WTRG - NYSE

Good day, and welcome to today's Essential Utilities Third Quarter 2023 Earnings Call. This meeting is being recorded. At this time, I'd like to hand the call over to Brian Dingerdissen. Please go ahead sir.

Thank you, Serge. Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter 2023 Earnings Call. I'm Brian Dingerdissen, Vice President of 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. The slides that we will be referencing and the webcast of this event can also be found on the site. Here is our forward-looking statement. As a reminder some of the matters discussed on this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of any non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. We'll begin the call with Chris Franklin, our Chairman and CEO, who will provide an update on the company. With that I will turn the call over to Chris.

Hey, thanks Brian and good morning, everyone. Thanks for joining us today. I want to start to call out by acknowledging an unfortunate event that some of you may have heard about our read about back in August. In a suburb of Pittsburgh, a home exploded, destroying and damaging multiple homes in the neighborhood. Unfortunately there were six fatalities, including one of our off-duty employees and his young son. The Fire Marshal has indicated that based on the investigation, the incident occurred inside of the home and was not a result of an issue with the gas utility. And we continue to, of course, fully cooperate with investigators. We really need to recognize our team for their response to this tragic event, their professionalism, their expertise and especially the way they performed under extremely difficult conditions just having lost one of their colleagues that day, very difficult day for the team. All right. Let me shift gears a little bit here and start off by expressing my appreciation to those of you who participated in our off-season governance meetings and our IR perception study. While they are still compiling and synthesizing your comments, you know that we appreciate your time and your feedback. And most certainly we'll take the insights gain very seriously. Operating a public company, we're always glancing at the stock price throughout every given day. And as sizable shareholders ourselves, our management team and the Board are well aware of the current performance of our stock. We acknowledge the sector has been trading off. Much of the industry performance over the past few months, we believe has largely been driven by the macro environment and the recent sell-off of utilities due to the Fed's comments and actions on interest rates. We know that dividend paying stocks are typically out of favor during periods when investors can capture income through interest-bearing accounts without the risk of their principle. We also understand that some investors are concerned about utilities that have robust capital programs, which need to be financed and then recovered through the rate process. Fortunately our team has a long history of executing large capital programs and achieving timely regulatory recovery, obviously, helped by the constructive regulatory environments in the states where we operate. Now, I also want to acknowledge that we traded below our extend price. We don't like it. We don't believe it's as large as some might imply. We compare our PE to that of our most similar water utility peer and assume a slight discount because our projected growth rate is just slightly lower. We estimate that since the Peoples transaction in 2020, we've traded at an average discount of about 5% compared to the weighted average of our water and gas peers that discount currently sits a little higher roughly 10%. For those of you who've followed us or have been with us over the last four years, you know that there have been many fluctuations and often we've traded above that target as well. Now to investors, many of you consider various things. And we know that you're thinking about the fact that our two largest rate divisions will file for rates in the next six to nine months. And we've had some challenges recently. Q1 weather was difficult on the gas side continue to wrestle with the DELCORA and East Whitland litigation. But remember, despite our challenges we have continued to deliver on our EPS targets. And from a stock performance perspective, some have written that this has been the worst year for utilities in 40 years. While that current climate is challenging, we have remained focused on strong execution and enhanced shareholder value. And I'll point you to our recent pruning of our small and underperforming West Virginia gas business and the strong result of our sale of the energy projects to further refine our portfolio and offset equity needs. And on a very positive note, we view the stock at its current price as a unique entry point and have been hearing from many new investors potential investors that previously viewed water utilities as too expensive. So at roughly 19 times 2023 earnings with an almost 3.5% yield, coupled with our strong record of operational execution, our large capital program along with continued water system consolidation, the company is poised for long-term success. I also want to emphasize that we don't need to close the DELCORA transaction to meet earnings guidance in 2023 and 2024. In fact, our earnings guidance 2023 and 2024 is not dependent on any of the acquisitions that are currently in our materials. This includes East Whiteland too. Remember that most municipal transactions lose money or breakeven until we bring them through a rate case. And you'll recall that our Pennsylvania water case will buy out until 2024. Now, we'll use this window of time to work with regulators and stakeholders to improve the fair market value process and hopefully alleviate some of the headwinds that the sector has been facing related to municipal acquisitions, especially in Pennsylvania. We spent time on our last earnings call reminding investors about the primary source of earnings generation, the execution of our capital plan. Now, make no mistake, our acquisition program is important to our long-term success, but is often not as impactful as the negative impact to our stock – our price performance, if these opportunities hit speed bumps or don't fully materialize in. Now listen, we're going to continue to work hard on our growth through acquisition program and we're going to go look at improved methods to communicate those opportunities so that we adjust expectations from the onset. We've heard you clearly on that. And one other factor that I wanted to mention that's been impacting our share price was the need for equity. In September, we completed our financings for the year, removing any perceived equity overhang. We heard the feedback related to our new guidance approach regarding equity needs. And believe me, we're going to take it into account as we finalize our future guidance plans. We've heard you loud and clear. All right. Let's move on to some highlights from the quarter and a couple of company updates. With a dedicated focus on capital investment and operational efficiency, we had a strong third quarter with earnings per share of $0.30. Dan will take you through those -- the financials in just a moment. We remain on track to invest $1.1 billion in capital projects this year and maybe even slightly higher than that, improving the service and reliability for our customers, while adding substantial rate base growth. In the first nine months of 2023, we've invested $874.5 million through our water, wastewater and natural gas systems as compared to $719.7 million for the same period last year. Keep in mind that our capital budget is composed of thousands of projects and it takes significant expertise to achieve success in those projects. We currently have asset purchase agreements signed for five municipal acquisitions, totaling nearly $354 million in purchase price and continue to have a robust pipeline of opportunities. I mentioned the sale of our West Virginia gas utility assets, which was announced on October 2. This sale really enables management to focus on fewer states and specifically where we have larger bases of customers and growth opportunities. Then on October 3, we announced a $165 million binding agreement to sell three nonutility energy projects in Pittsburgh, including innovative microgrids and district energy system. And finally, in late October, the Board appointed Rod West to the Board of Directors. Some of you may know Rod from the utility industry. He serves as the group vice -- I'm sorry the Group President, Utility Operations at Entergy Corporation. The departure of Chris Womack from our Board, we were looking for a seasoned executive with utility experience much like the skills that Chris brought to the Board. We're really excited about Rod's experience and his expertise. And I think it's a great match for the Essential Utilities Board. We will -- Rod will serve on the corporate governance and risk mitigation committees when he joins us in December. Also, I want to take a minute to discuss our recently published biannual Environmental Social and Governance Report, which covers our performance in 2022. The updated ESG report tracks key progress on our commitments to the environment, our employees and the communities we serve. And while we made these commitments just a few years ago, I'm really proud to say that, we've achieved our diverse supplier and employee commitments already, ensuring that the company's team and business reflects the communities we serve. We've reduced our Scope 1 and Scope 2 greenhouse gas emissions already by 25% from our 2019 baseline and are well on our way to our overall goal of a reduction of 60% and by 2035. As a reminder, this is the equivalent of removing 80,000 cars from the road each year. This is significant. We were able to achieve this strong progress by successfully shifting to nearly 100% renewable electricity for our water segment in Pennsylvania, New Jersey, Ohio and Illinois and by reducing stray methane emissions in our gas segment through our pipe replacement program. Report also highlights that the water segment outperformed the national average for water quality by nearly five times. I think this is a test to our technical and operational expertise as an industry leading utility and supports our proactive commitment to PFAS treatment. We continue to refine our numbers. So you'll notice that we have updated our capital investment estimates related to PFAS from approximately $350 million to now $450 million. Additionally, we estimate annual operating expenses will be in the 5% range of the capital -- overall capital expenditures. I'd encourage you to visit our ESG microsite where you can do a deep dive into the full report, or just take a look at the supplemental reports for a brief overview. With that, let me hand it over to Dan to talk about our financial results.

Thanks Chris. Good morning, everyone. I'll start off with the third quarter highlights. You'll recall that GAAP EPS revenues include purchased gas costs and that natural gas commodity prices have decreased significantly year-over-year. So, on a GAAP basis we had revenues for the quarter of $411.3 million compared to $434.6 million in the third quarter of last year. Similar to last quarter, the largest contributor to the decrease in revenues for the third quarter was the recovery of lower purchased gas commodity prices with purchased gas costs decreasing by $35.5 million from the same period last year. Our Regulated Water segment contributed $310.6 million our Regulated Natural Gas segment contributed $94.8 million. Incremental revenues from regulatory recoveries and water and wastewater customer growth contributed positively, offsetting lower purchased gas costs and lower volume in water segment for the quarter. O&M expenses decreased 2.9% to $147 million for the quarter, down from $151.4 million in the same quarter of last year. Lower employee related costs and lower recoverable costs related to our natural gas segment customer rider were the primary drivers of the decrease and were offset by higher water production costs and operating expenses related to acquired systems. Net income was up year-over-year from $68.6 million to $80.1 million and GAAP EPS was up approximately 15% from $0.26 in the third quarter last year to $0.30 for the quarter this year. Next, let's look at the waterfall slides starting with revenue. In the third quarter of 2023, revenues decreased $23.4 million or 5.4% on a GAAP basis. Starting on the left-hand side of the waterfall, regulatory recoveries added $14.1 million in revenues year-over-year. This includes impacts of base rate cases and other regulatory proceedings across all nine states in our current footprint. Next, organic and acquisition growth from our regulated water segment provided an additional $3.2 million and other items combined with increased volumes from our regulated natural gas segment added an additional $0.4 million towards the third quarter revenues. Natural gas commodity prices have continued to decline from the significantly elevated prices in 2020. And therefore, when compared to the third quarter -- sorry, prices in 2022 and therefore, when compared to the third quarter in 2022, you'll notice the primary driver of the decrease in revenues for the quarter was the recovery of $35.5 million less, in purchased gas costs. And lastly, decreased water volumes of $5.7 million from our regulated water segment, also contributed to the reduction in revenues. Now, let's walk through the operations and maintenance expenses. Operations and maintenance expenses were $147 million for the third quarter, a decrease of 2.9% compared to $151.4 million for the same period in 2022. Increased production costs related to chemicals, purchased water and purchased power contributed $3.2 million in incremental cost for the quarter and operating expenses from newly acquired systems in our regulated water segment, added another $1.7 million. These were offset by lower employee-related costs of $6.3 million which were related to the incremental pension contributions and an accrual for one-time incentive compensation for non-officer level employees, in the third quarter of last year. The gas customer rider, which is recoverable, through a revenue surcharge decreased $2 million due to lower commodity prices in our regulated natural gas segment. And finally other items which include depreciation, interest and taxes and lower bad debt combined decreased O&M expenses for the quarter by another $900,000. Next, let's spend a minute on the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for the third quarter of 2022 was $0.26. Regulatory recoveries contributed $0.038. Lower O&M expenses contributed another $0.013. And in organic and acquisition growth from our regulated segment -- regulated water segment added $0.04. These were offset by decreased volume from our regulated water segment of $0.15 and other items of $0.002. The result is GAAP EPS of $0.30 for the third quarter of 2023, a 15.4% increase over last year. We continue to expect to meet our annual earnings per share guidance for the year and remain confident in our ability to deliver on the 5% to 7% earnings growth per share. Before moving on, you may also recall that in August and September we agreed to issuances of common stock at market pricing to raise approximately $300 million. So with this, in addition to the equity raise earlier in the year through our ATM program we've satisfied our 2023 common equity needs that were previously announced. Additionally, in August of 2023, the company's regulated water segment subsidiary Aqua Pennsylvania issued $225 million of first mortgage bonds. The bonds consisted of $175 million of 5.48% first mortgage bonds due in 2053 and $50 million of 5.56% first mortgage bonds due in 2061. The proceeds from these offerings both the equity and debt offerings reach to repay existing indebtedness and for general corporate purposes which include capital expenditures and acquisitions. As Chris mentioned earlier, we announced two portfolio rationalization efforts to further simplify the business. First, we completed the sale of the West Virginia Natural Gas utility assets, which allow us to better focus on our core operations. And second, with the more recent news, really good news here of $165 million binding agreement to sell three non-utility energy projects in Pittsburgh. This transaction is subject to various closing conditions, so we'd expect it to close in late 2023 or early 2024. We plan to use the proceeds to finance our capital program and acquisitions in lieu of external funding from equity and debt issuances. I'm pleased to report that while there'll be a nearly $100 million gain, we expect to meet our current stated earnings guidance without factoring that in, presuming normal weather and resulting gas usage. Under regulatory activity and other matters, so far in 2023, we completed rate cases or surcharge filings in all nine states in our current footprint with the total annualized revenue increase of $42.4 million for our regulated water states and $21.3 million in our regulated natural gas segment. Also, we currently have base rate cases underway in Ohio and Virginia for our regulated water segment. As previously announced, we plan to file a base rate case for our Pennsylvania natural gas utility by the end of the year. As a reminder, this is the first Pennsylvania natural gas rate case filed under our ownership, the first rate case since the adoption of tax repair in the gas business and also the first case in which there will be a request for weather normalization, a mechanism that a number of our peers have today. Given that we've replaced over 450 miles of pipe in Pennsylvania across our gas footprint, rate base at peoples has grown significantly, while our system has become safer and more reliable and our greenhouse gas emissions have meaningfully declined. And lastly, I want to remind everyone that Pennsylvania allows base rate cases to be filed using a fully projected future test year and therefore, we anticipate recovering the impacts of rising interest rates and inflation through much of 2025. And with that, I'll hand it back over to Chris.

Thanks, Dan. Let's take a moment to talk about our water and wastewater acquisition program. As a reminder, with the closing of four transactions early in the third quarter, we've acquired seven systems so far this year, adding over 11,000 customer equivalents to our current water and wastewater footprint. Remind you again that these acquisitions don't necessarily come at full earnings. In August of 2022, that acquired the East Whiteland wastewater assets in Pennsylvania, which was then subsequently appealed by the office of the Consumer Advocate to the Pennsylvania Commonwealth Court. And then in July of 2023, the Commonwealth Court issued a decision to overturn the PUC order approving the acquisition. Now just last month, the company, the PUC and the East Whiteland team then appealed the Commonwealth Court's July order to the Pennsylvania Supreme Court and we're currently awaiting to hear if the Pennsylvania Supreme Court will hear the case. Now, we'll continue to own and operate the East Whiteland system until we hear from the Supreme Court. In the meantime, we'll continue to work with regulators and stakeholders to attempt to make improvements to the fair market value process to bring more clarity to the rules and to ensure it brings value to all of those impacted by the process. All right. On to the next slide here. Let's take a minute to review our pending transactions and our acquisition pipeline. As of this call, we have five signed asset purchase agreements in two states; Pennsylvania and Illinois where we currently have existing water operations. You may recall in the second quarter we announced the agreement for the Greenville Wastewater System in Pennsylvania. And then more recently we announced the agreement to acquire the Green Water System, which has 3,000 customer connections. Collectively, these five acquisitions are expected to add over 211,000 customers or customer equivalents and totaled nearly $354 million in purchase price. We continue to see a strong and healthy pipeline of opportunities for additional growth and we're currently engaged in active discussions with municipalities which have over 400,000 water and wastewater customers. Now before moving on I just want to note that the DELCORA regulatory process continues to be under a stay by the federal bankruptcy court and we remain confident that we will ultimately close the DELCORA transaction despite the lack of a clear time line. As we stated on our last quarter's call, we removed any impact to our guidance from DELCORA prior to the second half of 2025. All right. Let's wrap up-with reaffirming the guidance for 2023. We continue to expect earnings to be between $1.85 and $1.90 per share and remain confident that our three-year earnings per share growth will be 5% to 7% through 2025 extension. Think of this excluding any gain associated with the sale of the energy projects and assuming of course normal weather. Our capital plans remain on track for the year as we expect to invest approximately $1.1 billion or maybe even a little bit better than that. We continue to expect rate base growth to be between 6% and 7% for water and between 8% and 10% for natural gas with customer growth between 2% and 3% on average for water and stable for natural gas excluding the sale of West Virginia. Finally, we remain committed to our ESG targets, commitments and initiatives and we welcome you to take a look at the recently published 2022 ESG report and updated ESG website. We are currently discussing our plans for providing 2024 guidance and our approach and timing similar to past years our Board doesn't meet until mid-December where they approved the budget. And that concludes our formal remarks. With that I'd like to open it up the line for questions. Back to you, Sergey.

Thank you. [Operator Instructions] The first question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Hey, Julien.

Good morning, Julien

Hey, good morning, Chris and team. Pleasure guys. Maybe just to come back to where you started this call, right? I mean obviously a certain degree of frustration. Obviously, you've got multiyear guidance out there. How do you think about responding to the current environment? Again I just -- I hear your frustration in your voice same time providing perhaps even further extended our guidance and a refresh could be still pending for a bit here considering the upcoming case. But I wanted to put it back on you as far as incremental day points that could help derisk or provide a longer-term refresh on the outlook if you will.

Yeah. Listen, I think, we provided our thoughts pretty thoroughly. I guess, I would just add my optimism, we're all going through -- I mean, when I say we are in the utility industry are going through a rocky time for our investments in utilities and we all acknowledge that. And then we further acknowledge that we've got some headwinds we've been dealing with. We're going to work on some of this regulatory process in Pennsylvania and see if weak some improvements there. Listen litigation is always frustrating. And if you sense that my voice you'd be right. It is frustrating. Having said that though, these are adders, our base earnings generated from our capital program are solid as can be and we continue to perform and are highly -- and are good states where regulatory climate states. And so we feel good about the base business and our continued ability to produce nice earnings growth especially in what is a generally tough environment for utilities. So listen I'll just conclude that thought with my optimism. Dan, do you have anything to add?

The only thing I add Julien is, I think like all utilities we're, obviously, facing interest rates and inflation and I think as utilities in general, we'll respond to that by having more frequent regulatory filings.

Yeah. No, indeed. All right a couple of follow-ups there on a more specific basis. The $165 million pending for the non-utility projects, energy projects, can you talk a little bit about the timing element here and how that fits in your financing plan on the expense to, which that does or does not close here in the near-term or what have you? Just again maybe that's more of a Dan than the Chris question here.

Yeah, Julien, I think to either close late 2023 or early 2024. So either side of the end of the calendar year here would not really change, how we think about it from a financing perspective.

Yeah, and you're excluding the gain anyway from your core earnings numbers anyway. All right, fair enough. And then just coming back on this Pennsylvania case, I mean, obviously it's been a minute since you all filed here and obviously it's a new owner et cetera. I mean, how are you thinking about the rate increase and the impact on customers as it stands right now? I mean, you've done a lot of investment obviously there are potentially some degree of benefits that could go back to customers as well to mitigate it. Any updated thoughts?

Yeah, Julien, I guess I'd say we're still in the process now. It's clearly an important case for us. We've been out for five years. It's the first case since we bought the gas business. This case combines both the Peoples Gas business and the Peoples Natural Gas business as we did a filing to combine those entities. And it will have significant rate base addition in the case, so invested a lot of capital here. So as we think about the fully projected future test year in this case that we're going to file versus last case, the increase in rate base is about $1.9 billion. Now that includes about $300 million that came across from the Peoples Gas business into Peoples Natural Gas, but it's still a very significant capital investment that we'll be filing for here. Now this is the case too Julien as a reminder that really incorporates the benefits of tax repair. So we've had this tax repair scenario for the last few years. We're going to continue to invest capital that's repair eligible going forward, which lowers the effective tax rate and that low effective tax rate will be incorporated into the rate, so it will benefit the customers and help to mitigate what would otherwise be the anticipated increase here tied to the capital. But of course, I'm not -- I don't want to say there is not an increase here, but that repair benefit will help to moderate that increase. We're still kind of working through the specifics here. We'd expect the equity layer in this case to be consistent with our cases we filed for water in Pennsylvania as well as what Peoples had filed previously for gas. And in terms of sort of the ROE ask and the revenue requirement increase that's something we're still working through in this case process. So standby, as we file that and we have to file it by the end of the year, you'll see the details of that in the filing.

Dan, just maybe one adder to that affordability. When you think about rates, fortunately where we sit on Marcellus Shale, our commodity price is better than most, right? And as we know, if you look at the spot market, natural gas is in a pretty good place right now in terms of pricing. And so, Julien when you look even a decade ago before directional drilling, rates were higher than they are today. And if you look at a year or so ago, when rates spiked, our rate rates are better today as well. And so we're in a pretty good position with our customers. Having said that, we also have significant safety net programs in place. In fact, our safety net last year I think was in the range of $35 million that we helped customers who couldn't afford our bills. So I think we're in a really good place and this is a capital case, capital case largely. I mean, there's an inflation element no doubt, but this is largely a capital case. And I think our rates are in a pretty good place.

Got it. Excellent. Sorry, last quick one just maybe to bring it home. Year-to-date obviously, employee is trending well here in terms of cost benefits? And then also tax. I mean how are you tracking against full year here just to flag the big deltas there that are favorable for you, especially tax?

Yeah. Well, certainly, we've had -- and as you know we had a warm winter. So the first quarter was tough in terms of the gas business. We've had some nice pick up since then some things are broken in our direction in terms of operating expenses, in terms of weather later in the call it the second quarter for the gas business, a little bit of a pickup there. We had a purchase water pass-through pickup in Texas that I think I talked about on the last call. And then, certainly, this natural gas safe harbor has been beneficial because what it's done is really increased the eligibility of the pipe that we put into the ground. So the more of that pipe is eligible for the tax repair benefit and that's certainly been helpful here as well in terms of making up for what we saw in the first quarter, and helping us to get into that guidance range for full year. Presuming again, as Chris said that we've got normal weather here in November and December.

Really appreciate it. Appreciate the time guys.

Thanks, Julien.

Thanks, Julien.

Durgesh Chopra from Evercore. Please go ahead. Your line is open.

Hey, Durgesh.

Hey, good morning, team. Thanks for taking my questions. Just can you give us maybe a bit more clarity on as you file this rate case, how should we think about disclosures, whether it's long-term earnings growth guidance, when to expect that -- will that be in December or on the Q4 call? Just anything that you can share there in terms of timing?

Yeah. I think what we'll do on that Durgesh is provide guidance consistent with what we've done over the past few years which is sort of a January February timing there.

Yes. As I mentioned, Durgesh, our Board meets in the next couple of weeks actually mid-December and we don't approve the budget until then. So we'll provide guidance as Dan said on our normal schedule.

Okay. Got you. I just want to make sure there was no changes there, given the rate filing. It sounds like even if you're going to follow basically what you've done in past years. Okay.

Yes.

Okay. Perfect. And then just – can you talk about the PFOS, PFAS? I think the – in the last call you might have highlighted $350 million in incremental capital opportunity, if I captured that correctly. How has that view evolved or changed? Do you see that as potentially raising your capital like your $1.1 billion run rate capital going forward? Just any color that you can share there, please?

Yes, sure. I mentioned that we've now upped our estimate from $350 million to $450 million. And so it will increase our spend. However, what we've also said we continue to look at our capital budget and opportunities to displace other projects that maybe don't have the same level of urgency as the PFAS mitigation does, and so we don't see it as a material change to our capital guidance and spend over the next few years. Having said that, listen $450 million to mitigate PFAS is a big deal. And it's several sets of projects right as you do it across the company. So it will be time energy and cost but we just don't see it as a major adder to the capital budget.

That’s perfectly clear. Thanks, guys. I appreciate you giving me time.

Take care, Durgesh.

Gregg Orrill from UBS. Please go ahead. Your line is open.

Hey, Gregg.

Good morning, Gregg.

Hey, good morning. Yes. Following up there on PFAS just has anything changed about the timing of potentially getting proceeds from the legal arena to offset the PFAS investments that I guess the consequence of that would be that you're thinking about PFAS as more of a rate base eligible investment at this point?

Yes. So as we think about the recoveries from lawsuits again call it the 3Ms and so forth, we have some key decisions to be made. The whole industry actually does early in December here. And those decisions are you stay in with the group, with the class action or do you separate and assuming you can do better on your own. Those decisions are currently under discussion in all other companies we're no exception. And then I think the prevailing thought is that should we stay in and get our piece of some of those settlements, it would be paid out over a 10-year period. And so the capital that we would spend Gregg, would be largely done and invested and recovered before the main portion of the proceeds of a settlement would come through. And so whether that would be – end up being an offset to operating costs or how we would account for it I think yet to be decided but I think that's generally how we think about it.

And how does the PFAS capital investment relate to your capital budgeting plan and guidance...

Yes, it's embedded and will course, we'll update it. But we don't see a material change to our overall capital budget. We're always measuring ourselves against affordability. And so, we may spread some of the projects that are in our current plan out, a little bit further not bad for investors, but short term focus more on PFAS in that capital budget. I'm not saying there won't be any increase, but it won't be material.

Okay. Thanks for your update.

Jonathan Reeder from Wells Fargo. Please go ahead with your question.

Hi, Jonathan

Yes. So here's -- I think pragmatically, how to think about it we would probably need to just refile and we have to articulate the affirmative benefits if you will, what the office of the consumer advocate is really picking apart in the case is the fact that, in their mind the commission didn't articulate those affirmative benefits in the case. They really referred to the fact that we're a large capable utility, that we could handle this and that was the benefit. So the OCA just felt that they didn't go far enough in articulating or didn't articulate to the satisfaction of the OCA, the benefit. We -- I believe we did in our filing articulate those well. Now, so it would probably be a refiling and whether there'd be a negotiation or some kind of a settlement discussion with the OCA. I don't want to put words in the OCA's mouth, but when a township doesn't want the utility back, we found plenty of opportunity to make improvements. We've obviously -- if it had to go back it would have to be refinanced at higher rates bad for the township. An unwind is not a favorable thing for anybody. So I do think, there is opportunity for settlement. But I think some of that Jonathan could be tied up also in hopefully what's a further discussion with the commission on how do we make fair market value a process that is feels fair to everybody, including the office of the consumer advocate, including to various customers who have strong feelings about this as well. So I see it as a sort of an intertwined effort here. Does that makes sense?

Yes. No, it does. But how long does it take for the Supreme Court to kind of let you know if you're taking up the case and then ruling like would it be easier just to almost go down that re-filing or re-approval path instead? Or would that be more -- ?

Well, it might be. But I think just letting the court decisions stand as it currently sits is not ideal for the industry. And so not to say we couldn't figure -- listen what it does it says, we got to be more sharply focused on impacts to customers, more sharply focused on facility and more sharply focused on the various issues that we articulate as affirmative public benefit of the transaction. And so that's really what the net effect is. And so I would leave you with this Jonathan. We're not going to just sit and let the court play out. We are going to actively work with the commission the OCA and other parties to see, if we can really come to some terms here that makes sense going forward because it has general effects on the industry and ability to do these transactions in an efficient way.

Yeah. That make sense. Okay. I appreciate your taking the time and looking forward to catching up next week.

Yeah, yes. Looking forward to it.

Thank you. And Ryan Corners from Northcoast Research. Please go ahead.

Hey, Ryan.

Thanks for fitting me in. Hey, guys. So yes just -- most of my stuff has been answered as well but I did want to get your take on -- I guess, there was a new DSIC ROE set in Pennsylvania with water set below gas and electric. And I guess there was a four to one vote in the scenting Commissioner, did have some pretty strong words about that being a negative for water utilities in terms of competing with other states capital and that sort of thing. Any take on that decision and both the tactical impact on earnings and the bigger picture thoughts there?

Yeah a couple of thoughts. Maybe Dan, may have some others as well. But number one, let's remember that at least right now we're still under our last rate case ROE. So it really that ROE does not impact Aqua at this point. So it will in the future, but it doesn't at this point. Secondly, the -- as you know the decision that was recently made on the DSIC is they let it flat. They did not increase it. And I think Commissioner Younora you thought it should be increased like electric, which is we share that thought as well. But the commission is looking at, there are various measures and they'll make those decisions. I think we're -- we still feel good about the overall ROE that we could get in the case. But these are decisions that the commission weighs and looks at the numbers after each decision -- or before each decision. So Dan, I don't know if you have anything to add to that?

I think you generally covered it Chris, but I would add and maybe just to clarify the reason that we're still under our prior ROE or rate case ROE, if you will is because we had a litigated outcome in that case. So then that trumps the DSIC ROE that's been stated here by the commission. But as you know, it's a bit of a tail of two cities on these DSIC ROEs, because on the gas side, the ROE is nicely above 10%. I think it's 10.15% whereas that water ROE has been dropped. So as we go into the gas rate case for a DSIC ROE of 10.15%, I think we feel pretty good about our ability to achieve a nice outcome in terms of ROE in this upcoming case.

Yes. Okay. That's very helpful color. And then, sticking with the gas side Dan, so West Virginia divested, what about Kentucky? Is that any shift in the thinking there? Or is that Kentucky piece big enough where you consider that to be core?

Yes. The Kentucky piece is -- it's a nice subsidiary. It's like any of our water subsidiaries and we view that to be core to the business that we have.

And I was just in Kentucky last week Ryan, and we think the commission is a constructive commission down there. We met with all the commissioners and we would actually like to grow in the water business down there. And so, it's a relatively new state for us, but I think there's opportunity for some growth down there as well.

Yes. Okay. And then finally, just -- I appreciate your comments Chris on the strategic incident. It must be very tough for everybody involved. But -- in terms of what that says about the big picture for gas, I know -- it's one of the ironies is you mentioned earlier, the gas trade at a discount to water in terms of the stock price but rate base growth is actually faster than water. I mean I would imagine that even though that's -- the company is not culpable that that really heightens the focus on many investments that need to be made and the type of thing that can happen if those investments aren't made. So I mean does that kind of just reinforce the rate base growth outlook that's above -- it's above water? And just what are your thoughts on that in terms of just that rate base growth in gas relative to electric?

Yes. Listen, as a general theme, I think that's right. This specific case as determined by the fire marshal was -- work being done inside a home and not our equipment or our pipe. So, I just want to make that clarification. But generally, yes, the safer the system and the more environmentally friendly the system is, the better off we all are as a society, better off we are as a company and the better off our customers are as well. That's why we continue to be laser-focused on meeting our LTIP work as outlined by the PUC and implementing the miles and miles of pipeline replacement that we've already accomplished and that we plan to do in our upcoming three to five years. That work coupled with some other work we're trying to do around hydrogen and other innovative ideas. I think will come together and hopefully make it even more environmentally friendly in the future and safer.

Got it. Thanks for your time today.

You got it. Thank you.

Take care.

Thank you. With this I'd like to hand the call back over to Chris Franklin for any additional or closing remarks. Over to you, sir.

As always we're available for follow-up. I really appreciate your time and questions today. But Brian, Renee, Dan and myself are all available for follow-up questions that you're convenience. Have a great day.