Good day ladies and gentlemen and welcome to the Essential Utilities Inc. Q1 2022 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Brian Dingerdissen. Please go ahead sir. .

Thank you, Kyle. Good morning everyone and thank you for joining us. I am Brian Dingerdissen, 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 we will be referencing in the webcast of this event can also be found there.

Here is our forward-looking statement. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements.

Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risks and uncertainties. During this call, reference may be made to certain non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial measures is included at the end of the presentation is also posted on our Investor Relations website.

Here is our agenda for today. We'll start with Chris Franklin, our Chairman and CEO who will discuss the highlights from the first quarter and provide a company update. Next, Dan Schuller, our CFO will discuss our financial results.

Chris will then conclude the presentation with an update on our growth strategy and a summary of our guidance before opening the call for questions. With that, I will turn the call over to Chris Franklin. .

Hey thank you, Brian and good morning everyone. I want to start off this morning just by letting you know that we held our Annual Meeting of Shareholders last week and I'm pleased to report that all of the items on the ballot were voted according to management's recommendations. So, a good meeting overall. So, let's talk about the first quarter.

We had a strong first quarter with earnings per share of $0.76, up 5.6%. Dan is going to talk to you a lot more detail about that in just a few moments. For the first few months of the year, we invested approximately $183 million in infrastructure improvements. That's in our combined water and natural gas segments.

That compares to $178 million in the same period of last year. It's a little bit ahead of that schedule. We remain confident that our ability to execute the $1 billion investment is well in hand for the rest of 2022. Now, we continue to advance our municipal acquisition strategy with our previously announced closing of Lower Makefield, Pennsylvania.

That transaction closed which added about $53 million in rate base and 11,000 customers to our water footprint in Pennsylvania. And we're diligently working on the closing and integration of our seven pending acquisitions, totaling $418 million in purchase price Also pleased to report that we recently co-hosted a Hydrogen Summit in Pittsburgh.

The purchase -- the purpose of the event was to bring together key stakeholders in a region that we know has long been at the forefront of energy innovation. We continue to look at possibilities associated with hydrogen and we'll continue our discussions and our research.

Now, the Hydrogen event, along with the changing geopolitical conditions in the world, continue to strengthen our belief that natural gas has a firm place in the short and long-term energy mix in our country as well as many other countries around the world.

As we've seen in the macro environment over the last several months, the tone regarding natural gas and its future continues to evolve. I think the public is becoming more educated on natural gas and the importance of American energy independence.

Now, like everyone else in the industry, we continue to monitor public and private valuations of natural gas utilities in the market. We also remain committed to making investments in our natural gas utility to improve safety reliability and the environment, all while growing rate base and earnings per share.

And lastly, as we continue to recover from COVID, we're pleased to hold a large-scale employee community volunteer effort associated with Earth Day across all 10 states in our footprint. As you know we're very proud of our industry-leading ESG work and have shared some of that work with you in previous calls.

Our ESG website has also received important recognition in the market. And it was in that light that we held our first ever essential Earth Day, which involved a variety of activities and opportunities for customer education, employee volunteerism and corporate giving.

We kicked off the event on March 22 with World Water Day and concluded the series on April 22, which was Earth Day. Over that course of a month, we hosted 35 events across our 10-state footprint and had nearly 500 employees volunteer almost 2,000 hours of their time.

The activities range from forest restoration and park cleanups to assisting with water filtration. Essential also provided $580,000 in financial donations to support 28 non-profit organizations with their environmental causes.

When we work together with our customers and the communities we serve to assist and partner non-profit organizations, we recognize we can make a significant difference in our communities. And Dan, with that, we turn the call over to you in discussion about our financial results..

Thanks, Chris, and good morning, everyone. We had revenues of $699.3 million in the first quarter, up 19.8% from $583.6 million last year. Our regulated water segment contributed $239.2 million and our regulated natural gas segment contributed $445.2 million.

The largest contributors to the increase in revenues for the quarter were the recovery of higher purchased gas costs and additional revenues from rates and surcharges, increased gas volumes and water and wastewater customer growth. O&M increased to $142.6 million in the first quarter, up from $125.1 million in the first quarter of last year.

Employee-related costs and expenses related to the gas segment customer assistance program, which are recovered through a revenue surcharge were the largest drivers of this increase in O&M for the quarter. Net income increased year-over-year by 8.5% from $183.7 million to $199.4 million and GAAP EPS was up from $0.72 to $0.76.

Next, we'll walk through the waterfall slides starting with revenue. In the first quarter of 2022, revenues increased $115.7 million or 19.8% on a GAAP basis. You'll notice the primary driver was the recovery of higher purchased gas costs of $95.6 million due to a significant increase in natural gas commodity prices over the last year.

Rates and surcharges, increased gas volumes due to colder weather and customer growth and volume from our regulated water segment provided an additional $23 million towards the revenue increase which was offset by $2.8 million of other items. With that, let's review the first quarter weather on the next slide.

As you know, there's a strong correlation between weather and gas consumption and associated revenue. This winter for our regulated natural gas segment, the weather in the first quarter was slightly colder than normal with 2,878 heating degree days.

This compares favorably not only to the last two winters, but to the 20-year first quarter average in Western Pennsylvania.

As a reminder, the chart on the right shows how residential natural gas consumption in Pennsylvania was distributed throughout 2021 noting that just over 80% of the gas was consumed during the heating season, meaning the first and fourth quarters of the year with the largest portion of gas being sold in the first quarter.

In terms of commodity prices, our customers benefited from gas purchases at lower prices in the second and third quarters of 2021 as we injected gas into storage for the 2021, 2022 heating season.

Going forward, we expect gas prices to remain elevated for a while due to the geopolitical situation, lower-than-normal storage levels, domestic supply and -- domestic demand and a supply lag. Thus, we're currently putting more expensive gas into storage for the coming months.

However, pricing in the Appalachian Basin remains discounted to NYMEX by $0.50 to $1. Almost half of the gas consumed by Peoples' customers is withdrawn from our own storage and the rest is purchased as needed. Next, let's move on to operations and maintenance expenses.

Looking at operations and maintenance expenses for the first quarter, expenses increased 14% to $142.6 million, compared to $125.1 million for the same period in 2021.

The largest driver of the increase was $8.4 million in additional employee-related costs, including compensation and benefit, some defined contribution plan enhancements to match market conditions and maintain our workforce, recruiting costs and more expense-related maintenance activities.

Gas customer assistance costs increased $6.8 million, due mainly to increased commodity costs. These expenses are recovered through a revenue surcharge. The $2.4 million increase in other expenses reflects, among other things, the favorable prior year impact of an insurance reserve adjustment.

Inflationary cost increases contributed to the $1.5 million increase in production costs in our regulated water segment. Organic and acquisition-related water and wastewater customer growth also added $1.3 million and these increases were offset by $2.9 million in lower bad debt.

Now if we remove the impact of the customer assistance program rider, as well as onetime expenses, the year-over-year O&M increase would be around 3.5%. Next, we'll review the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for the first quarter of 2021 was $0.72.

Rates and surcharges contributed $0.026 and increased volume from our regulated natural gas segment added another $0.023. Continuing on other items, which include increased depreciation and interest, offset by higher tax repair at Peoples added $0.012 and growth from our regulated water segment contributed $0.008.

These were offset by $0.03 of expenses, which were up due to a nonrecurring charge related to insurance, as well as an office lease-related charge, increased fuel costs and labor costs. The result is a GAAP EPS of $0.76 for the first quarter of 2022.

The $0.76 also includes the impact of 6.7 million additional shares from the forward equity sale that we settled in August of 2021. These shares were not in the denominator when the $0.72 from the first quarter of 2020 was calculated.

Given the $0.76 in earnings per share for the first quarter, we wanted to take a moment to remind everyone of how we think about net income by quarter. These strong first quarter results fall above the midpoint of the range noted here on the slide for Q1.

But as we've explained before and noted on the heat integrated day slide, the seasonality of the natural gas segment earnings -- the seasonality, I should say, it shifts earnings to the first and fourth quarters as a result of winter weather.

While the first quarter was strong, we still have three quarters to go and some inflation headwinds, plus our stated guidance range of $1.75 to $1.80 remains intact. Additionally, I'd like to remind all of you that we recently settled the tangible equity units, or TEUs, that we issued three years ago as part of the Peoples transaction financing.

Issuing these units tapped another pool of investor capital and thus helped our concurrent common share issuance. We were pleased with the outcome of these TEUs as we were able to issue the minimum number of common shares given our positive stock performance since the issuance date.

Please keep in mind that the common equity resulting from this final conversion has always been considered in our formal guidance. And in each quarter since the issuance, the estimated as converted common shares have been included in the diluted shares outstanding.

Thus the shares outstanding you should be modeling post this conversion continue to be at the 262 million share level. Consistent with our commitment to maintaining strong investment-grade credit ratings with S&P and Moody's, the company expects to launch an at-the-market equity issuance program in the near term.

We will use the program to raise equity over time for municipal transactions and other corporate purposes and expected issuances will continue to be included when we develop our earnings per share guidance.

We expect the ATM program will provide us with an efficient and opportunistic way to raise equity as needed to support future investment opportunities. Moving on to rate activity and other regulatory matters.

So far in 2021, we've completed rate cases or surcharge filings in our regulated water segment in Illinois, North Carolina, Ohio and Pennsylvania and we completed a rate case in our regulated natural gas segment in Kentucky. The combined total revenue increase is $13.4 million.

And as you're aware, we currently have base rate cases underway for our regulated water segment subsidiaries in Ohio and Pennsylvania and in accordance with the statutory time line, we expect our Pennsylvania base rate case to be on the commission agenda this Thursday and new rates effective later this month.

And with that, I'll hand it back over to Chris to discuss the municipal acquisition program.

Chris?.

Thanks Dan. Appreciate it. As I mentioned earlier in the call, we closed on the Lower Makefield transaction, which is a significant acquisition that added $53 million in rate base and about 11,000 customer connections. It represents nearly 25% increase to our wastewater customer connection number in Pennsylvania.

So this milestone acquisition also increased Aqua Pennsylvania's total number of customers served to more than 0.5 million. Many of you are familiar with the seven signed asset purchase agreements pending, which will add about 224,000 customers or customer equivalents and a total of over $418 million in purchase price.

Let's take a minute and talk about the DELCORA transaction. The Pennsylvania Commonwealth Court issued a decision in March, regarding the enforceability of our asset purchase agreement with DELCORA.

In its remand the Commonwealth Court found that Delaware County can dissolve the authority if it so chooses, but our purchase agreement must be upheld regardless of whether DELCORA remains standalone, or if the county dissolves the authority. It was very good news for us.

Following the court's decision, we sent a letter notifying the Public Utility Commission of the court's decision and requested that the PUC move forward. And as I've said before, we remain confident that we will close the DELCORA transaction. I also want to take a moment and mention our Willistown acquisition in Pennsylvania as well.

You may have seen that the ALJ recommended that the PUC reject our Willistown acquisition, and I think this is an important policy indicator.

Essentially the question that is now posed to the Pennsylvania Commission is should duly elected municipal officials have the authority to sell or regionalize their water or wastewater utilities even if they're not out of compliant or financially troubled.

You'll recall that Willistown is selling their wastewater authority to us to put it in the hands of a professional operator basically Aqua despite the fact that the authority is not technically out of compliance.

Now we're optimistic that the Pennsylvania Commission will hold to its longstanding policy that encourages regionalization and respects the authority of local elected officials. Hopefully, we'll see some movement in that in the coming couple of months here.

Now the next slide you've seen before, you know our pipeline of opportunities for growth remains strong and healthy. Our value proposition to municipal systems is also strong and includes our competitive capital solutions, industry expertise and long-term rate stability.

We'll continue to focus on growth in all eight of our water states and fair market value statutes are in place in each of our eight states as well as a reminder. Currently, we're engaged in active discussions with municipalities and pursuing approximately 415,000 potential water and wastewater customers as illustrated in the table that you see here.

All right, I'll wrap up today's call just with a quick review of our guidance. We expect to earn between $1.75 and $1.80 per share this year. We remain confident that our three-year earnings per share growth will be 5% to 7% through 2024.

Our capital plans are on track and we anticipate investing approximately $1 billion annually to rehabilitate and strengthen water wastewater and natural gas systems through 2024. Rate base is expected to grow between 6% to 7% for water and 8% to 10% for gas.

And customer growth is expected to grow between 2% and 3% on average for water and remains stable in natural gas. Finally, we remain committed to our ESG targets and we'll continue to share our progress throughout the year. And with that, let me conclude our formal remarks and open it up for questions.

Kyle?.

Thank you. [Operator Instructions] We'll take our first question from Insoo Kim with Goldman Sachs. Your line is open. Please go ahead..

Insoo, how are you?.

Hi, Chris. How are you doing? Good morning, Dan. First question, just thinking through the next few years, I think you reiterated the $3 billion of CapEx through 2024 about $1 billion each. When we just think about the flattish level of CapEx over the three-year time frame just doing math-wise it implies lower rate base growth just given a higher base.

How conservative are you on the organic side of things on the CapEx versus your thoughts on I guess the pace of muni acquisitions maybe playing into that as well?.

Yes good question. I mean we -- as you know we don't bake into that CapEx any future acquisitions that we don't have signed already. So it -- we would expect it to be stronger given our pace of acquisitions and especially given the size of some of the things that we're working on at the moment.

And, of course, it doesn't include any of the follow-on capital for then any of those acquisitions we could do during that period. So really we're talking about base CapEx in our existing system.

Dan, you have anything to add to that?.

I think that covers it Chris..

Okay. Thanks for the color. Second question, going back to the big strategy question. I think Chris in your prepared remarks you mentioned the, I guess the changing views perhaps more recently about the role of natural gas and the energy mix here, and how you continue to monitor the public and private valuations.

Just curious your latest thoughts on that mix that you have at water -- or Essential Utilities with that gas exposure? And any time line for making more of a call -- one could say on that strategy?.

Yeah, I'll start with the mix. 70%, we think about rate base; about 70% water, 30% natural gas. Certainly rate base growth is growing in natural gas at a faster pace. Just base capital expenditures I would say it's growing faster.

Of course when we layer in acquisitions and we think we've got a strong pipeline, so we think actually we can outpace growth of gas with growth of water in the coming years. So that's our hope that we would continue to focus on water growth and it would outpace natural gas ultimately diluting natural gas a bit.

Now going forward, listen, we are really satisfied with our natural gas utility. It's performing on every level as I've said many times before, beyond what our expectations were when we bought the company. The team is functioning extremely well.

And frankly we think in particular the Pittsburgh region of the country, natural gas has a long, long future. We talked today in the call a little bit about hydrogen and its potential mix in that long-term formula there in the Pittsburgh region. Hopefully you get a hydrogen hub there out of the federal government and engage in that research.

We have a great infrastructure and a renewing infrastructure, bringing our environmental footprint down. So I guess that's a long way Insoo of saying we're very pleased with our investment in natural gas and we have no plans to do anything other than continue to invest in building that capability there..

Got it. Thanks so much..

You bet..

Thanks Insoo.

We take our next question from Durgesh Chopra with Evercore ISI..

Hey, Durgesh..

Good morning, Durgesh..

Hey, good morning Chris and Dan, thank you for the update.

Hey just can we quickly touch base on Chester and what's the latest there?.

Yeah. So Chester City as you know had made a public statement supporting its sale to us having run a request for proposal. Of course, it's tied up with the receiver there as you know. And then the Chester Water Authority has filed to the Supreme Court and appealed to the Supreme Court.

The Supreme Court more recently accepted that appeal and so that will play through the courts over the coming year. Now in the intervening time, as we've discussed many times, the political wins have shifted in Delaware County and the surrounding counties since the last set of board members were appointed at the Chester Water Authority.

So they all serve five-year terms. They're all up this year, beginning this summer. And so, we'll probably see a short-term shift in the leadership of that water authority. Whether that changes people's minds on the -- their stature of independents and everything remains to be seen.

But I think the way to think about this is short-term potential change given mix of Board members. Long-term, we see what the courts have to say, the Supreme Court has to say in terms of the appeal. And that's all about what we can say about it at this point..

Got it.

So, I mean, is there a timeline here Chris that us and investors should be following, or there's no set schedule at this point as the sort of -- the Supreme Court takes on the case and other moving pieces?.

Yeah. The Supreme Court really doesn't set a timeline. So, we're at their -- at the disposal of the court. So, I really can't give you a timeline. I can tell you that the changeover of the Board members will be this summer. Call it late summer..

Got it. Thank you. And then, Dan just on the ATM comment here. Just one can you just confirm for us and I think that's the case that, when we think about your long-term targeted EPS growth rate of the 5% to 7%, that incorporates and includes any equity issuances you may do..

That's correct, Durgesh..

Okay. Perfect. And then, how should we think about you utilizing this ATM as you announce more acquisitions, or is it going to be more sort of programmatic in nature every quarter and things like that? I don't know if you can share any color on that front..

Ye, it's great question. I guess the way I'd put it is the timing of issuance depends on a few things right? It depends on the municipal acquisition program, and the timing of those transactions and when we see those getting through the regulatory approval process and closing.

It also depends on our share price at the time, is the share price at a price where we'd like to issue more stock or not. So, a few different factors come into play there. And as Chris noted, right, we've got about $418 million of signed acquisitions yet to close. That was on one of the slides he spoke about.

And so, as we've talked we finance those with a combination of debt and equity plus obviously, we've got a robust capital investment program that we need to support. So, we think of this as the best way to support our credit metrics while making acquisitions and doing our capital program..

Got it. Thank you for the update today morning, guys. Thanks a lot..

Thanks, Durgesh. Take care..

We take our next question from Ryan Greenwald with Bank of America..

Hey, Ryan..

Hey, Dan. Good morning..

Hey, Ryan..

I appreciate the time. Just maybe piggybacking off that a little bit here.

How are you guys kind of thinking about the magnitude of equity needs through the base plan? And I mean you alluded to your commitment to the gas business a bit there, but any change in how you kind of think about potential monetization to offset equity needs, particularly kind of given the public market backdrop here?.

Not at this point in time. At this point in time, we see these -- this -- our equity needs being financed externally. We see ourselves using this ATM to finance those. And in the plan, we have this $418 million of signed acquisitions that we talked about.

Of course, we're looking to add to that all the time throughout our states with our active business development program.

So hopefully, we are using the equity to support transactions as they come in and we're getting more transactions to add and over time require investing more at one-time rate base right? Chris, anything to add to that?.

Yes. Listen, I think in terms of our base capital plan, our base CapEx plan and the equity needed is baked into the plan. That's why you're getting the projected three-year EPS, so all that's baked in. If we do acquisitions, as Dan said then we'll add the equity component necessary to finance those at a 50-50.

And the good news about that with an ATM is you have call it eight, nine, 10 months to get regulatory approvals and raise the capital through an ATM,raise the equity through the ATM. So that's how we see it as another useful tool basically and paying for as Dan said it's flexible. But largely I think about it as related to acquisitions..

Understood.

And outside DELCORA and Chester here, any particularly sizable muni opportunities that are on your radar in the near term?.

Yes..

Any additional color you can provide?.

Yes right. That's harder for us to do right? I mean yes we're working on some good-sized opportunities we really are. And as soon as we can begin to share some of the color around that I'd love to do it. But hard to do that while we're in the midst. .

Fair enough. I'll leave it there. Looking forward to seeing you guys next week..

Sounds good..

Sounds good. Safe travels..

We take our next question from Ryan Connors with Boenning and Scattergood..

Hey, Ryan..

Good morning. Thanks for taking my call..

Hey, Ryan..

So yes. First one was really for Dan actually. You talked about this rise in employee-related costs. It really did – pretty nice jump there. And you did give some of the color comp and benefit recruiting costs.

But can you just discuss what that looks like? Is that just a function of the environment we're in and we're going to continue to see that ramp up given just the tight labor market inflation, or are there things in there that were just hot in the quarter that will kind of settle down going forward?.

Yes. There are actually a number of things in there that are one-time kind of hot in the quarter to use your terminology there. So we did go ahead and put in a couple of 401(k) enhancements as I mentioned, really to match market and make sure that we're retaining our workforce.

There are a few other things in there that are not regular course, but we'd like them to be like business development bonuses that get paid things like that but they're not a standard compensation expense.\ So the analysis we've done is we sort of – I guess the way to characterize that is if you just look at that headline number for the increase in employee-related costs it kind of oversimplifies the facts here.

If we pull out these one-time-type expenses, we get to a more normal level.

I don't want to say – I should be careful in my terminology but certainly as I said, if we look across the whole of the O&M waterfall there, if we remove the onetime expenses and we remove the customer assistance program increase, we would get to about a 3.5% year-over-year increase higher than normal, higher than we think about our 2% to 2.5%, 3% type of range.

But we are in this inflationary environment and we are seeing some incremental costs related to employees. And we did see as I noted it earlier some incremental expense related maintenance activities as well..

Got it. Okay. No that's actually really great detailed color. Thanks for that, Dan. And then my other one was more strategic. I mean Chris, you talked about the Willistown proposed decision. And you mentioned I guess the battleground issue at play there being whether these "nondistressed" systems should be subject to sale.

But importantly, you noted that as it did the decision also that what's at stake is not only privatization but regionalization, which sort of suggests that it's not an anti-private decision, it's an anti economies of scale decision. And a couple of questions related to that. Is that the proper characterization of it? Number one.

And then two, does that make the – are the other big regional systems around the state sort of your allies? Are they writing briefs on that in terms of supporting that and saying "Hey we're a publicly – public sector system but we want to be able to acquire as well?" Or is it really just at base level kind of a cynical anti-privatization play at the end of the day? I mean what's the read on that?.

Yes. Listen, I'll give you my thought. I don't want to characterize the judge's decision. It was actually a pretty detailed decision over 200 pages. So there was a lot of thought that went into it.

But my take from it is that the judge was basically saying to the commissioners, this is your decision on a policy level, not mine and we kind of need to make it.

I would like to think that, the commissioners will think about it in the same way we do and that is this long-term view across the country not just in Pennsylvania the regionalization of water and wastewater systems is important to long-term viability. And therefore the policy remains consistent with where they've been for many, many years.

That's why I tend to think this is going to be a fairly straightforward decision for the commissioners themselves. But I think the ALJs need to hear from the commissioners that in fact this is the case. So it is an important policy decision. I don't want to make any comments on whether it's cynical or anything else.

I just think it's an important policy decision that the commissioners have before them. .

And then lastly just -- you talked about FMV and all of your states having it and you've talked about that being a national trend. But really I mean as we can see from our discussion here Pennsylvania really does seem to still be far and away the most active region.

And can you discuss the reasons behind that? I mean, why have we seen other states implement the legislation, but would really not take off to the extent Pennsylvania has even though it's been in place for a few years in some of those areas?.

Yes, it's an interesting dynamic, Ryan and probably a longer conversation, but I would just make a couple of maybe thoughts here that there's safety in numbers, right? Once a couple of municipals successfully transact and others look at it and say that actually worked out well for the municipal.

For whatever reason they do it right and there have been a number of reasons, could be from compliance issues to economic viability to simply economic development funds or tax paydowns say pensions all kinds of reasons. But as municipals see others doing it and doing it successfully, I think there's more and more interest.

And that's certainly what's happened in Pennsylvania. And I think what we're trying to do in some of the other states is get that started, get people comfortable so that they see it's a it's something that you don't lose your election over. It works out financially. It works out operationally.

And then selling to a regulated utility gives the adequate protection to ratepayers. I just think it's -- that is an education process that takes place over time. .

Yes. No that's helpful color. Thanks for your time today guys..

Yes. Thank you, Ryan..

Thank you, Ryan..

We're moving forward to Ben Kallo with Baird. Your line is open. .

Hi, guys..

How are you, Ben?.

Hi. Good morning. Hey, could you guys just walk through --I don't think you have gas exposure, but just because of volatility could you walk through just how it works in the gas business? And then my second question just on -- in terms of CapEx for the first quarter.

I know you guys did better than last year but just any kind of constraints you're seeing whether it's supply chain shipping anything like that for the rest of the year that we should watch out for? Thank you, guys..

Yes. Maybe I'll start and then Chris can chime in as well. Let's start with the CapEx program and the supply chain. I mean we have had certain things over the last 1.5 years that have taken longer to get. So we've adjusted our ordering patterns to accommodate for that.

We've also ensured like with our pipe producer that we have supply and certain number of truckloads coming in every week to our capital program in the states where we use that pipe supplier for ductile iron. And so I'd say, we have seen some supply constraints.

We've seen price increases as you'd expect with commodity costs up things that are; steel and concrete and wood and plastic HDPE. We've seen those things. But we don't think that in any way puts our CapEx program in jeopardy. We've adjusted to that. We are on track at this point into the year.

We see no reason we wouldn't complete our $1 billion CapEx program this year across water and gas. And then coming to your first question you're correct. We don't really have what we'll call exposure from a gas price perspective a commodity perspective. Meaning, we don't make any more or less in terms of margin, with higher or lower priced gas.

The way it works for us is, we start buying right about this time of year. We buy gas. We put it into storage between now and October. We put just under half of the gas needs in the storage through that buying program. So think of that, as buying at today's cost next month's cost, July costs as we build that up.

And then the other half will come as we – through the rest of – through the heating season we both pull from storage and buy gas on a stock basis that's needed. That – and then from a price perspective to our customers, basically we aggregate those gas costs.

We set a gas price in October based on the costs that we've already incurred and the cost we expect to incur. And then we true that up with gas cost adjustment. We do that a couple of times. And then, if there's a tail it would flow into rates the following year.

But those gas prices eventually get fully recovered from our customers through either the base rate or the gas cost adjustment..

Great. Thank you..

Certainly..

Next question from Jonathan Reeder with Wells Fargo..

Hey, Jonathan..

Hi, Jonathan..

Hey, good morning, Dan. Hey, Chris.

Dan, I may have missed it but how large of an ATM program do you anticipate establishing?.

Yeah. We've not quite finalized it, but think of it around $500 million..

Okay. Great. And then Chris on the PA rate case for some reason it isn't on the agenda for this Thursday.

Do you implement like interim rates, or what's the implication for that?.

No. It will be on the agenda, because it's statutory they need to install rates by the 19th of the month. This is the last meeting before that. So it will be on the agenda. We don't have the ability to put rates under bond. And Pennsylvania always act before the statutory deadline..

Okay.

But like in theory if they wouldn't and I mean, it doesn't sound like you expecting that, but then does the case go in as filed then? Like, your request just gets approved as filed? Would that be the fallback?.

I don't know the answer to that, because they've always met statutory decline. So I don't know the answer to that Jonathan. I'd be happy to check with our regulatory team and give you a firm answer. But I fully expect it to be on the agenda..

Okay. Anything to like read that it wasn't on like the last tender, just kind of taking their time? And I guess, the commission looks like they're going to kind of probably reset the disk ROEs or affirm, where they are everything like that.

I mean, anything that should have us more concerned that it's coming down to the wire versus at an earlier meeting?.

No. No I don't think so. I mean, they're down to three commissioners as you know, and I know there was a cancellation of one of the meetings. And so we're down to the meeting and plenty of time between the meeting this week, and the time to install the rates. So we haven't been particularly concerned. And so, I wouldn't read any more into it than that..

Okay. Great. And then last on -- just following up on the Willistown stuff.

Does Pennsylvania's fair market value loss supply there has to be a troubled system?.

No, it does not. That's why I think this is a pretty important case..

Great. Okay. Thanks for updating me and yes looking forward to seeing you guys next week at AGA..

You bet. Next week..

Sounds good. Thanks Jonathan. .

Next, we take from Gregg Orrill with UBS..

Thank you. Hi there.

Do you have a timeline on closing for the East Whiteland and Beaver Falls acquisitions?.

Yes. So, East Whiteland later this summer, maybe early fall. And then Beaver Falls probably just after the first of the year first quarter next year..

Great. Thanks..

Moving forward to Verity Mitchell with HSBC..

Good morning everybody. Hi. I just wanted to follow up a bit on Willistown. I know it's been discussed a couple of times.

And I just want to know, is this a new discussion that the ALJ has come up with? And are you worried that it is a regulatory precedent that will be noted by other ALJs? And also just a feeling on the timing that would be really helpful. Thank you..

Yes. Well, worried. I'm not sure I would say I'm worried about it because the ALJs are -- I would say with some level of regularity are overruled by the commissioners themselves on all sorts of issues. So, I'm not particularly concerned.

I do think that it tees up a really important policy discussion that once resolved, Verity, will be -- should be a non-issue for other ALJs right? Once the commission clears this, gives an opinion that hopefully that they in fact support this regionalization despite not being technically troubled, then I think that will clear up for the future.

And my hope is that that's where it lands. And on timing second which was on timing. I would think that this gets acted on in one of the summer meetings by the commission. So they don't -- there's been no timing announced, but I would think that this would get some activity this summer..

Right. Thanks..

[Operator Instructions] We take our next question from Travis Miller with Morningstar..

Hi Travis..

Good morning everyone. Two high-level questions on inflation. I think you've talked in the past about how inflation could actually be positive in terms of the acquisition strategy of municipalities are facing higher costs. I wonder if that's still the case if you're seeing that play out with your development team.

And then the second question was just the -- okay, go ahead and I'll come back in a second..

Okay. Yes I think that that's a real possibility although I don't think we've seen that necessarily materialize at this point. I mean given the fact, that we can buy things like pipe and equipment at mass, using economies of scale.

I mean we're just buying, at prices that most smaller municipals can't purchase that, gives us a little bit more room in comparison. But I think, about it as additional upward pressure on their rates, which they hate to raise rates.

So that compared to whatever compliance or other financial pressures or compliance issues they have, only creates additional upward pressure and therefore potential consideration for solutions we might bring..

Okay. Great.

And then second is, how does inflation kind of flow through gas versus water bill? I mean obviously, a gas bill is very direct flow to their -- how do you think about inflation in terms of especially energy costs going through water bills? And how is that trending?.

Yes. No, it's a good question. Now when we think about inflation, flowing through a gas bill, the inflation that you see coming through the bill really is the commodity cost inflation for the natural gas itself.

Other inflation, maintenance costs, labor costs, fuel costs, things like that those would -- those have to be picked up in a rate case, typically. That's how they would come back through. Similarly, on the water side inflation really comes through -- materializes in our cost structure and then would have to be recovered through a rate case.

In terms of, energy you asked specifically about energy, for electricity we're -- we have more exposure in some of the places where we use coops [ph] for our energy production and supply. We have less exposure where we have long-term contracts in place long-term power purchase agreements. .

I guess, I would only add Dan, the only other impact on the capital plan if inflation were to continue to run, theoretically Travis, we would spend still to call it $1 billion a year but get less done for the money, right? So fewer miles for example of Maine, could be installed.

Now as we look at that today, even though we've had significant increase in our cost of call it ductile iron for pipe, labor -- since we have contracts labor has been fairly steady, which is the largest portion of that capital plan.

And so our capital plan really hasn't been impacted dramatically at this point but that is the -- what will be the potential impact would be less work done for the same spend. .

Correct. Yes. .

Okay. Got it. No that's helpful. Thank you very much..

Thanks, Travis..

It appears there are no further questions at this time. I'd like to turn the call back to Chris Franklin for any additional or closing remarks. .

Thanks for joining us, everyone. And as always Dan, myself, Brian always available for follow-on, if you have other questions. Have a great day. Thanks. .

This concludes today's call. Thank you for your participation. You may now disconnect..