Essential Utilities Inc (WTRG) 2020 Q2 法說會逐字稿

Good day, and welcome to the Essential Utilities Q2 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, sir.

Good morning, everyone, and thank you for joining us for Essential Utilities Second Quarter 2020 Earnings Call.

I am Brian Dingerdissen, Vice President, Chief of Staff, Investor Relations and Communications.

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 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 the course of this call, reference may be made to certain non-GAAP financial measures.

A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the website.

After the presentation, we will open the call up for questions.

So our agenda for today, we will start with Chris Franklin, our Chairman and CEO, who will discuss highlights from the year-to-date and provide an update on our Peoples leadership team.

Dan Schuller, CFO, will then discuss our financial results.

Dan will be followed by Matt Rhodes, EVP of Strategy and Corporate Development, who will provide an update on our municipal acquisition program.

Finally, Chris Franklin will conclude the call and then open the call up for questions.

With that, I will turn the call over to Chris Franklin.

Thank you, Brian, and good morning, everyone.

It's hard to believe that we're now almost 5 months in navigating through the COVID-19 pandemic.

And while none of us could have predicted the events that have occurred in the first half of 2020, I just continue to be amazed by the commitment demonstrated by our employees.

Our business remains as strong as ever because of their dedication to our mission.

In addition to achieving our mission, our primary focus remains the health and safety of our essential employees and customers as we work through this pandemic.

Before we get started with the primary agenda Brian just talked about on the call, I want to touch on some issues that we believe are important at Essential.

First, social justice issues have been the primary focus of the country really this summer.

This is a topic that should be a key topic or key focus of good companies and good people.

Long before the events of this summer, I'm proud of the work that we've done and continue to do at Aqua, now Essential, to ensure we have a diverse and inclusive workforce at the company.

I'll tell you this journey began at the top.

We've built our Board where more than 50% of our members are diverse, either racially or by gender.

Our work continues as we try to make our workforce reflect the demographics of the communities we serve.

Example, today, 22% of our workforce is black or brown versus the industry average of 16%.

We've supplemented this work by creating black employee resource groups and women's employee resource groups, among others.

Our work to make our management team more diverse has also been a key focus.

Today, at the senior levels of the company, nearly half of my direct reports are women.

And just this year, we've hired several people of color in key management roles.

In addition, we continue to work to diversify our supplier network.

We've got a strong program to bring diverse suppliers into our network in all aspects of our work, including professional services.

I want to highlight this effort to you, our investors, because it's work that we believe in and work that we're committed to.

It's also work that has been well underway long before the events of this summer.

And I'll concede that there is so much more work that needs to be done in this area at both our company and frankly, in the country before we all realize our true potential.

The second issue I want to talk about this morning has to do with the interactions between utilities and elected officials.

We've all been reading about some of the events occurring in Illinois and Ohio over the last series of months.

It's important for you, as our investors, to know that we pride ourselves living up to the 3 core values that we've posted, frankly, in all of our buildings across our company.

And among the 3 values is integrity.

I want to ensure you that Essential has processes in place to review, approve and continuously monitor charitable giving, political giving and lobbying activities.

We remain confident that we're in full compliance with all governing laws and regulations.

I'm also confident that our leadership team and our employees have made compliance with the law a central principle in the work we do with elected and appointed officials across our 10-state footprint.

Also, for your reference, we posted our corporate foundation giving policies on our website in our ESG tearsheets in case you're interested.

Finally, the last issue I want to mention before we jump into the agenda.

We've been closely monitoring the infrastructure package that the U.S. House earlier this summer looked at and any time federal -- the federal government focuses on water and wastewater infrastructure, we consider a good thing because it elevates the importance of the work we do.

That being said, the regulated water industry is working proactively to work to make sure that our customers benefit in the same way that customers of municipal water systems would benefit from any legislation that were to pass, either in the Congress or in our states.

All right.

With that, let's talk about the second quarter.

I'm really happy to report on our continued progress on our objectives.

So far, we've invested $346.6 million in infrastructure in the communities we serve during the first 6 months of the year.

Of that $346.6 million, $217.6 million of it was invested in our regulated water segment, and $129 million was invested in our regulated natural gas segment.

Importantly, you should note that $53.5 million was invested by Peoples in the first quarter pre-closing.

Now despite the brief COVID-related pause in construction back in mid-March, we remain on track for record capital spending of $950 million this year.

Our work on the Goodwin and Tombaugh gas gathering system is also well underway.

I know many of you will recall, this was an important topic during our regulatory approval process, and we're happy to say we're on schedule there.

As a reminder, we have approximately 2,700 miles of natural gas pipe to replace, which will be done through the Pennsylvania Public Utility Commission's long-term infrastructure improvement program.

Many of you know that as the LTIIP.

The pipe replacement program is very effective in our efforts to also reduce methane emissions in the environment, and we'll begin to report on that in the coming months and years.

Now we've said in February that once we own Peoples, we would quickly elect and implement tax repair.

I want to report that we elected the tax repair soon after we closed in March by filing our paperwork with the IRS.

We also told you that we would file with the Pennsylvania Public Utility Commission this summer for treatment of the catch-up portion of the tax repair.

That has been accomplished as of just today.

On the box, in the next box over, you notice that net income per share on a GAAP basis increased 16% compared to the same period last year.

Dan's going to give you a lot more detail and an overview of the strong performance we achieved in the first full quarter of our ownership of Peoples as well as the -- we'll give you a reaffirmation on our annual earnings per share guidance range of $1.53 to $1.58.

Now our municipal acquisition strategy remains strong with signed municipal agreements totaling over $300 million in expected rate base and over 200,000 new customers.

We also announced the closing of East Norriton in Pennsylvania, adding almost 5,000 customers and $21 million in rate base.

Finally, another milestone for the quarter included the announcement of our first fair market value acquisition in Texas.

I think most of you will recall that the fair market value legislation passed just last year in 2019.

Matt will give you some details on that in just a few moments.

Finally, Tuesday of this week, the Board approved a 7% dividend increase, which marks the 29th consecutive year of dividend increases.

You can see here on the next slide, the announced 7% dividend increase marks the 30th increase in 29 years and the 75th consecutive year of quarterly dividend payments, something we are very proud of at our company.

Following the increase, the annualized dividend rate will be just over $1 per share.

We take great pride in our long, consistent record of delivering shareholder value.

We also believe that our dividend policy is indicative of our financial strength.

I would say the Board's action is a reflection of their confidence, not only in our strategy, but also in our execution.

This next slide is an important one.

I'm really proud of the leadership team that we have at People.

And I want to take a couple of minutes to make sure you understand what's happening with our management team there.

We announced in July that Joe Gregorini, the President of Peoples is going to retire effective September 1. Joe has been with Peoples for 33 years and has really made significant contributions to the organization and really -- and the community as well throughout his career, and his influence on the company will continue long after he retires.

I know I speak for all the employees in saying how thankful I am to Joe for his leadership over the years and especially over the past 4 months since closing, when we've had to deal with the onset of the pandemic as well as all of the aggregation work.

Joe's leadership has been outstanding.

And while I'm sorry to see Joe's tenure end, I wish him and his family the best in his well-deserved retirement.

Now recently, after conducting a national search, we announced that Mike Huwar will be Joe's successor at Peoples as President.

Mike most recently served as President and Chief Operating Officer of Columbia Gas of Pennsylvania and Maryland Utilities, and is a strong -- is, I'm sorry, a longtime resident of the Pittsburgh community.

So he's right at home in the new job.

He comes to Peoples after more than 34 years with Columbia, which is a subsidiary of NiSource.

Mike is a true professional, proven operator and is really well-known and well-respected at the Pennsylvania PUC.

We're very fortunate to have Michael on board leading our gas company.

In June, we also announced the appointment of Mike Turzai as General Counsel for Peoples and Kim Edvardsson as Vice President of Finance for Peoples.

Mike Turzai is also a native of Southwestern Pennsylvania.

He spent the last 10 terms in the Pennsylvania legislature, including his last 3 terms as Speaker of the House here in Pennsylvania.

Throughout Mike's career, he's focused on creating jobs across the state and across various industries.

He's had a law degree from Duke and was a prosecutor before holding the elected office.

And he's already hit the ground running very strong general counsel, and will help us take the company to the next level.

Kim Edvardsson brings more than 30 years of extensive experience.

Most recently, Kim was Vice President and Controller for HM Health Solutions there in Pittsburgh, and her general industry experience and background as a former auditor make her a great fit to lead the finance team for our regulated natural gas segment.

And now we have the full team in place.

We're looking forward to supporting them as they focus on continued employee -- customer safety, ramped up capital plan and the same solid dedication to our core mission.

With that, Dan, let me turn it to you for our financial results.

Thanks, Chris.

Good morning, everyone.

The second quarter ended with revenues of $384.5 million, up 75.6%.

The Peoples acquisition contributed $149.6 million of this revenue growth, while the remainder was largely due to rate increases, volume and growth in our regulated water segment.

O&M increased to $128.6 million in the second quarter, up 48.8% from $86.4 million last year.

This was primarily a result of the addition of the Peoples operation and maintenance expenses, which we'll discuss further when we show the O&M waterfall.

Net income was up 35.9% year-over-year from $54.9 million to $74.6 million and GAAP EPS was up 16% to $0.29.

Although there's been little financial impact, we continue to closely monitor the COVID-19 impacts on our business, considering a number of metrics, including consumption and billing, collections, O&M and capital expenditures.

Some of which we'll discuss later in the presentation.

Let's walk through the details in the following waterfall slides, starting with revenue.

As we go through the 75.6% revenue increase for the second quarter, you'll notice that new revenue related to Peoples, which closed in March, was the main driver adding almost $150 million.

Rates and surcharges, increased volume and growth from our regulated water segment provided an additional $16.4 million towards the revenue increase, which was offset slightly by other items of less than $0.5 million.

Next, we'd like to provide a more detailed look at water consumption by customer class as it directly correlates to the increased revenues for the quarter.

As you saw in the revenue waterfall, we did not experience an overall negative impact to revenue from COVID-19.

Year-over-year water usage was up slightly over last year, but where the water consumption occurred changed dramatically.

With many customers working from home and favorable weather conditions, residential usage was very strong, up nearly 10%, which offset significant declines in most of our other customer classes.

While commercial and industrial are suffering, it appears that both indoor and outdoor usage at our customers' homes are strong.

As we've discussed previously, given the shutoff moratoria that states enacted when COVID-19 emerged in March, we're closely monitoring incremental increases in our bad debt expenses.

We're glad to see that many states, including our larger ones, have indicated a willingness to explore regulatory asset treatment for incremental bad debt linked to COVID-19.

Lastly, you'll recall that we secured a $500 million term loan in the early weeks of the COVID-19 pandemic as a precautionary liquidity measure as did many of our peers.

We're pleased to report that in June, we paid back the term loan subsequent to our mid-April $1.1 billion long-term financing and a couple of months of financial performance after the work-from-home orders began.

With that, we'll move to the O&M waterfall.

Operations and maintenance expenses were $128.6 million for the second quarter compared to $86.4 million in the second quarter of 2019.

The main driver was the $52.8 million addition of Peoples' O&M.

Other contributing drivers were employee-related costs of $1.6 million, acquisition and organic growth of $838,000 and increased production costs of $215,000.

Excluding the Peoples impacts, both transaction-related costs and O&M expenses as well as growth, O&M would have been up 1.8% on a comparative basis to last year.

COVID-19 is not currently impacting our O&M in a significant way.

We are seeing savings in certain areas such as travel-related activities, which offset some of the COVID-19 related expenses like personal protective equipment, cleaning and supplies.

Next, we'll take a look at the earnings per share waterfall.

GAAP EPS in the second quarter increased by 16% to $0.29 from $0.25 in 2019.

Peoples transaction costs contributed $0.07, growth net of the dilutive effect from the equity offering added $0.036 and regulated water segment rates and surcharges, volume and expenses together contributed almost $0.04 to the increase.

The decrease of $0.10 from other items such as increased depreciation, amortization and interest as well as decreased Aqua Pennsylvania tax repair benefit brought us to a GAAP EPS of $0.29 for Q2 of 2020.

In the next slide, we want to take a moment to discuss the net income by quarter.

This is a slide that we presented at our Investor Day in February.

We just wanted to bring it back and discuss net income volatility by quarter, given the strong performance of the current quarter and expectations going forward.

The intent of this slide was to assist our investors in constructing quarterly projections due to the lack of historical comparisons and the many moving pieces that are the result of the transaction and our new utility mix.

As you may recall, as a regulated water utility, there was limited seasonality and the summer months of Q3 had historically provided for our strongest results in terms of net income, and we typically only saw a movement of a few pennies due to weather.

As a combined company, including a regulated water segment and a regulated natural gas segment, we anticipate that the highest earnings will shift to the first and fourth quarters going forward.

This is, of course, a result of the dramatic impact of weather measured in heating degree days on a natural gas utilities results.

Let's take a look at the bars and the ranges on the slide.

We reported adjusted income per share on a non-GAAP basis for Q1 at $0.60, which falls just slightly below the middle of the light blue range on the first quarter bar.

We're reporting $0.29 for Q2, largely as a result of the greater number of heating degree days, specifically in April and favorable water consumption.

Thus, we were at the high end of the range expected for the second quarter.

As we look forward to the third quarter, we'd like to reiterate the natural falloff of gas consumption will push us to the lower end of the light blue range for Q3 which suggests a result just above $0.20 in earnings per share for Q3.

And while no one can predict what the weather will be in the fourth quarter, we anticipate that we'll be right in the middle of the 25% to 35% range illustrated on the slide.

Given our first half results and current projections, we remain confident in achieving full year earnings per share in our guidance range of $1.53 to $1.58 on an adjusted pro forma basis.

Moving on to rate activity.

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 $10.2 million.

In our regulated natural gas segment, we've completed surcharge filings in Kentucky and Pennsylvania, with total annualized revenues of $1 million.

In the coming months, we expect to receive new base rates or surcharges in New Jersey, Virginia, North Carolina and Ohio for our regulated water segment.

And at this point in the year, we do not have any pending base rates or surcharges for our regulated natural gas segment.

Fortunately, our relatively limited rate case -- sorry, fortunately our relatively limited rate related activity remains on track during COVID-19 due to technology and continual virtual interactions with our regulators and counterparties.

As previously reported, we elected the repair tax accounting method change in late March of this year for the Peoples natural gas subsidiary, our largest natural gas subsidiary with about 633,000 connections.

In terms of its impact for the second quarter, the tax repair benefits reduced income tax expense by $5.3 million.

We're pleased to announce that this morning, we filed a petition with the Pennsylvania PUC requesting accounting treatment for the approximately $380 million catch-up deduction for capital invested prior to Essentials ownership of Peoples.

Our proposal includes a sharing of the catch-up tax benefits between our customers and our shareholders.

As proposed, it would benefit all parties by extending the time until the next base rate case.

As such, we wouldn't envision it changing our expected annual earnings growth rate of 5% to 7%.

In terms of regulatory procedure, we expect this filing to be processed over a time line similar to that of a rate proceeding.

And finally, as we've discussed on previous calls, we continue to look for the right time to issue approximately $300 million of equity this year.

That equity, as you may recall from Investor Day, is necessary to appropriately capitalize DELCORA and other acquisitions in the pipeline.

Next, I'd like to turn the call over to Matt Rhodes for an update on strategy and corporate development.

Matt?

Thank you, Dan.

Essential has been able to provide continuous water, wastewater and natural gas service to the 5 million people we serve during this challenging COVID-19 pandemic.

In this environment and during these uncertain times, the company remains strongly positioned to play an important role in solving today's infrastructure challenges and supporting our mission of delivering safe and reliable natural resources that are essential to everyday life.

Many of you are familiar with this slide, and we continue to believe that utilizing this strategy, which leverages our core competencies is best for our company and differentiates Essential in the marketplace.

As we think about growth, we have very sizable capital opportunities to grow rate base.

The water business has a robust internal CapEx program that is continuously backfilled by new capital needs through our municipal acquisition program which has a proven track record of success.

Our municipal program has been our growth engine over the last several years, and we expect it to remain our primary focus for consistent year-over-year customer growth and rate based growth as capital investments are needed.

We continue to see significant water and wastewater municipal transaction opportunities of varying sizes, which is why our water and wastewater municipal initiative remains our top priority for growth.

As we have said, the Peoples transaction was a unique and strategic opportunity because it is a pure-play gas LDC located predominantly in Pennsylvania, and it has significant infrastructure investment needs, which drives organic growth.

As we have previously discussed, the nearly 2,700 miles of identified pipe replacement is quite unique considering many gas LDCs have already completed their pipeline replacement programs.

We are pleased with the existing rate base mix of our utility platforms at approximately 70% water and 30% gas.

In fact, we would be happy to see the contribution from water increase as that would mean we have been successful in our municipal acquisition program.

We will continue to be very strategic and selective as we consider future acquisitions.

The final prong of our growth strategy is market-based opportunities or MBAs, which are nonutility businesses.

While there are a few of these businesses within Essential today, in total, they contribute only about 1% of our net income.

These include home warranty businesses, investments in micro grids and combined heat and power projects and others, which are complementary to the existing utility business and often have environmental benefits.

I will discuss 2 of these projects in more detail a little later.

Moving to the next slide.

We continue to discuss the importance of fair market value legislation as we position our company as a solution to municipal leaders.

On our last call, we were happy to report that this legislation is now available in all 8 states where we currently serve customers in our regulated water segment.

As Chris mentioned earlier in the call, we recently announced our first fair market value acquisition in Texas, which I will discuss on the next slide.

This slide represents acquisitions for our regulated water segment.

So far this year, we have closed the Campbell Water System in Ohio, the East Norriton Wastewater System in Pennsylvania and continued to advance the New Garden, Rockwell Utilities, Commons Water and DELCORA transactions.

The signed agreement with Commons Water represents our first fair market value transaction following the 2019 implementation of fair market value legislation in Texas, and it consists of approximately 1,000 customers located in the Houston suburbs.

Regarding DELCORA, our transaction continues to move forward with the Pennsylvania PUC regulatory approval process.

Just last week, we reached the milestone of the PUC fully accepting our application.

There has been some news in the local media about legal challenges to the transaction, but we continue to believe we have an enforceable and legally binding contract with DELCORA.

We expect the transaction to close in early 2021.

We have not experienced any major delays in the regulatory approval process due to COVID-19 and continue to closely monitor our regulatory proceedings.

During this COVID-19 crisis, we've ramped up communications with our regulators so we can work together to keep our regulatory activities on track.

We continue to see a strong pipeline of municipal acquisitions, especially given the passage of fair market value legislation.

And now with economic pressures, as the COVID-19 crisis continues, we are anticipating more municipalities will be looking for solutions to financial constraints.

We stand ready to partner with these towns and cities on their water and wastewater utilities so that they can focus on other vital municipal programs and community projects.

Moving to the next slide.

In addition to our signed municipal acquisitions, we have a healthy pipeline of potential municipal deals.

To be included as part of our pipeline, it means that we are having active discussions with the municipality.

As illustrated on this slide, we are actively pursuing acquisition opportunities totaling approximately 365,000 customers.

Again, many of our recent municipal acquisitions have been wastewater assets rather than water, given the operation and compliance of wastewater assets can be more difficult for some municipalities to manage.

We see the same trend in our pipeline, with the majority of the potential customer additions coming from wastewater systems, which are effectively regulated the same way as water systems.

Next, similar to how we look for acquisition opportunities, it is important that we look for partnership opportunities in the communities that we serve.

One of the community partnerships we would like to highlight on this slide is the Pittsburgh International Airport microgrid project, which Peoples Gas will build, maintain and operate.

Through the use of on-site natural gas and solar, Pittsburgh will be the first major airport in the U.S. completely powered by its own microgrid, which is an independent electricity source.

The airport will remain connected to the main electrical grid for emergency backup, but this project will allow increased reliability, public safety and lower emissions, while achieving cost savings for both the airport and its tenants.

Through the use of 5 generators, which use on-site natural gas supplied by Peoples and approximately 7,800 solar panels, microgrid will produce an equivalent amount of electricity needed to power more than 13,000 homes.

The project ensures a more efficient, environmentally sustainable and resilient energy source for the airport using local natural resources.

In addition, Peoples has also formed a partnership with Allegheny Health Network to build, maintain and operate a combined heat and power project, also known as CHP at the Wexford Hospital.

The project will be more energy-efficient and provide electricity, hot water, chilled water and steam to meet all the power, heating and cooling needs of the hospital.

This will reduce costs and improve reliability for the hospital and importantly, will reduce emissions.

We believe the project is the first of its kind for a hospital in the region.

And with that, I'll hand it back over to Chris.

Thanks, Matt.

Appreciate it.

Earlier this year, during our Investor Day, we presented our 2020 priorities.

We said that we would remain focused on operational excellence, the integration of Peoples and the continued focus on the DELCORA transaction process.

We said we would remain committed to our municipal acquisition program, that we implement our accelerated Peoples CapEx plan, including the election of repair.

Of course, at the time, we didn't know we would be facing a pandemic.

But despite our work to overcome the pandemic, we've remained focused on this core agenda and remain committed to delivering on all of the priorities.

In addition to these priorities, we also continue our focus on ESG initiatives.

Recently, we hired a manager of ESG, John Catalano, who is focused on overall ESG program of work every day, and that's all he thinks about.

Later this month, we'll be filing our annual CDP survey, and we anticipate publishing our updated ESG report later this fall.

I continue to believe that we have a strong ESG story to tell, and John and the team are working to take our ESG work to the next level.

With that, let's talk about guidance.

We are reaffirming our 2020 guidance, recognizing that we're not completely out of the pandemic.

However, we believe the company's current position will allow us to continue to deliver strong results for the remainder of the year.

Adjusted income is still expected to be $1.53 to $1.58 per share on a pro forma basis for 2020.

Dan spent some time providing you the insight into where that falls in the various quarters, this is important to think about, especially as you do your work for the third quarter projections.

So hopefully, that chart is helpful to you.

Our capital plans remain on track as we anticipate spending approximately $550 million on the regulated water segment and approximately $400 million on the regulated natural gas segment.

We anticipate investing approximately $2.8 billion across the Essential platform through 2022 driving rate base growth on the water side, up 6% to 7% and driving rate base growth on the natural gas segment up 8% to 10%.

Lastly, we expect annual customer growth to be about 2% to 3% on average for our regulated water segment.

And with that, let's open it up for questions.

(Operator Instructions) And we'll go to our first question from Ryan Greenwald of Bank of America.

Can you provide a bit more color just around the acquisition platform in Texas following the latest announcement, the magnitude of opportunity there and the efforts underway in the state and just kind of what you're seeing in terms of the competitive landscape?

Sure.

Matt, you want to take?

Yes, sure.

We're very optimistic about opportunities in Texas.

As we talked about on the call, we just announced our first fair market value deal there.

It was an investor-owned utility with about 1,000 customers.

We see other investor and utility opportunities, other municipal opportunities there.

And now that we have fair market value in Texas, we really expect and hope that it opens up.

So it's a big focus of ours.

We have business development people in the state of Texas that are working actively having discussions.

So we do think there's additional opportunity there.

Yes.

Texas is an interesting place because you have municipal utility districts as well that -- particularly around the Houston area.

So it makes it a bit of a different animal than what we experience in some other states.

And so we've been working hard to open the market there.

And I'm with Matt, I think the FMV legislation will see it more and increase the activity in the state.

Got it.

And then more broadly, just kind of thinking across the rest of your jurisdictions on the water side.

Any particular states where you're seeing the most opportunities or particular states that are standing out where it's the most competitive?

Yes.

We continue to see a lot of activity in Pennsylvania.

And also in places like Illinois and now in Ohio.

Not coincidentally, we've had fair market value, the longest in Illinois and Pennsylvania.

And so that's part of the reason we see a lot of continued activity there.

But given we now have fair market value in all of our states, we're starting to see additional activity in places like Texas and Virginia and North Carolina as well.

So while Pennsylvania probably is still our busiest state, we're definitely seeing more activity across our other states as well.

Importantly, we're trying to add new tactics as we approach and make our solutions available to the various municipals that need us, especially at this time when we know that more and more municipals are strapped for cash.

And so for example, we're making offers where we just think that the municipal is in trouble or needs help, we'll knock on the door and actually offer to buy their system as opposed to get a call or wait for an RFP.

So I think you'll see increased sales tactics as we move into this period to offer better offer our solutions on a proactive way.

Got it.

And then just lastly, in terms of the catch-up component filed this morning, it sounds like you're not kind of changing the 5% to 7% longer-term guidance there.

But are you able to provide a bit more granularity in terms of the contribution on an EPS basis that could materialize out of that?

Yes, it's hard to do at this time.

And what we're doing, Ryan, is really proposing a concept here, construct where a catch-up deduction of benefit from it would be shared between the customers and the shareholders.

And you can imagine customers getting like a sort of credit on their bills to reduce their bill over a period of time.

And then to benefit the shareholders, what we'd look for is ability to bring some of that back later to extend the time until the next rate case.

And when I say extend the time until the next rate case, you might say, well, that benefits customers, too.

And I would say you're absolutely right.

So that's what we have proposal in for.

It's newly filed.

It's kind of a -- it's actually an open matter now with Pennsylvania PUC.

So we probably can't provide really any more color on it than that.

And we'll go to our next question from Ryan Connors of Boenning and Scattergood.

So I wonder if you can give us any regulatory update on the issue of the service disconnection moratoriums in Pennsylvania.

I know the PUC split on that issue back in June.

But they had a public meeting this morning, and I didn't hear it come up at all.

So any update on when that -- when they might expect to move on that one way or the other, extending it or rolling that back?

Yes.

I think it's an important question.

I guess the good news even before I get into the timing, the good news is Pennsylvania has given -- provided some relief in the form that allow our regulatory asset for COVID-related bad debt expense.

So Ryan, from that standpoint, it's still a cash flow issue, but it's not necessarily a P&L issue long term.

And hopefully, frankly, we hope customers pay their bills, there won't be an issue at all.

But in terms of being able to enforce a shut off for nonpay, the commission has brought it up 2x to my knowledge and each time the commission has been split a 2-2.

We're still missing a fifth commissioner when commissioner in place retired from office.

We don't have a fifth commissioner now.

The governor just sent over a name to the Senate this week, Hayley Book, and so we'll see what -- how that develops.

But the best estimate, I think, is that we would see some action by the Commission in the September time frame.

Remember, there comes in a winter moratorium later in the fall, call that, the December time frame where we're again faced with no shutoffs for -- on the water side for water-related heat and certainly on the gas side.

So these are considerations that I think the Commission would think about and allow some period between the September time frame and the moratorium -- the winter moratorium to be able to clean up some of the bad debt issues.

That's best I can give you, Ryan.

Got it.

Okay.

And then, I mean, that kind of dovetails into my other question, which is somewhat big picture in nature.

I mean you mentioned it's cash flow issue, not an earnings issue, but the longer it goes on, the bigger the risk, that it becomes an earnings issue.

So I guess my other question is sort of -- it seems to me like when you look at the overall regulatory dynamics for COVID, it seems like the water utilities have been caught in kind of a -- caught in the middle here.

On the one hand, you're an essential service, no pun intended.

So you've got to keep operating, which costs money.

And then on the other hand, any kind of monetization, whether it's a rate case, whether it's collections and shutoffs, that's sort of a third rail right now.

So what's your reaction to that?

And what can be done to sort of help turn the tide and bring some balance back into the regulatory compact, if, in fact, this thing in terms of the job market, unemployment and household impact does end up going on for another year or more.

What's being done to kind of balance some of that out?

Yes.

Let me start with saying, we are always focused on affordability for our customers.

So we'll start with that.

So we understand what a lot of American families are going through right now.

And so -- and we've eased a lot of issues around collections during this time so that we can help customers.

In fact, about $27 million of help comes to the customer a year on the Peoples side on gas bills through LIHEAP and other programs.

So a lot of help we try to provide for customers to make it.

Now having said that, listen, I think we believe that you're better off handling these issues with a more surgically and not with a blunt instrument.

What I mean by that is a broad moratorium probably isn't as effective.

It's important that we give customers who need it, the help that they need.

On the other hand, customers who take advantage of it, there needs to be some discipline.

And so we continue to advocate commission by commission for a more surgical approach rather than an approach where it's a broad moratorium.

So all I can say, Ryan, now we're in 10 states, state by state we're in those conversations.

Two of our states have already gone that way and reinstituted the collections, and that would be West Virginia and Texas.

And then we have 4 more states who are lifting their restrictions in August.

And then it looks like the remaining 4 would be sometime in September to the best of our knowledge.

But those conversations continue in each of our states.

Got it.

Okay.

And then just 1 more.

Just going back to the prior question there on the municipal acquisition pipeline.

It definitely seems like you're sort of punching very much at or above your weight in terms of your pipeline and your deal flow and then sort of outpacing the industry.

You really pulled ahead, especially, it seems like in Pennsylvania, which is pretty impressive, given it's a very competitive market.

So -- and if you look at the local press reports indicate there might be more on the way there.

So what are factors that are enabling that?

What is it about your process that you think is giving you that edge?

Or do you think that's just timing and that you're on a hot streak, and that will all even out over time?

It's all management, Ryan.

I'm kidding, of course.

But listen, we stay at it pretty hard.

And I think the offerings we have, let's face it, too.

We are -- we have a nice reputation in the areas we serve.

We work really, really hard to -- with our communities.

And so that reputation is long built, right?

And so some of these transactions we're talking about are right on top of the water customers we currently have.

So that gives us a little bit of an inherent advantage given our location and on our reputation.

But beyond that, all of these deals are political at 1 level or another, some more than others, and there are various opinions.

And the larger they get, as you know, we're doing larger and larger municipal transactions now, the larger they get, more people have opinions.

And so I think the nature of these things is we're going to have to just kind of stay the course.

And as we've done with DELCORA, file it, make sure that we've got all the necessary documentation for the Commission and allow people to participate in that process as they see fit and oppose it if they need to.

But let the regulators and legal judges in some cases determine ultimately what the outcome is.

But listen, as they get bigger, we're going to see more and more people have an interest and take a position.

And that's just the nature of these things, but we're confident we'll continue to close them.

And moving on, we'll go to a question from Durgesh Chopra of Evercore ISI.

A very, very solid quarter.

Maybe just -- can I start off with one of your peers actually mentioned COVID impacts, and they're seeing a pretty material earnings impact from COVID.

Can you just maybe help us understand how much was weather an offset to the extent that you can during the quarter?

And what are you seeing in terms of normalized commercial industrial declines?

Sure.

Dan?

Yes.

Yes, absolutely.

I mean I think if we think about weather, weather was helpful for us, and you saw it certainly in the Mid-Atlantic.

And we would say, too.

What you're seeing with some of this work from home is people are taking care of their lawns, they're now watering their lawns and the weather has been conducive to keep that watering up.

So that could be for us as much a couple of pennies of incremental earnings here.

And so that is helpful.

But I'd say in terms of when we identify the actual COVID impacts and PPE and cleaning expenses and things like that, they're relatively modest numbers that are in the O&M waterfall we showed earlier.

So it's not -- they're not big figures put into there.

And then as we did say, there's a bit of an offset because we've effectively stopped our travel.

So you're not seeing people traveling between our 8 or 10 states now.

People are not going to conferences.

As you know, you haven't seen Brian and Chris, myself or Matt at any investor conferences, right?

We've stopped that.

So there are some savings there that helped to offset those expenses as well.

Understood.

And yes, I haven't seen you guys, and I miss you for the record.

But in terms of the declines, the actual demand declines, anything -- I mean, obviously, largely residential footprint, but nothing alarming there, I'm guessing, right?

I mean in terms of what you're seeing so far.

No.

I think that's kind of what we expected going in before we saw the data.

And then as we said right on our last call, here on our last call, we had just gotten the April numbers and said we were basically kind of coming in on budget for April.

So by that point, we'd started to see this that the residential was making up for the declines in the commercial, industrial and other segments or other customer classes.

So what we wanted to show here is just quantitatively put that on a slide and let you see exactly what's going on there so far during this period compared to the same period last year.

Yes.

And going into it, as we watched this over the last several months, Durgesh, as you can imagine, and this probably varies company to company and jurisdiction to jurisdiction.

But there was obviously concerns over businesses such as industrials that maybe had supply chain issues or other issues that would cause them to decline production and therefore, decline their consumption.

And certainly, as you look at this, probably some of that happened, but it doesn't appear to be as bad as it might have -- as maybe it could have been, at least in our view.

And that's going to vary company to company and jurisdiction to jurisdiction, as I said.

Understood.

Understood.

Very helpful.

In terms of just the equity issuance timing on DELCORA, why do it this year and why not just wait for the deal and do it subsequently.

Any thoughts around that front?

A lot to think about on that, right?

Yes.

Lot to think about on timing.

So Dan, you want to -- you want to go through how we're thinking about it?

Yes, little bit.

And Durgesh, they say, don't wait to raise money to the point where you really need it, right?

So as we think about it, DELCORA closing and how do you kind of get ahead of that and make sure that we're ready for it, just want to make sure that we picked the right time here in this back half of the year to raise that equity.

And as you know, if you look too far out here, you start to see the election and who knows from an equity market perspective, kind of what happens around that.

I think that's right.

The economy, what happens to the economy if this COVID continues into next year, there's just a lot of events that could cause some volatility.

So I think we're going to look for -- we're going to be opportunistic in terms of timing and do the best we can for -- in the equity raise.

Understood.

And just 1 quick follow-up, hopefully, for Matt.

In terms of MBAs, very, very interesting, but how are you -- is this going to be a business model, which is going to be capital-light contracted businesses or you plan on deploying balance sheet there, too.

Just any color on that front would be great, Matt.

Yes.

The -- I would say it's a mix.

It -- Peoples, for instance, they have a few different MBAs.

One is a home warranty business, which is very capital light, right?

It's a fast-growing business, and we like the business, but it doesn't require much capital.

On the other hand, they're doing projects like the Pittsburgh Airport and like in CHP projects and hospitals, which are more capital-intensive, right?

They spend the capital, they basically develop those projects and manage them.

And so those are definitely a little bit more capital-intensive.

So it's a little bit of a mixed bag depending on the business at both Peoples and at Aqua.

And we'll move to Angie Storozynski of Seaport Global.

So I have 2 questions.

One is that, so far, we're seeing the impact of COVID mostly related to your customer class mix, right, meaning that residential customers are consuming more on just a normal weather basis and that offsets the declines in the C&I side.

Now just like we hope -- or at least we hope to see on the electric side, I would argue that COVID should make your weather sensitivity higher, right, because there's -- one, there's a change in the customer mix, but also this residential customer is more reactive seemingly to the weather, both on the water side and the gas side.

So what I'm trying to say that, is there actually a scenario where given what we've seen so far this summer, and assuming that the winter is going to be at least normal, we could have actually a weather benefit, both on the water side and the gas side, which would be not only offsetting COVID, but also additive to your guidance?

Well, from your lips to God's ears, right?

These things are hard to predict.

I mean, I think your -- a couple of your suppositions there are accurate.

That is more people are at home, so therefore, probably more people have done yardwork, plantings this year and are watering their lawns than before.

So I think all those things are accurate.

As they get their bills, they move their way through the summer, will they continue at that rate?

That's a question.

Do I get my bill and maybe one of my -- my spouse's out of work, and so we're looking at trimming expenses.

So we just don't know, Angie.

I think our best estimate at this point is right within that guidance range that we've described.

And could there be upside, I guess, potentially, but we're -- in our best estimate at this point, we're within the guidance range.

Okay.

And secondly, I know that you have just filed this catch-up repair tax application.

But -- and even if there is a sharing mechanism, I don't think that we were expecting you to file another rate case on the gas side through 2022.

And so again, as long as the sharing lease anything for shareholders, that should still be EPS additive versus the original plan now?

I guess the way I'd say this is we've made a proposal in such a way that we would be stretching the time until the next rate case beyond what you were expecting.

So going further out from there and frankly, further out than what we would have planned by using some of that benefit to in that later period make up for what you'd call a revenue requirement shortfall.

So...

Due to the continued heavy capital spend.

Due to continued heavy capital spend over that period of time.

So we see it really driving this extended period between the last rate case and the next rate case, which we think is really good for all stakeholders.

Okay.

And lastly, I know that this question was already asked.

I mean, you guys are not showing any impact of COVID or negative impact of COVID on your earnings.

In that year-to-date estimate and assertion for the remainder of the year, are you assuming that Pennsylvania allows you to defer any COVID-related expenses both basically expenses and bad debt.

On bad debt, we're assuming that we get some treatment on COVID-related bad debt expense, right?

That's a regulatory asset.

And that's -- Commission has already issued guidance on that.

So on bad debt expense, but not on other COVID-related expenses.

We think we can offset those with other opportunities for savings associated with COVID and not associated with COVID.

We think there's opportunity to basically hit our numbers without damage from COVID-related expenses.

(Operator Instructions) And we'll go to Jonathan Reeder of Wells Fargo.

Dan, can you reiterate what the size of the repairs catch-up filing was?

And is that the amount of income that it shielded?

Or is that the net income impact?

So it's $380 million, approximately $380 million, and that is the deduction.

So the benefit is effectively a tax rate multiplied by that deduction.

And that benefit is then what flows through the income statement.

All right.

Okay.

And so then for the portion that you request to accrue to shareholders, I mean it sounds like are you asking flexibility to recognize that as needed to keep your earned ROE consistent with the allowed levels as opposed to some sort of predetermined amortization over a multiyear period, like it was done on the water side.

Yes.

It's a bit of that predetermined, but I think time will tell here.

This is -- as I said earlier, this is now an open matter in front of the PUC, and we just want to be respectful of that process.

It's actually adjudicated.

I think just to maybe put it in a little bit of a bigger box, I think we could say Jonathan is thinking about it the right way.

Yes.

Yes.

Jonathan, you are thinking about it the right way.

I would agree.

Okay.

And then is the request -- has that been shaped by any like relevant discussions you've had with regulators or key interveners over the past few months?

Or is this just purely presenting it to them for the first time and see how they react.

Well, I have to complement, Dan and Kim and the team for the work they've done on this because there have been pre meetings.

So this is not the Commission's or the OCA or the staff's first exposure on this.

They've done a very, very nice job with communications on this.

And so while I wouldn't say that -- I wouldn't characterize it as we've been guided by the regulator on how to file.

I would say that they wouldn't be surprised by what they saw.

Was -- Is that correct?

Yes, that's correct, Chris.

We've had good -- very good conversations and socialized this concept with the first parties in advance.

We try to create something, Jonathan, that is a win for everybody long-term and short-term, where the customer really benefits and shareholder benefits by some portion as well.

So we really try to craft a compromised situation.

It supports the elevated level of capital deployment as well.

So it's that longer stay out plus continued capital deployment to replace pipe to really drive safety and reliability in our system.

It's like -- as we think about the recovery from even COVID here, the economic condition associated, the long -- we believe, the longer we can stay out of race in the gas utility and at the same time, continue to focus on replacement of pipe for reliability and for environmental reasons, we think that's the strongest outcome.

Yes, that all makes sense.

I appreciate that color.

Lastly, I know it's not a fight that you're really in, but you are interested in it.

Where do things stand in the whole legal fight between like DELCORA and the City Council or whatever?

Let me just start it, and then I'll take it to Matt for further.

But -- so we have filed, as Matt said in his presentation, filed with PUC, they fully accepted our application.

So that's good news.

So the process is formally now winding through the PUC.

And that's a tough defined time period.

So that would take us to, call it, early 2021 if it stayed on this current track.

The county has now noted that they have -- it's very public what the numbers are, so the proceeds are somewhere around $200 million from this.

And so the county, I think, is concerned about the COVID cases they've had, the COVID-related impact, and so I think they're carefully watching those expenses.

And I think at least one of the county commissioners had said to me that they would like to have some of those proceeds or taxpayers as opposed to simply ratepayers.

And listen, at the end of the day, the proceeds from the sale, it's going to be largely up to the county or this -- or maybe in this trust.

I thought it was a very creative idea that DELCORA came up with to say, we're going to take the entirety of the proceeds put them in a trust and then offset future rate increases.

Because, as you know, and we've predicted, we have about $700 million of capital spend in DELCORA expanding a plant to redirecting flow.

So it's going to be a heavy lift over the next year, it's 8 years.

And so we thought the solution was pretty good.

But again, as I said a few moments ago, politics or what they are, and I think people see things sometimes through their own lens.

And so we're going to have to work through those issues.

At this point, we would expect the judge in the county to have a ruling sometime in early September -- mid-September on what he thinks about the situation.

Matt, I don't know if you have any...

Yes, the only thing I'd add, Jonathan, is we are -- there are legal proceedings ongoing, so we can't comment too much.

But we do have a signed APA in place and we're confident that's a legally binding agreement.

And so we continue to progress with that in mind and hopeful that we'll get this transaction closed in early 2021.

Okay.

Chris, that judge ruling that you said in mid-September, that would determine whether the county has a right to any of the proceeds or actually sell-out maybe what right they have to it.

And then I guess whatever appealed, it's more about the proceeds versus the transaction?

Yes.

I think it's more about whether the county has the right to stop the transaction, right?

Whether the county has the right to step in and intervene in a contract that exists.

So it's a pretty important decision by the judge in September.

Less about the trust and more about the county's ability to dissolve the authority and intervene in the midst of a transaction.

And with no further questions in the queue, I'd like to turn the conference back to Chris Franklin for any additional or closing remarks.

Thank you all for joining us this morning.

Great questions.

And obviously, we're available for follow-up if there are any.

Brian and Dan and I are all available.

Thanks so much.

Have a great day.

And again, that does conclude the call.

We'd like to thank everyone for your participation.

You may now disconnect.