Q2 2022 Essential Utilities Inc Earnings Call
Good day and welcome to the essential utilities incorporates quietly into 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Brian. Please go ahead Sir.
Good morning, everyone and thank you for joining us for today's conference call.
I am Brian Davis, Vice President Investor Relations and Treasurer at essential 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 Darko.
The slides that we will be referencing and the webcast of this event can also be found that their website.
Here's our forward looking statement 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 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 in the presentation and also posted in the Investor Relations section of the company's website.
Here's our agenda for today.
Start with Chris Franklin, our chairman and CEO , who will discuss the highlights from the quarter and provide a company update.
Next Dan Schuller, our CFO will discuss our financial results.
Following Dan Matt Rhodes, our EVP of strategy and corporate development will provide an update on our acquisition program.
Lastly, quick Chris will conclude the presentation with a summary of our guidance before opening the call up for questions with that I would like to turn the call over to Chris Franklin.
Thanks, Brian and good morning, everyone. Thanks for joining us its Brian Shea, let's start off with some highlights of the quarter first we reported year to date net income growth of six 5% in our quarterly earnings per share were in line with expectations and Dan will take you through that in a little bit more detail in a moment.
We continue to enhance shareholder value as the board approved a 7% increase in the quarterly dividend. This week, marking the 30 <unk> consecutive year of dividend increase is something we're very proud of.
We currently have asset purchase agreements signed for seven municipal acquisitions totaling more than $418 million in purchase price.
Each of those continue toward regulatory approval in closing.
Now we shared some pretty exciting news just a couple of weeks ago that after a lengthy bid process by the Bucks County water and sewer authority. We were selected by the authority board to engage in exclusive negotiations to purchase their substantial wastewater assets and Matt is going to take you through that in a little more detail as well and just a few.
Moments.
Now as part of the company's ongoing commitment to the renewal of critical infrastructure, we invested approximately $424 million $124 6 million of exact through.
Throughout our water wastewater and natural gas systems in the first half of the year as compared to $404 6 million from the same period last year.
I'm going to give you a little sense of those projects that we undertake undertook in the quarter in just a few minutes.
Lastly, we remain on track to achieve our ESG targets and our commitment to ESG as well you can read more about our progress in our 2021 ESG reporting update that was just posted this week for those of you who follow ESG metrics closely those updates can be found on our ESG.
Micro site.
Now when we talk about investing a $1 billion in infrastructure each year. It often goes unrecognized that to achieve this level of spending.
You have to plan execute and account for thousands of projects each year.
And this is different from a lot of large utilities think about the electric utility industry, where they have a very few but very large high dollar projects that make up their capital budget.
So I want to provide a few examples of the work that our operations team has accomplished already this year.
Execution of a vast number of projects and a large capital plan has become one of our core competencies of the company.
Best thing and our infrastructure is key not only to our company's growth, but critical to protecting our environment and ensuring reliability of service.
Now starting on the water side in Pennsylvania, We're working on the Valley Forge National Park transmission main replacement project is consists of a stalling a large.
9100 linear feet 30 inch transmission main.
To replace an existing 98 year old cast iron main.
This main helps convey water from one of our largest plants. The pickering water treatment plant to roughly 670000 people and is being completed in coordination with all of the services you might imagine the National Park service, the Pennsylvania Department of transportation local townships in another utility.
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All to ensure that we have minimal disturbance to this really historic area for our country.
This $4 $4 million project is expected to be completed in 2023.
No in Ohio, we completed the ash tubular water treatment plant upgrades, which includes.
The first place settler water treatment plant process in our Ohio fleet. This allows us to use a smaller footprint to process, even more water obviously.
You can get much more efficient.
We also.
Added new flagellation and renovation to improvements to our existing conventional filters.
Our filter improvements include automation of valves, which is also much more efficient.
This $14 million project has yielded improved settled water quality at the front end of the plant, which ultimately yields and savings and power and chemicals, along with improved water quality, just bringing overall efficiency through reduction in O&M costs are really good strong project and finally in Illinois.
We're making significant upgrades to our kankakee water treatment plant.
Largely compliance driven updates to meet federal requirements, specifically, the crypto spurring some compliance.
Ultraviolet disinfection was our selected.
Method and we believe that's the optimal treatment process for this situation. The design includes three parallel UV reactor trains with a capacity of 24 million gallons. A day. We also made accommodations for future upgrades that could actually increase.
Our plant two at about 36 million gallons a day.
<unk> includes four intermediate pump pumps to accommodate the hydraulic profile requirements of this new UV treatment process construction is already underway and upgrades are planned to be online by December of this year.
Additional water treatment plant improvements also include filter upgrades and some upgrades to our backwash pump, but this is also a really strong upgrade to our plant there in Illinois.
Now these details might not necessarily be important to you. But this is really important work that our people are executing and it continues to build the reputation that is so important as we talk to municipalities who are considering a sale of their assets because we know.
That our expertise our compliance record and our overall execution act as our resume as we continue to work to grow our company.
So now on the gas side. There are a couple of examples that I would like to highlight as well in the Pittsburgh area.
Now the FERC Hollywood Bridge project in the Squirrel Squirrel Hill area of the city is a $5 $5 million project that not only includes replacing the pipeline that was severed and you may remember this from the last winter when the bridge collapsed in January .
But also includes replacing an additional 3800 feet of $19 27 vintage cast iron pipe on each side of the bridge.
Recall this was and this was national news President Biden was visiting the collapsed shortly after it happened you just happen to be in Pittsburgh that day and the project is expected to be completed in the fourth quarter of this year, which is a pretty pretty big.
Sure.
Fast timeline, given what we experienced out there.
Now another product project the Fort.
Boulevard project in downtown Pittsburgh and for those of you who know Pittsburgh This would be in the Golden Triangle area. This is a $3 $5 million project installing about 'twenty 210 feet of 16 inch coated steel pipe, replacing $19 36 in 1939 vintage 16 inch bare steel pipe.
This project will also be completed this calendar year.
Now, let's talk about ESG for a moment.
We recognize that transparent and detailed ESG reporting is important to many of our constituencies, including many of you were on the line today.
Mental reports that summarize key metrics now.
Now this year, we're updating just the supplemental reports then next year, we'll look to publish a new version of our full ESG report.
We arrived at this reporting cadence after dialogue with many of our stakeholders, including some of you.
Now through June of this year.
Scope, one and scope two emissions reduction.
Now this is driven in large part by our January 1st switch to nearly 100% renewable electric power for our water segment operations in Pennsylvania, Ohio, Illinois, and New Jersey.
We expect this figure to continue to rise.
In the right direction as the remaining six months of the year actualize.
We also continue to replace aging gas main is I just was describing each year, which is the greatest contributor toward our targeted 60% reduction.
By 2035.
Now lastly, it's not on this slide but I did want to briefly revisit what I'll call industry, our industry, leading <unk> commitment given the recent federal proposed health advisory limit.
We consider our 2020 commitment a great example of strong ESG in practice.
We were the first and the only multistate utility to set its own companywide P. Fast standard and I think we are uniquely positioned to address P fast because of our experience and our capabilities with analytical testing and building and operating treatment systems spending nearly $40 million.
To meet the companywide standard of 13 parts per trillion.
The Epa's recent announcement about its revised.
The non enforceable health advisory limit.
Recommends that utilities, considering addressing <unk>.
At a level over.
All four parts per trillion, which is more than a thousand times lower than the previous advisory limit set in 2016.
It's also a thousand times lower than the technical capability to detect this contaminant, which is currently at four parts per trillion.
So largely we see this as a political action by the federal EPA and not necessarily based in science.
So I think we all know at this point that the EPA will be proposing a true P. Foss enforceable limit in the fall of this year, which is based on the legal process and requires a cost benefit analysis.
We believe that the mcl or maximum contaminant level.
That will be issued this fall will require a much higher concentration than the health advisory level, They recently announced.
We have our key people from.
From the company, who are involved in organizations that will be reviewing and discussing this proposal with the EPA.
Up and through the fall. So I think we're well positioned to have adequate input into this decision that the EPA will make.
And with that Dan, Let me turn it over to you for the financials, Thanks, Chris and good morning, everyone.
Let's move to slide 11, we ended the second quarter with revenues of $448 8 million.
About 13% from last year.
Our regulated water segment contributed $269 4 million and our regulated natural gas segment contributed 167 $7 million with the balance coming from our limited nonregulated operations.
Purchased gas costs increased by $32 million due to higher natural gas commodity prices.
That's gross margin increased year over year by $21 5 million.
Largest contributors to the increase in gross margin for the quarter were additional revenues from rates and surcharges customer growth and increased volumes from both our water and natural gas segments.
O&M expenses increased to $135 million for the quarter up from $127 5 million in the second quarter of last year.
Recently additional recently added acquisition increased maintenance expenses and higher water production costs, primarily as a result of inflationary pressures were the main drivers for the quarter.
Net income was up one 7% year over year from $80 9 million to $82 3 million and GAAP earnings per share decreased from <unk> decreased to 31.
<unk> 32 for the quarter given the increase in shares due to the August 2021 settlement of our $6 7 million share forward sale that we did in 2020.
Next we'll walk through the waterfall slides starting with revenue.
In the second quarter of 2022 revenues increased $51 7 million or 13% on a GAAP basis.
Similar to the first quarter of the year Youll notice. The primary driver was the recovery of higher purchase gas cost of $30 2 million due to the significant increase in natural gas commodity prices.
Rates and surcharges organic and acquisition growth and increased volumes from both our regulated water segment and our regulated natural gas segment provided an additional $23 7 million towards the revenue increase which was then offset slightly by other.
Next let's look at the other operations and maintenance expenses on slide 13.
Looking at the operations and maintenance waterfall expenses for the second quarter increased to $135 million compared to $127 5 million for the same period in 2021.
Other expenses contributed $3 5 million for the quarter.
To reflect higher outside services costs in the water segment, some of which will be capitalized in the third quarter offset by higher capitalization in the gas segment align with the accelerated pace of capital projects. This year.
Growth, which reflects the O&M costs of acquired systems in Pennsylvania, Illinois, and Texas contributed $2 2 million and increased production costs in our regulated water segment added an additional $1 5 million.
And production costs, the largest inflation related increases we are experiencing are for chemicals.
Many of which have seen significant increases year on year.
Employee related costs added 554000, and the gas customer assistance program expenses, which are recoverable through our revenue surcharge increased 524000.
These increased expenses were offset by decreased bad debt of 788000.
Next I'll spend a minute on the earnings per share waterfall.
Okay.
Beginning on the left side of the slide GAAP EPS for the second quarter of 2021 was 32.
Rates and surcharges contributed three.
And growth on increased volume from our regulated water segment added another $2 one combined.
Continuing on increased volume from our regulated natural gas segment contributed <unk> six.
These were offset by $4.04 of other items, including increased depreciation interest and taxes.
And $1 seven tenths of expenses.
The result is a GAAP EPS of <unk> 31 for the second quarter of 2022, which was in line with the street's expectations.
As I noted earlier. The 31 also includes the impact of $6 7 million additional shares from the forward equity sale that we settled last August to August of 2021. These shares for that's not in the denominator when the 32 from the second quarter of 2021 was calculated.
We remain confident in our full year guidance and our ability to deliver on the 5% to 7% earnings growth per share expectation that we set at the beginning of the year.
Moving on to rate activity in other regulatory matters on slide 15.
In 2022, so far.
We completed rate cases, or surcharge filings in our regulated water segment in Illinois, North Carolina, Ohio, and Pennsylvania, and we completed a rate case in our regulated natural gas segment in Kentucky.
The combined total annualized revenue increased $83 3 million.
Okay.
As many of you are aware we received a final order in the litigated base rate case for our regulated water segment subsidiary in Pennsylvania.
Just to recap we filed a rate case for our Aqua, Pennsylvania subsidiary in August of 2021, which included six acquisitions as well as the request for the first water focused Universal services program in Pennsylvania.
The primary driver of the rate case filing was the $1 1 billion in capital investment since the last rate case.
We were awarded an ROE of 10% by the Pennsylvania Public utility Commission and additional authorized revenues of $69 million with new rates effective on may 19th of 2022.
And with that I'll hand, it over to Matt to discuss developments in the municipal acquisition program, Matt. Thanks, Dan I appreciate it I'll start on slide 17, many of you're familiar with the seven signed asset purchase agreements pending that are shown here in the dark blue boxes, which together add nearly 224000 customers our customer equivalent.
And total over $418 million in purchase price. We are pleased to report that last month, we received approval by the Pennsylvania Public utility Commission for the East Weiland and Willis town wastewater transactions, which is reflected on this slide we anticipate closing both of those transactions over the next.
<unk>.
Regarding del Cora. Many of you are aware that we submitted a request to the Pennsylvania PUC earlier this year to restart the regulatory approval process. After the Commonwealth Court decision on March three 2022 were in the court acknowledged the enforceability of our asset purchase agreement with <unk>.
We are now currently awaiting an order from the common please court that is consistent with the Commonwealth Court's decision.
On July 14th the Pennsylvania, PUC also remanded the approval proceeding back to the administrative law judge for review in a prompt manner. The order for this was then formally entered on July 26th.
Given these developments we remain comfortable in the closing timeline, we laid out earlier this year and continue to have no core are included in our long term guidance starting in 2023.
We expect to close the other four transactions on this slide.
Later, this year or in the first half of 2023.
Moving on to slide 18, I would like to cover the exciting development with Bucks County, water and sewer authority.
As Chris referenced earlier last month, it was announced that we were selected as the sole company to move forward with discussions regarding the sale of the authorities wastewater assets.
Aqua, Pennsylvania, Aqua, Pennsylvania was granted a one year exclusivity agreement based on the authority board's determination that our terms, where the most beneficial to its customers employees and other constituents along with our residents and taxpayers our Bucks County.
We have not yet signed an asset purchase agreement. Therefore, it is not included in our current pending acquisition numbers, but we did want to provide you with some of the details regarding the potential acquisition.
<unk> for $1 1 billion in total for the Bucks County, water and sewer authority wastewater system assets with with the majority of this paid upfront and the rest paid over time the.
This system serves approximately 75000 customer connections and approximately 130000 equivalent dwelling units given the 14 other wholesale wastewater contracts.
There are 15 plants with a combined total capacity of about 50 million gallons per day.
Approximately 115 pumping stations and the system has approximately 900 miles of sewer pipe.
And then in addition to Bucks County, the authority also has service areas and own assets and <unk> assets in both Montgomery County, and Chester County.
This is a very very exciting opportunity for our company, which will more than double our existing wastewater connections in Pennsylvania.
We hope to have more news to share on this exciting development, including the potential signing of an asset purchase agreement in the near future.
Moving on to slide 19.
In addition to the signed municipal transactions and with the most recent announcements our pipeline of opportunities for growth remains strong and healthy the.
The competitive amount of upfront capital, we provide along with our technical and operational expertise and long start long term rate stability continued.
To demonstrate our value proposition to municipal systems, we continue to focus on growth in all eight of our water and wastewater states given we have fair market value legislation in place in each.
Currently we are engaged in active discussions with municipalities and pursuing approximately 410000 potential water and wastewater customers as illustrated in the table you see here and I will note that this pipeline no longer includes the Bucks County, water and sewer authority wastewater customers.
Now I'll hand, it back to Chris Thanks.
Hey, Thanks, Matt.
I mentioned earlier in the call that when the board met this week they declared a 7% increase to our quarterly dividend. This marks the 30 <unk> an increase of 31 years.
And the 77th consecutive year of quarterly dividend payments supporting our consistent record of delivering shareholder value.
Now following the increase the annualized dividend rate will be nearly $1 15 per share and this slide demonstrates the annual dividend growth that we have consistently provided for shareholders over the years.
Let me wrap up on slide 22 by reaffirming our 2022 guidance.
We continue to expect to earn between $1 75, and $1 80 per share.
We remain confident that our three year earnings per share growth will be 5% to 7% through 2024, and our capital plans remain on track as we anticipate investing approximately $1 billion, a year to rehabilitate and strength in water wastewater and natural gas systems through two.
<unk> thousand 20 for rate base is expected to continue to grow between 6% to 7% for water and between eight and 10% for natural gas customer growth is expected to be between two and 3% on average for water and stable in natural gas and finally, we remain committed as we've discussed.
Just to our ESG targets and we will continue to report on our progress.
As things develop.
Including our year end report for all of you.
And this concludes our formal remarks and why don't we open the line for questions at this point.
Thank you Sir.
You would like to ask a question. Please see note by pressing star one on your telephone keypad, if they're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask question. We will take the first question from <unk> <unk> from Goldman Sachs. Your line is open. Please go ahead.
Okay. Good morning.
Hey, guys how are you.
First question.
On that pending discussions with the Bucks County.
Near term, we'll see if there's an API that signed.
Looking through that.
I guess the difference in the.
The breakout of the immediate payment versus the ones over time and thinking about potentially.
<unk> of those that.
Cascaded down into the rate base any rule of thumb or initial thoughts on.
How we should think about that.
Yes.
I can take that one.
Thanks, Anthony So really the Bucks County, water and sewer authority board wanted to ensure an ongoing revenue stream over time and therefore, we entered into our retained capacity agreement for a portion of its wastewater treatment capacity. So basically as development occurs in their service territory would purchase that retained.
Capacity and then once we purchases will be out included in our rate base going forward.
In order to service these new homes and businesses that come online. So the $195 million that we referenced on the slide we will it will be actually be paid out over a very long period of time it could be in the range of 50 to 100 years, but it really all depends on the level of development in that service area.
Okay and that the immediate $935 million of any.
What percentage that we could think of that ultimate goes immediately into rate base. If this does happen and close.
Yes, that's correct.
Dependent upon as you know the fair market value process and the public utility Commission's view of things.
But we feel good about.
Our purchase price and we think will make a strong case with the with our <unk>.
For inclusion in rate base.
It's hard for us to predict exactly what that will be before we run through the process.
Got it.
And then I guess somewhat related to that and then from a balance sheet and financing perspective given that this.
Pretty large potential acquisition is out there when we look over the next 12 months.
Or beyond.
Is the larger potential equity issuance.
Going to be tight.
Tied to potentially this agreement in the acquisition.
Or could we see something a little bit sooner.
Yes, so I think that's something we're still evaluating today I mean this is relatively new news in terms of Berks County, and then of course.
Got expectations around Cora, So, we're really reevaluating, how much equity need and what the timing is of that equity.
The means of raising that equity.
Just to add to that Dan.
We know that upon signing of the asset purchase agreement, we could probably have call. It nine to 12 months as you all know of regulatory process. So given we're not quite at the signing of the API. We have plenty of time to consider timing of equity needs as Dan said correct.
Okay, and just one more if I could on that.
On the balance sheet aspect over whether it's trailing 12 months or whether you are what your expectations are for 'twenty two from an <unk> to debt perspective.
Accounting for this future potential equity with the acquisitions are you looking to get to at least 30% level.
No.
I think when we look at our RF voted that in conversations with both agencies have effectively had 12% as our downgrade threshold.
That's been communicated as if we were consistently below 12%, we would be having conversations with respect to that so.
It's our intent as we financed.
Transactions and as we finance our significant Capex program to keep that <unk> to debt above that 12% level on a on an ongoing basis, but I wouldn't say that I wouldn't say that 13%.
Our near term target for us.
Got it that's helpful. Thanks, guys.
Thanks.
The next question from Doug <unk> Chopra from Evercore ISI. Your line is open. Please go ahead.
These are cash.
Good morning.
Congrats.
Congrats on the Bucks County deal.
You've answered all the questions that I had there.
Just wanted to just check in on the inflation reduction Act.
Obviously, you won't qualify from a size perspective for the alternative minimum tax so that's not an area of concern anything that.
US and investors should be watching.
That impacts your business on the inflation reduction Act.
No I mean, I think thats. The primary one that's sort of the quickest identify and kind of look at it and say no. We're not we're not hitting that $1 billion threshold, yet and we wouldn't be impacted by that minimum tax immediately and then like everybody else. I think we are still waiting for it to understand what the real impact could be but.
Nothing at this point is hitting the radar screen as being significant.
Got it I just wanted to check in and then just.
No.
On pension.
Can you remind us what your accounting policy is as we think about 'twenty three some of your electric and water utility peers. You. This mark to market accounting, where they could have a significant headwind next year, maybe just any color there and can you remind us what your accounting policies.
Yes, let me give you a few points on the on the pension.
The Aqua pension, which is the majority of the employees think about are really there.
Pension has been frozen since 20, sorry, 2003 to new entrants. So we have people that are in it let's say they.
They joined it before 2003 and in the last few years, we started a glide path in terms of our investment allocation there and so in that as we become more fully funded we materially reduced our exposure to equities and other risk asset. So at this point you guys were effectively 100% funded.
So the bulk of our obligations and we continue to have pension contributions as part of our rate structure. So when we think about pension it's something that we manage but it's not something that we worry about.
Got it thanks, guys I appreciate the time.
Thanks for that.
The next question from Ryan Connors from Northcoast Research. Your line is open. Please go ahead.
Hey, Ryan Great. Thanks for taking me, Hey, Hey, guys. Thanks for taking my question wanted to talk about the M&A pipeline from a little different perspective, and I wanted to get your thoughts on.
Sort of the public narratives out there obviously as you add larger deals to the pipeline in a major.
Press market like Philly you also raised more press coverage, which tends to skew.
And locally here and then you bring more of the food and water watch types.
In greater numbers.
It's been apparent at some of the some of the recent coverage locally and I'm curious my question is.
We do believe that that has been a factor in some of the pushback on bellcore funnels up to some of those leaders.
So what is your strategy for kind of taking control of that narrative and making sure that your side of the story gets out there I mean, you did some great comments on this call Chris but this obviously isn't the forum to reach that broader audience.
Just curious how you can.
Strategize around.
Making sure you get equal play with some of the detractors there.
Yes, a couple of observations and Matt may have some as well, but I think the.
Number one we have a.
A pretty.
Defined strategy communication strategy, which includes we're up with.
Micro sites and websites.
Full information out there.
We for the hearings that we had for Bucks County, we organize them much like an expo so that.
Constituencies interested would get a full view of the company's expertise its people and.
And how we perform so it wasn't a rows of chairs and everybody throwing rocks at each other it's it was a much more collaborative I realize that thats not.
Not what our opponents want they want rows of chairs they can yell and scream.
But also an.
An observation I would make that we've seen more recently as outsiders food and water watch in this case and to some degree other local organizers who have become professionals at this.
Think are viewed and had been viewed in some of the Bucks County work as outsiders rich.
I remember.
Even in this case I'll use this as an example, but put it all to apply to Chester and <unk> and others.
We live here, we work here.
We're part of the fabric of this community were not from Washington D C coming up here trying to to agitate and so.
I think those are important.
Factors I'm, not saying that that there werent involved constituencies, who had to say, particularly in some of these because there are but I would say, it's being led the the.
Most active agitation is being led by outsiders I think thats being recognized.
Yes look I think we have a very compelling value proposition for municipalities and I think municipalities see it right. They understand everything we bring to the table, but we're not always going to be able to convince these outsiders that don't really know the whole story right. They have a set agenda.
We're less concerned with those folks and more worried about making sure the value proposition gets to the people that need it in our communities and those outsiders are largely anti privatization. So it's not how do I operate by wastewater or my water plant. It's really about I don't want my assets privatized. So it's a it's a philosophy rather than an economic or a.
A common sense approach, so I hope Brian over time that those those win the day.
But we have to take these one at a time and as you know we take very seriously.
Yes, yes, okay, that's great color.
I wanted to ask also about it was an interesting hearing this week on SB $5, 97, which I guess is the water quality accountability legislation.
Mark and Chris did a great job, there and I wanted to see if Chris if you had any updated thoughts on whether that becomes.
Whether that becomes law or not and what the impact of that could be for for Aqua.
Yes.
The team who testified up there and we've tried to be very thoughtful in our comments.
Listen.
Ryan you've studied this stuff this is simply leveling the playing field we can make this.
Cost item or however that the opposition wants to portray it but the reality is we're just asking all utilities to provide the same level of service and replacement cycles and everything else that we do under the guidance of the public utility Commission and so we think it's very reasonable.
It's hard to read.
Legislators in terms of how they'll react but.
I think they are probably at this point in the process of digesting all of that information and testimony and I think we'll get a much better read on the.
The options for proceeding through the committee and then to the floor of the house as we did in the Senate.
In the coming weeks when the when the legislature comes back into session in September , but listen I think it's it's.
It's important legislation and we're going to we're going to continue to press hard but.
And really it will be up to the committee chairman and legislators.
Yep, Okay, and then lastly, just this is more of a housekeeping.
But then and there.
Apologies if you mentioned this I might have missed it but the tax rate did kind of jump.
Kind of one of the higher ones, we've seen in a few years. So is that just.
Any forward.
Guidance for us or.
What we expect now in the tax line.
Yes so.
And I would look for.
Full year 2020 to be just below zero, meaning a little bit of a benefit on the tax line.
And as you as you know kind of at this point.
We're getting tax benefit on the people side because of where we are in terms of the repair cycle.
<unk>.
Normal provision if you will on the water side and you blend. These two together so I think it's an interesting quarter tax wise when you look at it but I think look also look year to date, but think slightly slight negative effective tax rate or think of it as a benefit for full year 2022.
Got it Okay, Hey, great. Thanks for your time.
Yes, Thanks Ryan.
The next question from Travis Miller from Morningstar. Your line is open. Please go ahead.
Good morning Travis.
First question I was thinking about customer bills and I. Thank you.
A unique perspective and that you have the gas side and the water side how.
How are you seeing the trajectory, especially on the commodity side.
When the gas bills in water bills, obviously gas prices being high how is that going to affect the winter and then what are you seeing in terms of water.
Water bills relative to what we've been seeing on gas bills.
Let's start with water.
Clearly, we don't have the same kind of commodity or fuel charge that we have in natural gas. So the commodity is relatively inexpensive.
The cost really associated with that as the pipe to get there and our replacement projects along with the enhancements of our plants as we've talked about with <unk>.
So.
As a.
Clearly the trajectory is going.
Going higher what we've tried to do in this inflationary period is contained cost as best we can right. So we're continuing to focus on capital projects that reduce operating expense and so on the water side.
The cost increases or rate increases if you will are largely based on capital investment and.
Some now on.
On inflation, but we're working very hard to mitigate some of those on.
On gas obviously commodity.
Commodity cost is up now and Theres been some moderation as we put about 49% of our gas in the ground during the summer.
Will ultimately use in the winter time, so we've tried to take advantage of.
That as best we can but clearly when we look at it on a year over year basis natural gas is much higher this year than it was last and so therefore, the winter bills, our customers will see in the winter coming up will be higher based on that commodity costs than they were last year, Dan you want to put more color on that.
Yes, real quick Chris I guess.
I think of it as our customers tend to use kind of 90 Mcf a year, maybe 100, so in rough numbers.
About <unk>.
For each dollar and the increased commodity costs. The bill would increase by 90 to $100. If we're I guess, it's $2 more per year. This year you can think about it is.
Annual Bill being maybe $200 more in 2022 2023 heating season than we saw last year, Yes, now Travis we have significant safety net in place right not only the federal law heap dollars for natural gas and light up dollars on the water side, but we also have cap.
Programs, where customer assistance programs and on the gas side call that in the range of $35 million a year.
And on the water side, it's growing because we just put the Universal service program in with the last rate case.
Was finalized in may of this year so.
It's not as significant as natural gas, but we are working hard to make sure that the safety net is there for folks who really have hard time paying their bills.
Okay got it makes sense.
Then if we go back to the comments you made earlier on the EPA federal.
Regulations would you classify that more as a capital investment opportunity or is there some risk there that that can increase O&M costs that you might not get recovery of.
Now, we'd expect full recovery of all investments to comply with federal law and so we don't we don't think there's any exposure there I will say that.
When we talked about our initial commitments when we put the 13 parts per trillion standard in against an Hai health advisory level of 70 parts.
We did take some.
Level of risk.
Some of that wouldn't be recovered because it wasn't it was in some ways exceeding federal law, but the discussion with regulators has been very very positive.
So far there have been no regulators who thought.
We should not recover those.
<unk>.
Operating capital expenses now.
We're the <unk>.
Maximum contaminant level comes in this fall and if that should drop our.
Standard from call, it 13% to 10% or less.
We would of course move immediately to comply with that federal law like everybody else would be but we would expect full recovery. We also expect that that could open up some opportunities.
For us to.
To help other municipals, who may not be able to afford it or don't have the expertise.
We have.
And meeting those compliance rules.
Okay got it I appreciate the thoughts there that's all I had.
Thanks Travis.
The next question from Ryan Greenwald from Bank of America. Your line is open. Please go ahead.
Hey, Brian Hey, Hey, guys good morning.
Good morning, Brian and congratulations on the new role.
Thank you and maybe just.
Follow up on equity.
So I think you guys had talked about potential for $500 million ATM is that still kind of in the cards in the near term or is that on pause right now kind of pending further developments on box and maybe some other moving pieces.
Yes, it's really the latter of those I think given that the recent progress on box and as we think about Dell Cora.
The exact timing and format and quantum of the equity raise.
It's still in flux.
Got it and then.
Any initial expectations on benefits that could accrue to you guys from the recent move by the governor to reduce the tax rate in Pennsylvania, and how that could kind of factor in any rate case dynamics here.
Yeah actually in Pennsylvania, we have.
It's called staff, but it's really.
Process by which as their state tax rate changes.
This resulted in adjustment to the rates that our customers charge. So as a corporate rate comes down we'll be passing those benefits back to our customers.
Understood and then.
Any updated thoughts just in terms of Chester.
Yes, so we continue to move through the legal process you know the cases still.
The Supreme Court and they have not yet ruled.
The receiver continues his work we expect him to wrap up actually next year.
In the meantime, there will be a board.
Remember changed every five years the board of the Chester Water Authority comes up for renewal, we expect that there will be.
At least three new members of that board.
And.
So they're up call it August 15th or in that range and so we'll see what the new board.
<unk> has an appetite for.
<unk>.
I think we'll watch to see those developments, but other than that I think it's on the course to wait for the court hearings.
Great I'll leave it there thanks so much.
Take care guys.
Next question from Jonathan Reeder from Wells Fargo. Your line is open. Please go ahead.
Hey, Jonathan.
Hey, good morning, how are you guys how are you Chris.
Well Jonathan.
Good.
So unveil Cora B side.
The commission voted to restart the process and kicking it back to the ALJ has there been any other developments like at the timeframe for getting a new proposed decision then outlined.
Well.
The ALJ has asked for the preliminary hearing which I think is in the next week here on Tuesday, and so we expect that that schedule would be would become come as a result of that hearing so I would say in the next week or so we'll know what that schedule looks like.
And we hope that.
The ALJ would would adhere to the commissions desire to move swiftly.
Properly.
As I said.
Okay, and then can you remind us I know you said you are comfortable kind of your assumptions around the home decor and clothing can you remind us.
What is assumed in your guidance as it relates to you know kind of the timing of the close.
I'm assuming.
The purchase price that you guys assume stuff like that.
Okay.
Yes, so what we have included in our guidance would be.
Full year 2023, we'd have Dell Cora included in our numbers and if you kind of simple rate based math on the purchase price, you'll get pretty close to the net income assumption there.
Okay. So youre kind of assuming year end 2020 to close to.
The 20 or the $277 million purchase price.
Correct.
Gotcha and then.
<unk> life in terms of like O&M expense. It looks like you had kind of normalize a bit in Q2 after Q1 out abnormalities did.
Did you say some of the stuff in that other bucket that had a $3 $5 million increase this quarter will reverse or be capitalized in the back half of 'twenty two.
Yes, that's correct, we identified some things after the quarter close.
Outside services expenses, which should be capitalized so we'll turn those around in the third quarter.
Okay. So I think it was around like.
Close to 6% increase in this quarter, we should actually be thinking kind of lower than that.
Yes.
Yes take this take the five 9% that you see.
I'd remove the impact of the acquired systems from that and then the impact of the customer assistance program for gas because that just floats based on a gas price and theres, a revenue offset to it and you'd come down.
An increase of about three 7%.
Into account these reversals it would bring that number to a more moderate level.
Okay. Okay. So inflation as of now you haven't kind of under.
I would say, yes, but those inflation impacts are certainly out there and Scott related to both capital and expense.
Okay.
Jonathan just to think about think about fuel fuel rate.
One chemicals.
Yes.
As we said I think you mentioned chemicals and the.
In the prepared remarks with certain things like chlorine.
Effectively doubled in price.
<unk> volume small part of our cost structure, but some some significant.
Increases are out there.
Yeah.
Great. Good luck in the upcoming months in terms of Bell, Cora and getting box signed and signed sealed and delivered.
Thanks, very much thanks, Jonathan Eckard.
Okay.
Again breast breast I want to ask a question.
Moving to the next question from Greg <unk> from UBS. Your line is open. Please go ahead.
Hey, Greg.
Hey, Thank you.
So on Bucks County.
When would you see that being accretive to earnings and how would that ramp.
The ramp up with.
Fair value accounting.
Well I think couple of ways to think about that.
One we have our asset purchase agreement that we have signed right that they have not yet signed so.
It.
I think it could be tweaked right before it signed so we're not entirely clear.
Secondly.
Yeah.
It will be accretive.
Certainly in rates, but.
I don't think we're ready to say what that accretion looks like before we put it in rates like so many of these and then depending on the period of time it takes for us actually to get assigned to EPA hopefully that sooner than later.
That time period between.
Now in when we file our next case also it could be longer or shorter so I.
I think theres, a lot of considerations to that but but certainly as we look at this.
The long term accretion is positive.
It's a matter of getting it to rates initially.
Okay. Thank you.
You bet.
Uh huh.
Okay.
We have a follow up question from <unk>. Your line is open go ahead.
Hey, thanks.
Taking one more question from me.
Alright.
But cautiously.
Yes.
In the utility industry I think over the past year, there have been a maybe a couple of.
Utilities that when they had the financing needs through equity absolutely at least just a portion of one of the utility jurisdictions or assets that may have.
We've discussed the strategy of bottled water and Jeff and whatnot and now that box.
A couple of other chunkier acquisitions may be.
Front window.
Any consideration or thought that maybe eight.
Partial sale of the gas utility ownership may be on the table to finance the equity portion.
Yes.
It's a good question.
And I'll reiterate.
Where we've been and that is that we.
We really like these gas assets there, they're outperforming all of our <unk>.
Expectations earned.
Earnings safety capital program, and everything else and so we're really comfortable having said that.
You make a.
Point <unk>.
We think about.
All of our options and so as we think about whether box becomes real whether we can get <unk> close in the next quarter here.
We know Theres a lot to think about so.
I would say, we're evaluating all of our thoughts on capital raise at this point, Matt do you have any thoughts.
You said it correctly Chris.
Okay, So definitely a lot of different options on table.
Got it thanks a lot.
Yes.
Next question from Verity Mitchell from HSBC Your line is.
Is open please go ahead.
I have already.
Hi, and congratulations Brian on the new role Fantastic and co.
Alright.
Yes, Jim.
And also the donkey dramatic what and where should we see and it's just that question.
Do you mind archive.
Just kind of Blue Sky.
How do you think the way that changing or would you say that.
Changing more.
Rob is in the water and are they growing how do we think about that.
Okay.
Thank you.
The question is.
What is that ultimate energy mix down the road many years down the road.
And I would suggest to you that natural gas will continue to play a significant role for 30 or 40 years maybe.
<unk>.
Technology advances and things like carbon capture and hydrogen and we call it.
Play larger roles, but natural gas in places that get cold in particular will continue to play an important role in the energy mix now I think the.
I just mentioned the technology advances could mitigate risks the replacement of pipe and the tightening of our systems to reduce methane stream ethane or.
Our important aspects and we're as you know fully engaged in that but if you just simply said how.
How do we think about.
The work around ESG, and the environment and our two businesses clearly in.
An elevated focus and natural gas.
Alright, great.
Awesome.
Youre welcome.
Okay.
That's all the time, we have for question Mr. <unk> at this time I will turn the conference back to you for any additional or closing remarks.
Thanks, So much obviously folks will be available for follow up questions, Brian Dan myself, Matt all available and at your disposal have a great day, thanks for joining us.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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