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

Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter 2020 Earnings Call. I'm Brian Dingerdissen, Vice President Chief of Staff and Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co.

The slides that, we will be referencing and a webcast of this event can also be found on the site. Here is our forward-looking statement.

As a reminder, some of the matters discussed during this call may include forward-looking statements that involve 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-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures.

A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation, and also on our Investor Relations section of our website. After the presentation we will open the call up for questions. Here's the agenda for our call today.

We will start with Chris Franklin, our Chairman and CEO, who will provide a company update. Mike Huwar, will then provide a Peoples update before turning the call back over to Chris to provide the third quarter highlights and talk about our ESG program. Dan Schuller, our CFO will then discuss our financial results.

After that, we will turn it back to Chris for our municipal acquisition program, and then conclude with a review of our guidance. At the conclusion of the call, we will open it up for questions. With that, I will turn the call over to Chris Franklin..

Hey, thanks Brian, and good morning, everyone. Hopefully, you got some sleep last night after a long election night. It's been nearly nine months now since we closed the transaction with Peoples. And as many of you recall, the same amount of time since we activated our business continuity plan to deal with the pandemic.

I want to start today's call by letting you know that our company and its workforce are as strong as ever. I continue to be in awe of our dedicated workforce and the accomplishments we've been able to achieve despite the challenges of 2020. All right. Let's talk a little bit about the integration of the Peoples company.

Each of my direct reports, whether he or she is from Peoples or from Aqua now have teams that include leaders and employees from both legacy organizations leveraging the best thinking, and approaches from both utilities. Our functional leaders like HR, IT et cetera, now support both water and natural gas.

Our operations teams have really come together quite nicely in the spring to resolve the challenges associated with COVID, and they've also been working very closely ever since.

We're sharing best practices related to operations and construction, safety, just to name a few, and our engineers have been working together to accelerate the pipeline replacement program at Peoples, which ultimately improves safety and reduces methane emissions.

We're also leveraging our scale for the purchasing of vehicles, equipment and technology. We're building efficient backbone infrastructure, systems and applications to support both utilities and better serve our customers. And we're using our larger platform to attract a more diverse workforce.

And hopefully, that gives you a quick sense of our integration process. Overall, it's really going well. Now, we will address our stock price here for a moment. There are some micro and macro issues likely at play here.

I want to point out that, over the summer we entered into a forward agreement, you'll recall that to issue $300 million in equity and it took some time for this equity offering to be understood in the market. All in all, I think you'd agree that the $300 million forward went very well. Now, on the macro level, I'll point out the obvious.

We've been in the midst of one of the most contentious elections in our country's history and natural gas were at least fracking, as one of the central themes. And finally, we continue to hear concern about the progress of our DELCORA transaction, all impacting the stock price. So let's talk about a couple of these issues.

I'll talk both about DELCORA for a second and then we'll talk a little bit about our view on natural gas. So first, on DELCORA, we remain confident that, we will close DELCORA in early 2021. The pandemic-related issues have pushed our court date that was due to happen today at least a week out.

Hopefully, we'll know that probably this afternoon, but hopefully, it's only a week out. We remain confident that the central question before the court, which is, is there a valid and enforceable contract between the parties that's the key question. We hope that the results of our time in court will be a positive result for the company.

We see this as a pretty straightforward question for the court. And we hope that, we will get an answer from the court in about 60 days or within 60 days following the hearing. Either way, there is no expected impact on EPS in 2021 from the DELCORA acquisition. We've been saying that for some time.

I would guide against putting any pluses or minuses in your short-term model for DELCORA, but it will be accretive in coming years, but would not impact 2020 or 2021 earnings per share. All right. Let's turn to natural gas. First I want to acknowledge that, natural gas companies have traded off, obviously, more recently.

And some investors have even begun to speculate that, the future of natural gas in the United States is in doubt. So I want to take a moment to make a couple of things, really clear. Number one let's ground ourselves in, the projections from the non-partisan U.S. Energy Information Administration.

It's expected that natural gas consumption will remain nearly constant, in the United States, through at least 2050. The declines in nuclear and coal generation will obviously yield ground to renewables, but natural gas consumption is expected to remain constant, that's really important. I think a lot of people are missing that.

Secondly, we've said this many times as well, Peoples is situated over the Marcellus Shale region, and all the natural gas we serve comes from local sources. And takeaway to that is that, the plentiful and inexpensive natural gas will be available, for a really long time, in the Pittsburgh Pennsylvania area.

Now if you've not spent time in Pittsburgh, you might not know that, Pittsburghers are proud of their natural gas history. And understand its importance, not only to their local economy, but also to national energy independence. Next, our natural gas service territory is really in middle-class America.

So to switch, a home from natural gas to electric solar or wind, would cost in the range of $8,000 to switch and would also mean paying higher monthly energy costs. I think it's fair to say, our customers are unlikely to switch.

Now, if we aggregated all of the greenhouse gas from all of the residential natural gas consumption in the country, it would only equate to about 4% of, the country's total greenhouse gas emissions. So, minor in the scheme of things. And I think that sometimes, gets lost in the discussion as well.

I think those of you who know us well know that, at Aqua America, we were always an environmental leader. Over many years, we've been -- we've demonstrated our commitment, to be responsible stewards of the environment.

We specialize in rehabilitating underground infrastructure, and Peoples Gas is really no different, than Aqua America was before we were combined. We believe as the new owner of the business, we can modernize its infrastructure, and apply industry best practices to aggressively reduce emissions, and adopt advanced technologies.

As Essential Utilities, we plan to set a credible and aggressive intermediate term emissions reduction target, by early next year. And we'll continue to evaluate technologies and strategies, to further reduce emissions, in the longer term.

So in summary, while the media may have you believe that natural gas will go away over the next decade or whatever they're saying today, that clearly does not lineup, with the objective reality of energy use in the United States. In fact, it's quite the opposite. I'll say this as clearly, as I can. We are very pleased, with our purchase of Peoples.

It's performing extremely well. And we believe we have a long and successful future with Peoples and Aqua, as Essential. Now, I'm really pleased to introduce our new leader, of our natural gas business, Mike Huwar.

Mike is our new President of the Peoples Gas Company, and joined us in August, concurrent with the retirement of Joe Gregorini, who was our long-time leader of the Peoples operations over there. Joe he did a great job. And we wish him well, in his retirement.

Mike's a native of Pittsburgh, comes to us from Columbia Gas, where he spent, 34 years, a 34-year career there. And most recently was President and COO of Columbia's PA and Maryland operations.

I'd ask Mike to provide, some of his early observations about Peoples, and to provide his perspective on the natural gas business in Pennsylvania, where 690,000 of our 740,000 customers reside.

Mike?.

Thanks, Chris. It's really a pleasure to be with you today. As a native of Pittsburgh, I must tell you that, I have long respected the Peoples Gas Company for its leadership in the community. And I'm absolutely thrilled to have the opportunity to lead the utility.

Although, I joined Peoples just three months ago, I've been in the natural gas business for a few years now. And while, there's always opportunity for improvement, I'm happy to tell you that, I'm impressed with our management, our safety culture, and our safety record, at Peoples. The team is well-trained.

And may be equally important they're very committed to both, employee and customer safety. In fact, Peoples was honored by the American Gas Association in 2019, receiving an industry leader, Accident Prevention Award for achieving total days away, restricted or transferred which is, DART Rate lower than the industry average.

I have found the depth of management to be remarkable. If you count the years of service for my senior team alone, we have nearly 263 combined years of service in the natural gas industry. The team is well prepared to take the company to the next level including the ramp-up of our capital plan.

In fact we are preparing to invest nearly $1.4 billion of capital in the replacement of aging gas distribution infrastructure over the next three years. And over the next 15 years, we will replace nearly 2,700 miles of distribution facilities.

Any time you combine two companies together, you have a melding of cultures and that's going to take care and efforts. My early observations of the combination of Aqua and Peoples as now Essential, indicate the cultures are very similar to start which will make integration much easier.

I've been pleased with the spirit of cooperation among the teams and the full integration of the management teams. I believe we are developing a strong combined culture that will provide a strong and resilient company.

Peoples has always been a part of the fabric of the Pittsburgh community, the company's visibility, and community assistance has been particularly important during the pandemic.

I should also mention that the customers have access nearly to 27 million in customer assistance through the use of programs like LIHEAP, the Low-Income Heating Energy Assistance Program and CAP, the Customer Assistance Program so that customers in need can find help in to paying their bills and remain safely in their homes.

Natural gas is by far the most effective energy source to heat homes and businesses in colder climates and let's remember that our LDC, our Local Distribution Company, Peoples has access to an abundant low-cost supply of natural gas given our position directly above the magnificent Marcellus/Utica supply basin.

Low-cost commodity in this region have also presented Peoples the opportunity to make investments and modernize our distribution system with limited impact to the total bill of our customers, all while enhancing safety and reliability.

As a native to Southwestern Pennsylvania it's hard to underscore how much natural gas is a part of the fabric of this community. I see this is a region where business leaders, legislators, regulators, and communities work together to protect our environment and keep our economy vibrant as well.

While parts of the country mandate to move away from natural gas more quickly than others, for example, the West Coast, Peoples is located in a geography where I would expect natural gas to remain an essential part of the energy picture for generations to come.

Taking a look at the slide here, I'd like to make a few points that further the discussion on the sustainability of natural gas.

I won't make every point on the slide as you can read those on your own, but I believe natural gas will remain a vital part of the nation's long-term energy solution as natural gas remains an affordable abundant safe and reliable solution to our energy needs.

United States is natural gas rich and has supplied to fulfill the country's energy needs for the next century. As Chris mentioned eliminating the direct use of natural gas in homes and in businesses would be an expensive and impractical way to address greenhouse gas emissions.

In fact as the demand for natural gas has never been greater, it's estimated that one new customer connects their home to the natural gas distribution system every minute now, providing service to 179 million Americans or roughly half our country.

Conversions to alternatives are expensive and would result in an increase in households of nearly $1,000 annually in their utility bills. The reality is when you add up potential equipment conversion costs higher operating costs, the impact of moving away from natural gas would be profound on every household.

In addition to existing technologies which have dramatically reduced emissions -- the emissions profile of the natural gas industry in recent years, there are opportunities for further improvements. For example RNG renewable natural gas, this is a climate-neutral pipeline-compatible gas estriol-derived from biogenic or other renewable sources.

The industry and our company are looking at opportunities to do more RNG. Today as we sit Peoples acquires over 1.5 billion cubic feet of renewable natural gas annually within its portfolio and we plan to do more.

In closing, I look forward to leading the Peoples team and we believe we can do great things together as we look to continue to provide quality service to the communities that we serve. With that I'll hand the call back to you Chris..

Thanks Mike and nice job. Great to have you on the team.

I would just leave you with one final thought on this topic before we move on and that is that given our natural gas utility Peoples, given its rate base growth, that's position geographically, and its access to gas among many other reasons, it should be thought of differently than many other gas LDCs across the country for regulatory reasons and everything else and especially, should be thought differently than in natural gas utilities in -- call it Pacific regions or coastal -- some of these coastal communities.

All right. Now, let's take a look at the highlights for the quarter. We have invested already $607.6 million in infrastructure, in the communities we serve, during the first nine months of the year, of which $377 million was invested in our regulated water segment and $230.6 million was invested in our regulated natural gas segment.

I just only want to point out that about $53 million was invested by Peoples in the first quarter pre-closing. So bottom line, we remain on track for record capital spending of $950 million in 2020.

Now, in the box, you also see that on a non-GAAP basis, adjusted income per share decreased to $0.23 from $0.48 when compared to the same period last year and Dan is going to take you in more detail on those financial results in just a moment.

Our municipal acquisition program remains strong with signed municipal transactions -- municipal agreements I should say, totaling over $360 million in expected rate base and over 212,000 customers in customer equivalents.

We just recently closed the water and wastewater acquisition of Rockwell Utilities, that's in Illinois and announced the signing of Lower Makefield in Bucks County, Pennsylvania, which was a $53 million acquisition with 11,000 wastewater customers.

Finally, in the last box, we're excited to point out that our latest ESG report that was just published, just a few weeks ago and I'd encourage you to take a look at it, you can find it through our website. It's our new ESG site really, really strong ESG site I would say.

And with that let's use that as a segue to the next slide here and talk a little bit about ESG. Sustainability has always been a core part of our corporate culture and it's been a personal priority of mine as well. Since I became CEO in 2015, we really made an ESG priority. We started with Board refreshment. Our Board is nine members.

About one-third of those, exactly one-third of those are women and another two members are black. Our diversity helps to facilitate better discussion and better outcomes and I firmly believe that. As I mentioned, we've been ramping up our ESG communications since last February.

And even before the Peoples transaction, our ESG team published the first ESG tearsheet and dramatically enhanced our 2021 proxy last spring. Since then, to ensure we provide transparent and comprehensive reporting on our work, we hired a full-time in-house ESG manager.

Most recently, we issued a new and more detailed ESG report as I just mentioned and a digital microsite format really easy to navigate. Our ESG website will be the home of all of our future-related news and disclosures. Now, on the water side, we made some important announcements earlier this year and we've talked about these.

We said that by 2022, 60% of our energy would be sourced from renewable sources. We also said that, we believe we stand alone as a multistate water utility in our commitment to test every source of water in our eight states and treat any source that detects PFOS above 13 parts per trillion.

You'll recall that the Federal Health Advisory level is at 70 parts per trillion, so this is a sizable improvement from what the federal government provides as their guideline. This is really a significant commitment.

On the natural gas side, as I mentioned in the first quarter of 2021, we'll announce an aggressive, but achievable set of targets for emissions reduction. I want to do this before we reach the one-year mark of ownership, so looking at probably the January time frame.

Remember, we have significant pipe to replace at Peoples and each length of pipe that we tighten up quantifiably reduces methane emissions. We plan to report those reductions in our ESG reports in the future.

To give you a sense, each mile of pipe replaced is expected to reduce fugitive, methane emissions by the equivalent of 50 metric tons per year of CO2. This is the same as taking 11 cars a year off the road for every mile of pipe. It's pretty important.

Let's not forget that, while this effort reduces methane emissions, the pipe replacement program also contributes about 8% to 10% rate base growth annually over the 15 years. And so with that, let me pass it over to Dan for the financial results..

Thank you, Chris. Good morning everyone. Reviewing the financials for the quarter, we ended the third quarter with revenue of $348.6 million, up $105 million from $243.6 million last year.

The natural gas business contributed $92.1 million of this revenue growth, while the remainder was a result of rate increases, volume and growth in the regulated water segment.

We're also reporting adjusted revenue of $352.7 million, which excludes approximately $4.1 million of rate credits issued to water utility customers, which were as a condition of the Pennsylvania PUC approval of the Peoples acquisition. O&M increased to $136.2 million, up from $82 million in the third quarter of last year.

This was primarily a result of the addition of the natural gas operations and maintenance expenses, which we'll discuss further when we show the O&M waterfall. Net income was down year-over-year from $88.5 to $55.7 million and GAAP EPS was down from $0.38 to $0.22.

We're again providing adjusted income and adjusted income per share lines, which adjusts for the transaction-related water rate credits that I mentioned. Adjusted income was down $27 million to $58.6 million and adjusted income per share was down from $0.48 to $0.23.

This result aligns with the adjusted income per share guidance of $1.53 to $1.58 for the full year. Next we'll discuss the details using the following waterfall slides starting with revenue.

As we walk you the $105 million revenue increase for the third quarter, you'll notice that the revenue related to our natural gas segment was the main driver adding $92.1 million.

Increased volume, growth from our regulated water segment, rates and surcharges and other, provided an additional $17 million towards the revenue increase, which was offset by the $4.1 million of rate credits issued to water utility customers in the third quarter.

The $3.9 million growth component is primarily due to the acquisition of Wastewater Systems. In the fourth quarter we'll provide nearly $19 million of rate credits to natural gas customers to fully satisfy the rate concessions included in the Pennsylvania regulatory approval.

Given the nearly $10 million in incremental revenue from volume, let's discuss our third quarter water consumption on the next slide. We experienced a material overall positive impact due to volume during the third quarter.

Despite COVID, year-over-year water usage was up 5.5% with many customers working from home and a favorable weather, residential usage was again very strong, up over 10%, which offsets declines in most of our other segments.

Although commercial continued to be down, it rebounded significantly from the second quarter, when you'll recall that we were down about 16% versus last year.

As we've discussed previously, given the shut-off moratoria that states enacted when COVID-19 emerged in March, we continue to closely monitor incremental increases in our bad debt expense and the timing of when these moratoria will be lifted.

As you can see on the right, all of our states have lifted their moratoria with the exception of Pennsylvania, where this is expected to occur in the next few days and New Jersey, where the moratorium should be lifted in March of 2021. As moratoria are lifted, we resume our regular delinquency procedures.

During the quarter, we increased our bad debt reserves by $6.8 million across water and gas and identified potential regulatory asset filings for much of this, as we expect to be able to seek recovery of COVID-related increases in bad debt in several of our key states. With that, let's move to the O&M waterfall.

Operations and maintenance expenses were $136.2 million for the third quarter compared to $82 million in the third quarter of 2019. The main driver was the $62.2 million addition of Peoples O&M.

Other contributing drivers included COVID-related expenses for our water segment including COVID-related employee costs, growth and normal employee-related costs, which were offset by other costs and the impact of last year's Peoples acquisition-related expenses.

The other bar that you see in the middle of the page includes overhead savings, a reduction in insurance reserves and a combination of beneficial one-time items this year and detrimental one-time items last year. For our regulated water segment, third quarter O&M expenses decreased 2.2% relative to last year.

Next we'll spend some time on the earnings per share waterfall. Again this presentation bridges between GAAP and adjusted figures for both 2019 and 2020.

GAAP EPS in the third quarter of 2019 was $0.38 but adding back the almost $0.10 from the dilutive effect of the equity offering and the Peoples-related transaction costs, brought us to $0.48 per share on an adjusted income basis for Q3 last year.

Continuing on, volume expenses, regulated water segment rates and surcharges and growth together contributed almost $0.07, which were offset by $0.23 from the Peoples contribution along with $0.086 from other items, such as increased depreciation, amortization and interest and decreased Aqua Pennsylvania repair benefit relative to last year, that then results in the $0.23 for the adjusted income per share for the third quarter of 2020.

Now, remember the $0.23 impact of Peoples here includes the dilution from the share issuance, the financial performance of the gas business in this low usage quarter and other one-time impacts. Finally, the decrease of $0.011 due to water rate credits utility customers in the third quarter brings us to GAAP EPS of $0.22 for Q3 2020.

As I mentioned earlier, the fourth quarter of 2020 will include additional rate credits of approximately $19 million to be issued to the natural gas utility customers. Let's look at rate activity on the next slide.

In 2020, so far we've completed rate cases or surcharges for our regulated water segment in Illinois, Indiana, North Carolina, Ohio, Virginia and Pennsylvania totaling annualized revenue of $21 million. In our regulated natural gas segment, we completed surcharge filings in Kentucky and Pennsylvania with total annualized revenue of $1 million.

In the coming months, we expect to receive new base rates or surcharges in New Jersey, Virginia and Indiana for our regulated water segment. At this point in the year, we do not have any pending base rates or surcharges for our regulated natural gas segment.

Our relatively limited rate related activity remains on track despite COVID and we continue to have regular virtual interactions with our regulators and our counterparties.

As we announced in August, we filed a petition with the Pennsylvania PUC requesting accounting treatment for the approximately $380 million catch-up deduction for the tax repair eligible capital invested prior to Essential's ownership of Peoples.

The proceeding has been assigned to an administrative law judge per the normal process and we're in the discovery phase of the proceeding. If needed evidentiary hearings are scheduled at the end of January. At this point, I'd like to turn the call back over to Chris for an update on our municipal acquisition initiative..

All right, Dan and thanks. Many of you are familiar with this slide, you've seen it before, which represents our acquisitions for the regulated water segment. So far this year we've closed the Campbell Water System in Ohio, East Norriton wastewater System in Pennsylvania and Rockwell Utilities in Illinois.

We continue to advance the New Garden, Cummins water and DELCORA transactions and as I mentioned we recently announced a signed agreement with Lower Makefield in Bucks County, Pennsylvania to acquire their wastewater assets for $53 million with about 11,000 customers.

These signed agreements are expected to generate about $18 million of incremental annual earnings. We expect to execute asset purchase agreements on probably two or three other transactions by the end of the year, totaling over 10,000 EDUs or equivalent dwelling units and over $70 million of purchase price.

So we're doing really well this year with our wastewater acquisitions. I mentioned the status of DELCORA earlier in the call. And so I'm just going to suggest that I take questions in a moment rather than reiterate again.

But I just want to reiterate our confidence that we'll have a we have a ballot contract and then we'll close the transaction in early 2021. Now in addition to the signed municipal acquisitions that we just mentioned, we have a healthy pipeline of potential municipal deals. Our pipeline includes acquisitions where opportunities are active right.

We have our active discussions with potential sellers. And as illustrated by this slide, we are actively pursuing acquisition opportunities, totaling about 360,000 customers, so a really strong pipeline at this point over our multiple states.

Before we wrap up our discussion on the strategy piece here, I should mention that we were part of a joint venture that owned a raw water pipeline that was built to deliver water to the Marcellus Shale region. The pipe was originally built to reduce the trucking activity associated with bringing wells water to frac wells.

And some of you may recall that, but the venture was not as successful as it was envisioned to be. And as a result, it was written down when I became CEO. And now in October just last month, we sold our interest in that joint venture. So that is now behind us. Let me just wrap up with guidance here. We are updating our 2020 guidance.

We believe that the company's current position will allow us to deliver at the top end of our adjusted income range of $1.53 to $1.58 per share on a pro forma 2020. The rest of our guidance remains unchanged and we expect to announce new annual guidance early in 2021. We'll plan to provide another three years of guidance as we have done previously.

And with that let me open the line for questions..

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

Hi, Julien..

Thanks so much Chris and the whole team here.

Perhaps I wasn't going to start here, but in light of your commentary I'd be curious I mean what do you think this strategically means for the gas LDC space Chris? I mean certainly, your observations are not lost on us, but I'm curious if there are implementations that -- obviously you all have been more on the acquisition side, but I'm curious if you can opine across the broader space?.

Yes. I mean listen I think -- as I mentioned, we're in a hyperbolic situation with the elections and the whole discussion and so I think there's a lot of factors contributing currently. Let alone I mean listen there's an ESG movement.

We're part of it to make the country and generally the world greener, but I really believe that natural gas plays a prominent role in that work and will for a very long time. And so, I believe, Julien that once people get really grounded in the facts, I think, we'll see some improvement.

Now, not all gas LDCs are the same and that's why I really wanted to spend time today differentiating the gas LDC that we purchased that sits over top of the Marcellus Shale region and has low-cost gas for a very long time, versus some of the areas where people are passing legislation to prohibit new natural gas opportunities.

Pittsburgh, Pennsylvania is very, very different and as I said, very proud. So in total, I think you'll see a return recognition to the importance of natural gas, as not only part of our energy independence in this country, but also as a prominent part of the greening, it has to be.

We're not going to cold start a nuclear plant, when it's not windy, it's not sunny, you're going to depend on natural gas. It's a very efficient way to heat a home. And so, hopefully that gives you a little insight in how we're thinking about it..

Okay. All right. Fair enough. It doesn't sound like too many strategic implications though, as I hear from you. But I want to pivot at this point back to the other strategic actions you have pending already.

With respect to DELCORA here, when you stand do you expect to close in 1Q, but can you just walk through the timeline for clarity? I know you kind of alluded to that already.

And how we should think about the cadence of pulling on the equity?.

Yes. Well, let's think about this. First on the acquisition of DELCORA. So a lot of moving parts to that. There's a court date coming up. It was supposed to be this week, we're still hoping it's going to be next week, but we'll probably know that sometime later today.

And then, there's the obviously the Public Utility Commission process that will wind through and we've got a pandemic overtop, which always delays things a little bit. So I would say, we're not locking ourselves into the first quarter, but I would say, it's probably fair to think about March, April timeframe, in terms of when we might get it done.

Now for the equity and I'll pass it over to Dan here in a moment, but remember when we talked about our $300 million equity offering, that wasn't all for DELCORA. That was for use of a lot of -- you see it, as we went through this, we've got a lot of work going on with municipal acquisitions and pretty chunky-sized acquisitions.

And so, as we continue to do that, we've said that we'll continue to need to pull down equity in order to finance these acquisitions.

Dan, do you have something to add on the equity portion?.

Yes. And maybe, Julien, which kind of implied there is the timing of pulling down the equity. And I just wanted to reiterate our August timing was really driven by the fact that we wanted to make sure we were in a good position to close these transactions.

We, obviously, wanted to price the stock at a strong price from a share price perspective and we wanted to avoid the volatility going into this election cycle. And, certainly, we've seen that volatility play out, really kind of since the time that we did that equity forward.

So we really, really were quite pleased with the timing of that equity forward, coming right off the last earnings call and put us in a position where, when we need that equity for the transaction we will issue those shares, we'll settle that forward and we'll get the proceeds we need to close the DELCORA transaction, as well as other transactions.

And in the meantime, you don't sense it is a forward, Julien, those shares won't count in our denominator when we think about earnings per share, unless there's material price movement. But without that you don't count those shares, or the impact. So we're quite pleased with it..

Got it. Sorry, if I can sneak another one quickly in here. Obviously, currently on the water side, especially with resi and large resi that looked like they're curbing some of the other impacts.

Can you talk very quickly about the gas LDC side of equation, as we talk about coming into their impact on COVID into the back half of the year?.

Yes. It's a little early to tell. And, obviously, we're coming out of Q2, Q3 that are low gas usage months. I would say, we didn't, in those months, see what we would call a meaningful impact that was due to COVID. And as you know, weather and heating degree days drive gas usage more than anything else.

And so, we are -- we're confident as we go into this fall that we'll see usage correlated with the weather.

And I would say from our conversations, in Western Pennsylvania, we're not seeing significant load meaning manufacturing, heating loads, things like that, manufacturers offline that would really impact the consumption in a way other than it being weather-driven..

Okay. Thank you guys for the time..

Yes, totally..

You bet..

Our next question will come from Ryan Connors with Boenning & Scattergood..

Hi, guys. Good morning..

Hi, Ryan..

Yes. Good morning. Yes. You've got -- it sounds -- seems like you've got a knack for timing this year. I remember the Dow was down about 4,000 points the week of the Analyst Day and then another interesting day-to-day to be active here. So anyway my first question was just -- I appreciate the waterfall, Dan, on the earnings and the revenue.

It's very helpful. But it seems like the O&M expense came in pretty well above our model and I think that might have been a factor in being a little shy of consensus as well. So yes, I think based on what you've said that seems to be driven more by the Peoples side.

So at least for those like myself, who are somewhat newer to the gas side, can you just kind of walk us through some of the moving parts there on the expense side for Peoples?.

Yes. And let me first comment that you're right in terms of where the expenses are that we've added that new expense from Peoples. And frankly, we don't see that -- we've got no comparison to that expense in prior quarters.

When you look at the regulated water segment, and you'll see this in our segment reporting when the Q comes out, you'll see if you look at the O&M line for the regulated water segment year-on-year and you do the math you'll see that that's down about 2.2%. So, comfortable with where expenses are there.

On the Peoples side, what we're doing here is we're really just kind of adding in the Peoples expenses this year. And I'm not sure kind of the basis for your model relative to kind of what we're reporting for the first time. So maybe that conversation we make sure we have it another -- kind of off line..

Sure, sure. Okay. And a couple of other kind of big picture questions. One is NAWC had their big annual Shindig last week virtual of course.

And one of the things that was interesting is NARUC was on there talking about sort of more federal involvement in the water utility space, whether it's things like encouraging so-called water grid investment and things like a LIHEAP for water.

All that it sounds great on the surface, but then again one of the great differentiators for water is that you are regulated closer to home.

So I guess did you happen to hear those comments? And what's your reaction to that concept of greater federal involvement? Is this clear some of that stuff moves forward that you kind of get pulled into some kind of regulatory constructs that maybe ultimately counterproductive?.

Well, let's use the example that you pointed out there of LIHEAP.

I do think Ryan that as people become more and more aware that the cost to serve water is climbing, given the massive capital expense that we've got to put forth, there is going to be a need for some customer assistance beyond what we've been able to provide in the way we've been doing it in the past.

So we are going to -- I think you know this, we are going to submit in this rate case, our next water rate case Universal Service Program for the first time. We'll be the first water utility in Pennsylvania to do it. We're going to submit that.

But listen, when we look at what's happening at Peoples, all in Peoples provides about $27 million of assistance to their customers and a lot of that comes from the federal government. There probably ought to be some consideration as water prices continue to climb as well, and I think it's tough to say that's going to come from the state.

It should probably be provided in the same way that the gas utilities and the electric utilities to get their supplements. So I think there is some advantage to that as prices continue to climb. But I agree with you, I prefer not to get stuck into the red tape of the federal government for many other issues other than maybe customer assistance..

Okay. That's fair. And then, my last one was just -- and you kind of alluded to it here Chris, about the rate case in Pennsylvania. I mean you came into COVID with a pretty light rate pipeline which is maybe lucky maybe good, but sort of good timing because the optics of trying to go out for rates right now is not great.

But we've got this K-shaped recovery where there's a segment of the population that's going to be struggling for a while.

How do you think about sort of the sequencing in base rate case activity? I mean is there -- the optics of that and the politics of that? And I mean how does that affect the timing of what you ordinarily would be doing right now in terms of sizing up various rate cases?.

Yes. It's an important question, and one that we spent time considering all the aspects of. But I think when you think about as large a unit as the Pennsylvania water utility is for the company, you really have to remain on a cadence given the continued capital spend and everything else. Listen, I hope we have a vaccine out shortly here.

And by the time, we're filing a rate case we're well in to a national vaccination for COVID-19. And of course, we'll continue to evaluate things as we get deeper into the spring. But suffice it to say, it does -- the national issue of the pandemic does play here in Pennsylvania and would impact how we think about a rate increase.

I can't tell you at this point that we're -- that there's any plans to alter course, but it certainly will be in the consideration..

And then Chris, I'd add too that the Universal Service Program proposal for that helps to address the people that are on that downward leg of that K-shaped recovery Ryan that you mentioned..

Yes. Okay. Super. Well, hey, thanks for your time..

Yes. Thanks Ryan..

Thank you..

We'll take our next question from Insoo Kim with Goldman Sachs..

Hey, Insoo..

Good morning. First question is on the equity side.

Just on a hypothetical basis, if the DELCORA transaction fails to close, how do you think about the amount of equity that you are expected to pull from the forward? Do you still expect it to do the full amount or could it be something less?.

Well let's remember -- I'm going to kick you to Dan in a second, but let's remember that we have other transactions Insoo that are pretty chunky here and a couple of others that we think we're on the precipice of announcing. Obviously we hope things stay on course but there are multiple uses for that equity.

And Dan why don't you jump in there?.

Yes. I think you're exactly right Chris. I mean it was interesting a few minutes ago you talked about Lower Makefield and the size of it being $55 million and 11000 connections. And a year or two ago on this call we would have thought that was a huge acquisition right? And now we say kind of matter of factly.

But we see a number of things that look like that in terms of size or bigger that could help to absorb that equity. I mean I think Insoo, we'll continue to evaluate it as we've got call it 9, 10 months left on that ability to settle that forward.

So we got a lot of time here for that DELCORA transaction to play out and for other things of scale that we're working on to play out as well. At this point we certainly anticipate that we would physically settle that forward, but there are options to cash settle or partial cash settle as well..

Yes. Makes sense. Understood. And then just my other question is going back to the gas strategy Chris, I know you and I have spoken about that and the reasoning for the Peoples Gas acquisition definitely appreciate the reasoning and the advantages that you that Peoples has of being in the Marcellus.

But just going forward from a longer-term strategic business mix perspective are you still committed that future growth especially when it comes to M&A will happen only on the water side versus on the gas LDC side?.

Yes. Yes. Let me say that clearly you and I have had this conversation before. We are not spending any time on the natural gas side for M&A. We're spending a heck of a lot of time growing the rate base by replacing pipe at Peoples ramping up that program. So as we've said before, that the rate base there is growing 8% to 10% a year.

So it is fast-growing even without doing M&A and that's allowed us then to put all of our M&A focus on the water side and it's really yielding nice results. So you said it exactly right, we're not spending any time on the gas side for M&A. It's all on the water side..

Got it. Thank you so much..

You bet.

[Operator Instructions] We'll take our next question from Durgesh Chopra with Evercore ISI..

Hey Durgesh..

Mike, Chris and Dan, good morning. Thank you taking my question. Can I just clarify really quickly and Chris appreciate all the detail around gas that's very helpful color and perspective from you.

Just -- can I go back to DELCORA and can you talk about procedurally what are the milestones that we should be watching out for towards the approval process? So it's the court order then the commission order can you just talk about that?.

Sure, sure. First the court hearing in what's called Common Pleas Court, County Court in Pennsylvania we expected that to be this week. It had to be moved, but hopefully only a week out and that -- the decision by the court there is -- and I'm going to be -- I'm not a lawyer. So I'm going to be super simple in how I describe it.

The judge has to decide, is there a valid and enforceable contract in place and clearly we believe there is and plenty of evidence of that. So we think that the court should look very favorably on our position there. So we expect that to be sometime next week. And then we would expect probably call it 60 days maximum.

The judge has actually been working pretty quickly in that case, so it might be sooner. But I would say within 60 days we would know what his decision is on that. Assuming he decides the way we think, it should go that makes it pretty easy to then continue to move on to then focus on the commission.

So the commission proceedings next week are the evidentiary hearings for DELCORA. And so, they'll move through the process there.

And then we would expect the commission to wrap up sometime in the March timeframe with their work and -- which would allow us to close call it late March early February -- or early April -- probably April is the more appropriate timing..

Got it. And if you in an event -- and I know you have a very successful history in Pennsylvania.

but in an event that the judge here has an adverse ruling is there a sort of forum for appeal and things like that?.

Yes. Of course you could go to the Commonwealth Court and appeal it. But I think -- well you can never suppose what a judge might come up with, but it could be more nuanced because the second question is the contract between Aqua and DELCORA or Aqua and the county of Delaware. And that's probably the more nuanced approach.

And frankly, I'm not sure it matters to us. We know we have a signed contract and it's enforceable. And so we feel confident that whether it's through the county or directly with DELCORA that contract is enforceable..

Yes. No, that's great. Thank you. I appreciate your granularity there.

And then just going back to -- just any update on the catch-up provision of income taxes on Peoples Gas that is pending with the commission just anything new there, and when to expect a final decision?.

Yes. As you'll recall, we filed that right about the time of the last earnings call, and then we had a pre-hearing conference with the ALJ in early October that really outlined the procedural schedule, and as I noted in my remarks earlier that has us with evidentiary hearings right at the end of January.

But whether there are hearings or whether we settle it this still probably plays out until a final order sometime early in the second quarter of 2021.

Just as these things go, they have a certain cadence and a timeframe and there are, you file, there are reply briefs, there's rebuttal, there's surrebuttal all of these steps that just take time before the administrative law judge writes a proposed decision, and it ultimately goes to the commission for the deliberation and creation of an order if you will.

So I think we're kind of in wait and see mode. Obviously we're working our way through that. But I would remember Durgesh too that don't think about this as increasing earnings in the near-term, think about the way we proposed this that what it really does in that sharing of the benefit between ratepayers, customers and shareholders.

What it really does is that it would help us to stay out of rates longer, help us to achieve the revenue requirement in the out years, think kind of 2024, 2025 rather than bringing earnings forward and having incremental earnings in the near-term..

That’s great, Dan. Thank you..

Good..

Thanks for the time today..

Yes. Thanks, Durgesh..

We'll take one more question from Jonathan Reeder with Wells Fargo..

Hey, Jonathan..

Hi. Thanks for taking my question guys. So Chris I think you kind of alluded to a little bit, but I think the court had the hearings a few weeks ago focused on the creation and use of the trust by DELCORA.

How did those go?.

Well, I don't think there's decisions out yet on the -- I mean, the arguments went well I think. And obviously we're a third-party to that Jonathan as you know right? The trust is really an issue between DELCORA and ultimately the county is -- would prefer not to see a trust.

But -- so we're a third party, the judge's rulings haven't come across on that. So on all of the procedural work that the judge has ruled on, it's all gone very well and we've been very pleased with every one of the rulings. So I would imagine that we would hear more on that trust going forward..

So does the judge issue two separate rulings then like the trust one being 60 days potentially after that hearing date, and then the one on the asset purchase agreement would come even later? Or will it be just one global ruling that he hands down?.

Well, I think the judge is pushing -- the judge would like to see, a settlement discussion. Obviously, he said that, very publicly. And so -- and obviously, I'm not going to comment on that. But I think you're thinking about it the right way, two separate decisions, one on the trust and one on the enforceability or the contract itself.

And I think your timeframes are probably about right. So -- but listen, there's a lot of ways to come out of trust. It doesn't have to be called a trust. It could be a fund; it could be under the auspices of the county versus DELCORA.

There's a lot of -- in other words, it's not a -- that's not a go no-go issue necessarily it may be, the current form of the trust. And I hate to go down this road, because we're getting into probably a more sensitive area. But I would not think about the trust issue, as a deal killer in any way..

Okay.

And so you -- do you think there is still a chance that it gets settled, the judge is incurring it, like are there active discussions? I mean, I know, you can't go into the details if there are, but is that still a potential pathway?.

I'm sorry. Ask that one more time, Jonathan..

I'm just -- I know you said, that the judge is encouraging the parties to settle or some discussions..

Yes..

So should we assume that, there are active discussions going on like, is that, a potential like, real pathway at this point even though, we might be only a month or two away from a judge's ruling otherwise?.

Listen, settlement is always a possibility. But I can't comment or respond any kind of settlement discussions..

Okay.

But they are occurring?.

I can't say, Jonathan. I really -- unfortunately, I can't say..

Okay. And then lastly, again regarding the settlement, but this time in the repairs tax, you kind of sound like, you're optimistic about reaching a settlement before the January hearing.

Is that kind of based on the Intervenor Testimony that you've seen? Or how should we be thinking about the prospects there?.

At this point, Jonathan we're really just working through the process. And we've gotten reply briefs back from the various intervening parties. And we're working through those. And we'll obviously respond. So I think it's really just too early, to give you any more color on it. As I said earlier, we're progressing through it.

And when I said, wait and see, we're on a wait. And see in terms of how the timeline and how the time evolves here. But we're obviously going to do everything we can here to make the case for this proposal and the sharing of benefits between, the customers and the shareholders, in a way that's good for all parties and keeps us out of rates longer..

Okay. Yes. No. I appreciate that. Yes good luck, and looking forward to those announcements before the end of the year that you alluded to Chris on the M&A side..

Great. Good, good. You bet..

Thanks..

Thanks, Jonathan. Take care..

I'll now turn it back to, Chris for closing remarks..

All right folks, thanks so much for spending time. I know this a more -- little more lengthy call. But I think there was some important information that hopefully we traded here, always available for follow-up. Thanks again. Have a great day..

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect..