annually in operating costs very good for the customers.
The Danville solar plant project.
Spent eight acres and is anticipated to become operational in the second quarter of the year.
This is a $2 one megawatt solar field and will supply approximately 70% of the power needed to operate that water plant and we estimate this project will save between 110 to $140000 annually in operating costs.
So in total now we have six solar fields across our footprint.
It's projects like these that allow increased reliability.
<unk> ability and lower emissions, while also achieving cost savings.
As we switch to renewable energy options throughout our footprint.
We will continue to improve the company's already aggressive target to reduce scope, one and scope two emissions by 60% over the next 15 years.
With that let me hand, it over to Dan to talk about our financial results. Thanks, Chris and good morning, everyone.
We ended the first quarter with revenue as a $583 million up about 128% from last year recall that the peoples transaction closed on March 19th last year. Therefore, the primary driver of the increase was the addition of the natural gas business from a hole.
Quarter, which contributed $315 $8 million of revenue growth.
O&M increased to $125 1 million in the first quarter up from $106 six in the first quarter of last year. Again. This was primarily a result of the addition of the natural gas business and we will spud that a little bit more spelled out a little bit more we talked about the O&M waterfall.
Net income was up year over year from 50, $851 8 million to $183 7 million and GAAP EPS increase from 20 to 72.
Adjusted income was up from $153 7 million to $183 7 million and adjusted income per share increased 19, 6% from 60 to 72.
As a reminder, adjusted income for the first quarter of last year excluded peoples related transaction expenses and included a pro forma adjustment for the peoples operating results for the period from January one to March 15, 2020, thereby providing a basis for a full year run rate of operating results for 2020.
And as a reminder to clarify there were no adjustments for 2021 for this first quarter.
Next we'll walk through the details in the following waterfall slides starting with revenue.
In the first quarter of 2021 revenue has increased $328 million or 128, 3% on a GAAP basis. The primary driver being the 315 8 million related to the full period for our natural gas segment.
This figure includes $132 2 million of purchased gas cost.
Rates and surcharges, primarily driven by the peso, the Pennsylvania, <unk> organic and acquisition growth and increased volumes from our regulated water segment quite an additional $12 2 million towards the revenue increase which was slightly offset by other.
$2 3 million increase due to volume reflects both water consumption and wastewater volume.
Next let's look at our water consumption by customer class.
Since COVID-19 started we've experienced increased usage and this trend continued in the first quarter overall usage was up one 7% and again residential usage was strong for the quarter up almost 5% offsetting the declines in the commercial and public customer classes.
As you'll recall commercial water consumption has consistently been down since COVID-19 began.
Next let's talk a little about weather and gas usage in our GAAP business, our GAAP segment.
Youll recall that weather has a very direct impact on gas consumption and associated revenue. So we closely monitor the heating degree days as an indicator as.
As the left side of the slide shows we had a somewhat warmer than normal first quarter in western Pennsylvania from 2000, 702006 heating degree day.
Share to a 20 year average of 2845 heating degree day.
This was however, an improvement over the 2421 heating degree days in the first quarter of 2020, and just short of last year's pro forma of 2766.
The chart on the right terms as a reminder of how residential natural gas consumption in Pennsylvania was distributed throughout 2020, noting that more than three quarters of the gas was sold in the first and fourth quarters of the year with the largest portion being in the first quarter.
Now, let's move on to operations and maintenance expenses.
Looking at the O&M waterfall expenses increased by 17, 3% from $106 6 million in Q1 last year to $125 $1 million. This year. The primary reason from the increase in O&M expenses for the first quarter was the $42 9 million of additional O&M associated with people.
<unk> from the fourth quarter.
Offset by the impact of the peoples transaction related expenses from $25 4 million incurred last year.
Other contributing drivers include employee related costs COVID-19 related expenses for our water segment and growth, which were offset by savings in other costs and production costs.
Adjusting for growth COVID-19 related bad debt and increased pension expenses.
Related water segment operations and maintenance increased in line with historical experience.
Net spend a few minutes on the earnings per share waterfall.
Presentation bridges from the first quarter 2020, GAAP EPS to the first quarter of 2020, adjusted net income per share and then to the first quarter of 2021 GAAP EPS.
You will note that GAAP EPS for Q1 2020 was 20.
But adding back eight peoples related transaction cost and almost 32 related to the pro forma adjustment for the peoples operating results for the period between January one and March 15 2020.
<unk> 60 per share on an adjusted income basis for Q1 2020.
Continuing on to the right. The People's contribution added 10, followed by regulated water segment rates and surcharges expenses volume and growth, which together contributed $4.05.
These were offset by <unk> from other items, which include increased depreciation amortization and interest resulting in GAAP EPS of <unk> 72 from the first quarter of 2021.
The incremental <unk> from people is primarily due to increased tax repair in its full three month quarter versus the 16 day first quarter that we had included last year.
For the full year of 2021 taxpayer peoples will contribute 18% to 20.
But it's attributed to the quarters based on profitability. So the high gas usage quarters will receive the most benefit.
Given our strong results for the first quarter, we wanted to take a moment to remind everyone of how do we think about net income by quarter as a water wastewater and natural gas company.
Due to the lack of historical comparisons the intent of this slide was to assist our investors in creating quarterly projections.
We reported income per share on a GAAP basis for Q1 at 72, which falls above the midpoint of the range noted on the slide but as we look forward to the second and third quarters.
We'd like to reiterate that the natural falloff of gas consumption question, that's lower in those ranges and that our previously stated full year guidance range of $1 64 to $1 69 remain intact.
As we previously noted our collective ability to quarter is our earnings will improve as we establish a track record of actual results as a combined company.
Moving on to rate activity in other regulatory matters.
In 2021, so far we've completed rate cases or surcharge filings for our regulated water segment in New Jersey, North Carolina, Ohio, Pennsylvania, Illinois, and Indiana with total annualized revenue $13 5 million.
And our regulated natural gas segment, we have completed rate cases, or surcharge filings in Pennsylvania, and Kentucky with total annualized revenue of $1 1 million.
In the coming months, we expect to receive new base rates in Virginia for our regulated water segment and at this point in the year.
Any pending base rates or surcharges for our regulated natural gas segment.
As we previously noted we expect to file a rate case for Aqua, Pennsylvania. This year is now expected to occur sometime in the second half.
Also I wanted to close the loop on the discussion we had in the last call related to the people catch up deduction.
Settlement that we reached with extra advocates was filed with the Pennsylvania PUC was recommended to the commission by the administrative law judge.
This matter was on the docket at the PUC today with a recommendation to approve and it was approved four zero without talent.
Okay.
The settlement proposes among other point, but the catch up adjustment be provided to utility customers over a five year period and that peoples will file its next base rate case before the end of 2023.
Now as you would expect again watching proposed tax legislation engaging its potential impact on essential.
For regulated utilities that tax increase would look like reverse Tc JA and we'd expect a surcharge on customer bills or a regulatory asset to recover the increase.
Interestingly an increase in the tax rate would actually increase the repair benefit.
And Fortunately it appears that the minimum tax on book income as currently discussed wouldn't apply to essential at this time.
So this is obviously something that is still developing but I would expect we'll have more to discuss on tax reform during our next earnings call.
Finally, let's spend a few minutes discussing our financing activities.
As you know last August the company announced an offering of $6 7 million shares of common stock by a forward equity sale agreements for $308 million.
Post settlement. The proceeds are expected to be used for general corporate purposes, including the Dell core acquisition and other water and wastewater acquisitions in our pipeline.
The forward sale agreement allows the company to settle the transaction between now and August 10th of 2021.
Regardless of the timing of the Dell Court closing, we intend to fully settle the forward by delivering the $6 7 million shares and receiving the cash from our Counterparties, we would likely do that close to that end date of August 10.
Additionally, on March 4th the company priced a $100 million of first mortgage bonds for Aqua, Ohio with a weighted average tenor of 20 years and a weighted average coupon of 286%.
Upon closing on April 15th the proceeds of these bonds were used for general corporate purposes.
On April 19th the company completed a $400 million public debt offering of 10 year notes issued at two 4%.
We use these proceeds to pay down short term borrowings and credit line.
And both of these cases, we moved expeditiously to take advantage of attractive capital markets conditions.
After years of falling rates and purposeful refinancings of higher higher rate debt, our weighted average interest rate for our long term debt now stands at 362%.
As of April 30, after considering the effects of these financings the company had $1 1 billion of capacity to borrow on various credit facilities.
And with that I'll hand, it back over to Chris.
Great. Thanks, Dan.
Let's switch topics now to municipal acquisitions.
Many of you I think are familiar with this slide as we previously announced six of these municipal acquisitions that have been assigned and are pending closing in.
In April we signed an asset purchase agreement for $12 5 million for our municipal system in Illinois with approximately 4000 equivalent dwelling units now these seven transactions in total will add close to 231000 customers or customer equivalents.
And approximately $455 million of rate base when closed.
We also have one additional deal in which we have been selected as the winning bidder. We are working to sign an EPA and hope to announce that as well in the near future here.
Now, let's take a moment to discuss Dell Cora.
You will recall the county Court has twice ruled that our asset purchase agreement with Dell Cora is a valid and enforceable contract and has also ruled on the validity of the trust concept.
<unk>, Delaware County has appealed those decisions to state Court, we know that the state court called Commonwealth Court in Pennsylvania, and we're awaiting the judge's decision give.
Given the clarity of the rulings from the County Court, we expect a positive decision in state Court.
Absent a settlement this process typically takes about six months or more.
Now, let's talk about the regulatory process for <unk>.
Since our last quarterly call the Pennsylvania public utility commissioners on March 30th vacated the administrative law judges recommended decision and remanded the case back to the ALJ to reopen the record and conduct further proceedings based upon recent developments, including.
<unk> settlement agreements reached with all of the municipal intervenors in the case.
And its remand order the commission indicated awareness of the counties appeal of the trial court's decision in favor of Dell Cora.
But then on April 16th the ALJ issued a stay order for the case pending a final and Unappealable decision by the state Commonwealth Court.
We have since petitioned the commission to review the Alj's order as the ALJ order is very clearly inconsistent with the commissions remained directive.
And we've asked the commission to clarify its direction to the administrative law judge for the remanded proceeding.
Alright, as these municipal transactions folks get larger like Dell Cora there is always going to be the possibility of litigation and politics that play a role.
We remain focused and patient as we move through the process.
We also remain convinced that our solution is best for the adult Cora in Aqua customers and essential shareholders.
We will see this to conclusion.
Alright.
As we continue into 2021, we have a healthy pipeline of potential municipal opportunities.
This table here includes acquisition opportunities, where we are actively engaged in discussions with municipalities.
As illustrated on this slide we are actively pursuing approximately 395000 customers through acquisition.
We continue to believe that the fair market value legislation in the eight states, where we have water utilities is the main driver of our strong pipeline of opportunities.
I'll also note debt fair market value or similar legislation for water and wastewater acquisitions has been passed in the states in which we serve natural gas.
West Virginia approved a fair market value legislation in 2020 and last month, the Kentucky Governor signed House Bill $4 65 into law, which has similar legislation to fair market value.
Favorable regulatory environments are providing their municipalities the opportunity to pursue private capital solutions in infrastructure needs and access industry experience.
So in closing I want to reaffirm our guidance for 2021.
We expect earnings to be between $1, 64, and $1 69 per share and hopefully.
The discussion Dan led about how to best think about the quarters was helpful to you or.
Our capital plans remain on track as we anticipate spending approximately $1 billion on a regulated infrastructure this year and nearly $3 $3 billion across our essential platform by 2023.
Rate base growth is expected to be 6% to 7% for water and 8% to 10% for gas and this does obviously does not include acquisitions in the water side.
Customer growth is expected to be between 2% and 3% on average from our regulated water segment and.
And finally, our ESG targets include a 60% reduction in greenhouse gas emissions by 2035.
And with that I'll conclude our formal remarks, and Katie if you want to open the line for questions that'd be great. Thank you. Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off.
Now your signal to reach our equipment. Once again, please press star one to ask a question.
Pause for just a moment to allow everyone the opportunity to signal for questions.
Yes.
Thank you. Our first question comes from Ryan Connors with Boeing and Scattergood.
Hey, Ryan good morning.
Good morning, Thanks for thanks for taking the time.
I've got one kind of P&L question for Dan and then a big picture question for you Chris.
Obviously, we're in an inflationary environment here that impacts materials, and chemicals and labor and all of the above.
Peers have called that out as a headwind, but you don't seem to be experiencing much of that Dan mentioned actually production costs down on the water side.
<unk>.
Yeah. That's you late in the rate cycle.
It anyway, but can you just frame that force a little bit there and why youre not seeing that and whether you anticipate any cost escalation going forward.
Yes, Ryan Thanks, and obviously you know we're on the lookout for it but we have not seen it yet and we do have long term agreements with providers of lots of our materials as well as chemicals.
We expect that debt will have a little bit of a warning before we see increases on some of those types of things, but obviously, we're aware of the commodity price increases in the market more broadly and so we're on the lookout for Mark here.
And as Youre involved in rate matters, I mean, do you I assume you'll have to make some more aggressive assumptions maybe in future test years and things like that how do you think about that.
Okay.
Yes, I mean, we do that.
As we go into a future test year, we are looking forward at what we expect to see in terms of expenses for specifically the operational expense ratio chemicals and power and things like that.
Power, we've got long term agreements in place chemicals, that's done on a one year basis and usually as we go through our.
Our budgeting process as we look forward to that subsequent year, which is something we would then use ultimately in our rate case filing in the future test year.
We're getting a read from our chemical providers in terms of what they expect to see as inflationary increases in net that subsequent year.
Sure.
We will be looking at that as we go through this budgeting process now for 2022.
Got it.
Okay, and then my Big Picture question, Chris was.
Just talking about the municipal acquisition side, you know just this past Sunday there was a very prominent from.
Front page above the fold story in the Philadelphia Inquirer biggest newspaper in the state.
Basically, suggesting that there is growing and more organized.
Opposition element to sort of municipal asset sales in Pennsylvania.
I think you were quoted in that in that piece.
Can you just kind of give us your sum up how you think about the issues raised there.
How you strategize against that if in fact, there is any any reality to that.
Yes. It was it was.
Interesting Andy <unk>, who wrote the article just spend some time with us I'm not sure he captured my sentiments.
Think about them one of the things I said to Andy that I thought is premise was somewhat flawed in the sense that we had 10 deals signed or closed last year and of those 10. If you look at them. One by one there was only one that has had a position and that was that was in and Dell Cora now you could add.
Add to that we did we did step back from Norristown.
But we did that before.
It came through any kind of a referendum or a flight of some kind so.
The way we see it is the volume of transactions are increasing and so proportionately we see.
People voicing their opinions.
In the same way so yes, theres more in the market.
Deals in the market and there is some more opposition, but I wouldn't say that it's disproportionate I would say it's growing proportionately.
Mhm mhm, Okay, that's fair and then lastly.
It's good to see Illinois picking up a bit on the M&A front.
Another deal there, but I thought it was kind of unusual that you don't disclose their the name of the town of the system.
What's the story behind that has that been disclosed locally or is there. Some other reason why youre not disclosing that one.
Yes. It is unusual right and the reason that we're not as we hope to announce it very soon here, but we're finalizing some other associated agreements there and and those are there are some sensitive things there that we just wanted to wind up before we before we make a formal announcement and make it public.
Obviously, it's very good news and we do have an asset purchase agreement in place. So we want to let the <unk>.
Investors know that we have made progress there but it'll.
It'll be a little bit of time before we can get.
Some of the associated agreement signed that's all.
Sure.
Great well, hey, thanks for your time today.
Thank you thanks, Ryan take care.
Thank you. Our next question comes from <unk> Chopra with Evercore ISI.
Andrew cash.
Hey, guys. Thanks for taking my question, Chris I must say the picture needs to be updated with with.
With patient here on the slides.
[laughter], it's alright.
It's already gone.
[laughter].
Saddened to hear that anyway that was main appropriate.
Appropriate earnings call.
Just.
I wanted to see so there is.
And force.
<unk>.
Is there and you guys were if I remember this correctly, it's been getting a midyear.
It seems like that is going to get pushed is there.
Our target there.
Of closing here and maybe perhaps in the second half early next year.
Yes.
The guidance I, just kind of provided was that if it's if it if it winds through the courts it could be at least another six months.
Theres always a possibility of a settlement we've said that all through the product from this process, but if it winds through the state court it could be it could be a while again. So we haven't provided an exact date, we have to see the county has to file a formal brief would be probably in the coming days here and then the debt that clock begins so.
Our best estimate is probably unless a settlement would probably be sometime next year.
Understood and then just.
On the timing of the.
The equity forward August 10th.
Did I hear that correctly.
Is that sort of.
Ah you're timing that in accordance.
Yes.
Perhaps no coral.
What should we think of that.
Yes, so <unk> got the forward agreement Windows work as they have a one year life. So you've got you've got one year from when you price that forward cash.
Actually settle that issue the shares and take the cash so that that expires on August 10th.
2021 here. So we would expect that we would we would settle that in the day before that days or weeks before that.
We don't need to settlement now.
But we expect <unk> satellite.
Close to that date, if you will and importantly, the dilution associated is already in the numbers for the rest of the year correct correct. So you'd see those.
Those shares would be in place from just simply point kind of the middle of August through year end, that's already in the denominator. When we think about our guidance range and the EPS in that guidance range.
Understood. Okay I appreciate that so so settlement.
Before or around August and but it is already incorporated in your 2021 guidance perfect. Maybe just maybe just one big picture question for you, Chris So clearly a private market as you I'm sure you're following very closely the gas LDC multiples and gas asset transactions clearly there.
As a disconnect between the public equity valuation marker for these assets, which is private.
Would you consider or how should we think about like lot of electric years have done from the Bard.
Part ownership dive.
Type deals and utilities.
Amongst other things is there an opportunity here for you to kind of.
Put a valuation marker of these.
These premier assets in the private market. How do you are you guys thinking about that.
We are we are.
Really happy with the acquisition of peoples.
The integration has gone extremely well.
It's earning in accordance with our expectations.
And as operating even better and so we are very happy with this combination we see a long life together.
And we're going to stay the course.
I think through continued understanding among investors and the public in general that natural gas is here for a very long time.
Estimated at least 36 per cent of the energy mix through the next 30 years.
We're going to we're going to tighten up our system.
We're going to operate it as environmentally consciously as we can with dropping our footprint by 60% of our greenhouse gas footprint by 60% and we believe this is going to be a strong combination into the future. So we're going to stay the course.
And I think that we would expect that we see.
Private market transactions at that level, we can.
Start to see that disconnect you start to see those converge with public market valuations, increasing to that level or towards that level as well.
Understood that makes sense guys. Thanks, thanks for the time this morning appreciate it.
Take care.
Okay.
Our next question comes from and so Kim with Goldman Sachs.
Hi, Thank you hey, good morning.
First question just on the timing of the equity forward and update you guys gave on bell core on what that could mean from a.
Clothing standpoint, I appreciate the comments on 2021 and what's embedded when you just look out to 2022 at this point with the recent updates.
Now how much of a potential impact of this disconnect.
Disconnect in timing and potential delays.
Just what are solid.
Net that you could do to maintain a five to seven.
Yes, I guess I'd say.
It's a relatively small number of shares relative to our total number of share today so that.
That helps mitigate any impact.
And.
As Chris said right, we've got six acquisitions coming down the Pike here already signed in addition to Dell Cora.
And so.
And plus a very strong pipeline of additional opportunities beyond that so.
In our.
Decision, making we just believe it makes good sense to go ahead and do that settlement in August to take those shares to take issue those shares to take the cash.
And then as we go through as I kind of alluded to Greg <unk>.
Annual planning process, we'll be incorporating these shares obviously there.
In our five year plan numbers already for 2022 they'll be in our budget for 2022, as we as we get to that.
And we've got some as you know you manage a business that's got a number of parts and pieces.
Manage it to drive earnings as much as we can and you know you work to offset any sorts of dilution you might have in the business.
And we have these other acquisitions to close where we'll put capital to work.
I think.
Also that when you think about.
The increased equity we are spending $1 billion a year.
So that's a pretty good clip of capital and we're very mindful about our credit metrics as Dan said earlier and so.
These things are as Dan said, it's a balance so all things in mind I think it's very prudent to take down the equity here in August just before.
And I think about.
Talking about about the future.
We remain confident that we're going to close Delcor as Dan said, we've got a couple of other things in the Hopper, but book.
I think we will stand behind our guidance here.
Debt completely agree.
Got it.
Second just.
Wondering if there's any updated.
That's a matter of cost from the February in fact, we have discussed that.
Fourth quarter call, but.
Any color there.
And if that impacts not that it would impact line, one guidance, but just giving our overall magnitude.
Yes, so net of big dollar spend there.
About a half a million dollars of costs that we've looked to establish a regulatory asset on.
That kind of takes care of the the revenue loss in the operating expenses to resolve the situation there and then looking forward from that event.
When we when we did our root cause analysis and looked at reason for systems being down.
As we said on the last call. It was very much driven by electrical outages, so electrical outages as opposed to freezing without the outage, we would've continued to be successful in providing our customers with uninterrupted service.
There may be an opportunity there too there certainly is an opportunity there.
Some of the system to do some hardening and make some investment is not huge dollars.
In Texas, we are basically in compliance in terms of the number of generators. We have for the systems that we have and to invest in more generators, we'd really need to buy in from the PUC kind of an advanced saying we want to ensure that we can.
Generate power at the powers out, but when you look at <unk>.
Barely.
A large number of systems across the.
The big number to start putting in lots of generators. So I don't I don't think the PUC will let us do a tremendous amount beyond the <unk>.
At this point, we have less than 100000 customers in Texas and wood costs in the range of $41 million to put generators and all of these facilities I just don't see I, just don't see customers willing to pay that number and I don't see that commission willing to sign up for that many probably someplace in between what we have meeting the today's regulation and maybe where the hardening.
The commission requires for the future.
There might be some opportunity to spend capital and harden the system as Dan said.
But we don't see.
Spending at the level, where everything would get a zone generators, it's just that.
I would call it cost prohibitive, so maybe a few million dollars, but not tens of millions of dollars yes.
Understood. Thank you so much book.
Yes. Thank you.
Yes.
Thank you. Our next question comes from Travis Miller with Morningstar.
They try to Hugh Thanks, Rob and hi, everyone.
Wondering if you could give some more thoughts on Kentucky and the legislation there is not a place you've historically looked at acquisitions and <unk> not been able to get it to work or no with that legislation is that a strategic area that you might look at more.
Yeah. That's a good question, we have not traditionally looked there because we didn't have a base. There now that we have a base of utility base there, albeit it's it's a natural gas base.
We do have a management team and our regulatory.
Experts, there and an operational team said, albeit natural gas, but it does give us a base of operations to look for utilities in Kentucky, and yes, I think the short answer is we are interested in Kentucky, particularly with that legislation.
Regulatory state otherwise.
And we enjoy.
Operating the gas utility there from a from a from.
On an economic standpoint so.
I would look for us to be to be very active in Kentucky going forward.
Okay, Great and then at the national level or do you think about the infrastructure move in some of the proposals are.
Do you think thats an opportunity more in terms of direct Capex free goes in your system or does it possibly open the opportunity for more acquisitions as kind of these municipal space or look at potential for large investment needs or wants.
Yes listen my hope is that they would focus more of the infrastructure.
Funding on infrastructure on things like separating Sanatory cemetery, and storm sewers bridges roads that sort of thing because I think that's really where you can't bring.
Private capital as easily to bear in water and wastewater.
We like to think about the solution as being a low cost capital to the two to the game here as well as local ratemaking, so that combination.
Think about it almost like a user fee rather than a federal bailout. So to the extent that those federal dollars would flow for our use I think that that would be that would be useful to the extent that it would.
Flow through municipals and give them.
Temporary band AIDS on some of their massive capital needs.
Obviously.
That is not as productive, but I really don't see it.
Having a major impact given the vast bucket of need and the relatively small dollars.
Designated here for water and wastewater.
Sure Okay great.
Really appreciate the thought.
Net.
Thank you again as a reminder, please press star one if you would like to join the queue. Our next question comes from Jonathan Reeder with Wells Fargo.
Hey, Jonathan Hey, Jonathan.
Hey, good morning, Chris and Dan Dan first per you did you say the repairs benefit is expected to be 18 to 20 of peoples for the full year and is that consistent with the benefit realized in full year 2020 on a pro forma basis for some reason I thought you'd previously indicated it was going to be like eight to 12.
Yes.
So Jonathan I did say 18 to 24 2021.
You are correct there.
If we think about last year.
Didn't have a full year of capital I do think Youre right eight to 12 is what we said when we had the Investor day.
In New York right before COVID-19 started so.
I can check it's probably at the high end of that.
Again, we didn't have the full year, we only had <unk>.
<unk> 16 days in the first quarter and then the subsequent three quarters, so less capital with.
Investors it was repair eligible.
Okay. So A&P to 12 was for 2020, and then having the full year capital gets you up to that.
<unk> 20 this year.
Full year capital with this year's capital program, Yes.
Gotcha, Okay, great I appreciate that and then.
Just to also clarify the comments around usage trends in Q1 and kind of the full year guidance.
Assume call it normal weather.
So the remainder of the year in terms of both water and gas consumption with that growth.
The current guidance range or does the strong Q1 have you trending at or above the upper end.
I would still say in the guidance range I mean, I think at some point here right. We will see more people return to the workplace will start to see.
Residential usage more commercial usage, but we may not be the beneficiaries net commercial use to try to force serving the suburbs and people go back to work and the steady. So I think we kind of come back to we call normal usage on COVID-19 basis on the water side.
Gas side right, so weather dependent.
The best you can do is sort of I assume kind of normal weather through the remainder of the year and of course, there's always variability around that but I would say as I've made as I said earlier and I think Chris reiterated that debt.
Dollars 64 to $1 69 guidance range free cash that remains intact.
Continuing to focus on that.
Okay Awesome and then.
Maybe this is Kris when do you expect the Pennsylvania PUC to respond to your appeal of the Alj's day.
In the adult court dockets from there.
Yes, 30 days may 20th is the public meetings that they need to respond by.
And if they.
If they kind of reiterate that they didn't want those things stayed in and moving forward would you think then like the Commission's prepared to act before I guess the appeal process.
Plays out.
That's a question.
I don't want to front run the commissioners. It is it is a it is a good question and I think there's there's a diversity of views among the commissioners. So.
We will have to let's see we're trying to take these things one step at a time, so let's see what they do on May 20th and then maybe give us give a better judgment from there.
Okay, and then last one.
I know you're limited as to what you can say in regards to the potential settlement, but do you feel any additional headway has been made in reaching a compromise.
Since say your year end update.
In February.
Yes.
All I can say is there has been discussions.
I'll just say this.
I've said this publicly so.
I am so disappointed in.
The politics being played here you know.
<unk> had to raise rates, 10% at the end of last year, though I'll probably have to raise them again, 10%. This year. If this continues on.
We committed to in the transaction that we would only raise rates, 3% a year. So already these customers are paying a lot more than they really need to and we continue to ask for through a right to know process. How much. The county is spending on legal fees and they are spending literally millions of dollars on this.
And it's it's a sad commentary on politics over.
Good economics and.
But Jonathan we're committed to seeing this thing through.
At the end of the day, we think that our contract as I said is valid and enforceable and we plan to take it to the end here.
Okay, Great I appreciate those responses and yeah, good luck with the quarter hopefully.
We get some movement there and then you can get the deal done soon.
Yes. Thank you.
Thanks, Jonathan.
Thank you. Our next question comes from Verity Mitchell with HSBC.
I've already.
Hi morning, I've got a more general question of biogas.
I mean, there's a lot of extra water and one of your previous slide deck. He's got at a rate of miles for gas to rehabilitation.
So you obviously got a desktop you may flow and then come back.
In 2000.
And then another step up in 'twenty, three I think its debt capable and teaching to your cash sweep penetration Paul.
And.
And more and.
I'll now be interesting. Thank you.
Yes, I think.
I'll give a couple of opening thoughts and then let Dan jump into Verde. So.
So when you when you do a gash rehabilitation program. The number one thing right is safety and so depending on where that work is being completed what it looks like is it densely populated city of Pittsburgh is it out further in more rural areas.
Clearly the complication in the city is difficult right.
Looking at our.
Construction site just this week out there in Pittsburgh and they were moving nine feet a day, that's what how complicated city St is however.
More oral areas you can move much more quickly and so the mix of projects is part of the element of what what comes to bear here and as you can imagine what we've tried to do in our capital program is handle those more densely populated areas first and then move into.
The more rural areas and so there is a lot of things to consider in that mix. We've estimated about 15 years.
In total and net will probably vary a little bit in terms of pace throughout that period.
Dan do you think about it in any different way then.
No I think you're right Chris.
I'm looking at the same slide now Verity that Youre looking at and there is that step up in terms of mileage.
I believe that on the on what underlies that is.
Move to get more mileage outside the city, where it is faster to move those miles, but also very together there are a couple of things to talk about here one is.
We do file with the Pennsylvania PUC of long term infrastructure improvement plan that really outlines a number of miles we intend to replace year after year, you'll remember as part of the transaction we agreed to increase both the mileage in the day.
Investing each year investing each year. So we've built that into our file the LTI program.
<unk>.
Note that there are there is there is that sort of plan in place for how we would do it.
And then our constraint is obviously qualified labor to implement a capital program and so ramping up our capital program.
We need more crews from outside contractors, who are well qualified to do this but also.
Fairly large number of internal resources as well because of the gas business, we need internal resources to do the to do the tie ins.
Any line gas type of.
Work, where we're connecting our customer service line.
There is a question of <unk>.
Ramping up.
On the resource side as well if you're trying to do this faster. So I would say at this point, we think that what we filed in the outset.
What we're planning to do.
Thanks very much.
As stated on the slide you're looking at will adhere to that from the time being.
Thanks, that's really helpful. Thank you.
Yes, Thanks Ravi.
Thank you. This concludes today's Q&A I would now like to turn the call back over to Chris for closing remarks.
Thank you all for your for joining us today as always Brian Dan and I are always available for follow ups. If you needed to have a great day, thanks again for joining us.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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