Essential Utilities Inc (WTRG) 2021 Q4 法說會逐字稿

Good day, and welcome to the Essential Utilities Inc.'s Full Year 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. Please go ahead, sir.

Thank you, Madison. Good morning, everyone, and thank you for joining us for Essential Utilities 2021 Full Year Earnings Call. 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 and a webcast of this event can also be found there.

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 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 company's website.

For our agenda for today's call, we will start with Chris Franklin, our Chairman and CEO, who will discuss the highlights from 2021 and provide a company update. Next, Dan Schuller, our CFO, will discuss our financial results. Chris will then provide an update on our growth strategy, a summary of our guidance and finally conclude the presentation portion before opening the call for questions.

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

Thanks, Brian, and good morning, everyone. I know today is a busy day with a lot of news in the market, so I'm going to get right to it. Let's start with a quick look at our 2021 highlights. We had another strong year and happy to report earnings per share of $1.67 in 2021, which was the midpoint of our 2021 guidance. This represents growth really in line with our 5% to 7% long-term guidance that we've provided.

Our water and natural gas segments were both focused on infrastructure improvements. And combined, we replaced over 470 miles of main and invested over $1 billion in infrastructure improvements. In a moment, I'll talk about another example of the importance of this continued investment in infrastructure.

Our municipal acquisition strategy remained strong. We announced the closing of 2 acquisitions last year, adding $36.3 million in rate base. And in 2021 alone, we signed asset purchase agreements for 6 deals totaling $141.5 million in purchase price. And now we're working diligently on the closing and integration of plans and plans for the 8 pending acquisitions that total over $471 million in purchase price.

Our total rate base increased by 7.6% from $8 billion in 2020 to over $8.6 billion in 2021. And finally, I'm pleased to tell you that last year, we continued to make significant progress on our ESG initiatives, while also receiving strong public recognition for our important work, and I'll give you more detail on this in the upcoming slides.

Now this slide is pretty dramatic looking. In 2021, there was a focus -- a national focus really on infrastructure. Our industry and our company continue to play a critical role in the renewal of water, wastewater and natural gas infrastructure.

We recognize that it's our responsibility, frankly, to provide our customers and our communities with the well-maintained infrastructure that is critical for safety and reliability. You might recall in previous calls, we've talked about some of the operational challenges that were brought on by external events, you think about the outages in Texas that came as a result of Winter Storm Uri and the flooding of our plant and our facilities from Hurricane Ida in Southeastern Pennsylvania.

I was very proud that in each of those instances, our operations teams met each of those challenges and overcame them. But most recently, and this is the picture you see here, you remember this from the national news, a bridge collapsed in the Pittsburgh area, and it was right inside of our natural gas service territory.

You may have seen this in the news, but as President Biden, who is already scheduled to be in town, visited the site of the collapse. The collapse did impact one of our large 16-inch gas mains, which was connected to the bridge. I am really happy to be able to report, though, that our quick action, our quick response and isolation of that impacted section of the pipe resulted in only minimal disruption to a very small group of our customers.

Really important, there were no injuries associated with the gas main that was damaged. And I just continue to be so impressed at the professionalism of our team that was able to act so quickly to ensure the safety of the public, while also allowing our system to continue to serve the rest of our customers that depend on our service to heat their homes and fuel their appliances.

Even though there were some weather-related issues that were out of our control, we continuously improve our systems and make them safer and stronger and more resilient. Now in addition to some of the projects we highlighted throughout the year, like our solar field project in Illinois and our new state-of-the-art lab in Bryn Mawr, our efforts to replace infrastructure really should be highlighted as well.

In 2021, I mentioned that we replaced over 470 miles of gas and water main and anticipate that over the next 3 years, we're going to replace about 1,400 miles of pipeline. These are major accomplishments. Earlier this month, we reaffirmed our ESG commitments. So as of year-end 2021, the company made strong progress in aligning the racial makeup of our workforce with that of our customer base.

We ended 2021 with people of color making up 15% of our overall workforce. Our overall 3-year goal is to achieve a target of 17%, which really nicely reflects the population of the customers that we serve. Last year, nearly 11% of our spending on goods and services was through the use of diverse suppliers. Our goal in this area is to achieve 15% over the next 3 years.

And as a reminder, you can find all the details on our commitments in our proxy statement as they are all tied to our executive compensation.

The company remains on track to make progress towards substantially reducing our Scope 1 and Scope 2 greenhouse gas emissions. And this is largely achievable through the extensive gas pipeline replacement program and our renewable energy purchases, accelerated methane leak detection and a number of other planned initiatives.

Since making these commitments, the company has already achieved -- we have already achieved an estimated 7% reduction in Scope 1 and 2 emissions from that 2019 baseline, and that's toward our overall commitment of a reduction of 60% by 2035. This is right on pace with the plan we originally announced.

Now the company also reaffirmed our industry-leading multiyear plan to ensure that finished water, the water we send to our customers, does not exceed 13 parts per trillion of PFOA, PFOS and PFNA compounds across all states served by our water utility. Now we're not aware of any other similar commitment across the industry and our peer companies.

We were pleased to make the Newsweek and Statista's America's Most Responsible Companies list for 2022. Really proud of this. This is one of the more notable rankings and continues to add credibility and recognition to our already strong ESG profile. I really have to complement our ESG team for their continued strong advances in the ESG ratings, which really transcends level in the company and includes most of us here who are all focused on making progress.

Capping off a strong 2021, MSCI upgraded Essential from BBB to an A. Sustainalytics made a major upgrade for us, 23.3, giving us a score stronger than many of our peers. CDP or the Carbon Disclosure Project, maintained our B-minus grade, that's even after we incorporated our gas utility into the disclosure for the first time.

And finally, our ISS scores remain the best overall in our proxy peer group. These strong ESG scores result from the company's strong focus on ESG and our well-designed and well-executed ESG work. The result of this work is tied to incentive compensation and highlighted in our award-winning ESG microsite. This is really strong work we've done.

Finally, last week, we filed an 8-K, which amended our corporate bylaws, adding a notice requirement for shareholders. Our Board took this action after our normal annual review of governance policies. This amendment aligns our shareholder notice policy with more than 80% of companies in the S&P 500.

With that, let me turn it over to Dan to talk about our financial results.

Thanks, Chris, and good morning, everyone. Before we dive into the full year, let's take a few minutes to review the fourth quarter highlights. We have revenues of $535.7 million, up $61.7 million from $474 million last year. Our regulated water segment contributed $243.8 million, and our regulated natural gas segment contributed $280.5 million.

The largest contributors to the increase in revenues for the quarter were the recovery of higher purchased gas costs, fourth quarter 2020 rate credits and additional revenues from customer growth as well as rates and surcharges and volume from our regulated water segment.

O&M increased slightly to $158.6 million, up less than 1% from $157.2 million in the fourth quarter of last year primarily as a result of employee-related costs. Fourth quarter net income increased year-over-year by 13.4% from $102.7 million to $116.5 million, and GAAP EPS was up from $0.40 to $0.44. Adjusted income was $116.5 million compared to $116.2 million for the same period of 2020, and adjusted income per share decreased from $0.46 to $0.44.

Next, we'll discuss the full year financial highlights. As Chris emphasized earlier, 2021 was another strong year for Essential. I'll start off by reminding everyone that the prior year figures include operating results from our natural gas segment subsequent to the closing date of the Peoples acquisition on March 16, 2020. So approximately 9.5 months of gas in 2020 as compared to a full 12 months in 2021.

We ended the year with nearly $1.88 billion in revenue, up 28.4% from $1.46 billion last year. O&M increased by 4.2% from $528.6 million to $550.6 million. Year-over-year, net income was up 51.5% from $284.8 million to $431.6 million, and GAAP EPS increased to $1.67, which is just above the midpoint of our guidance range of $1.64 to $1.69 for last year, last year being 2021.

In 2020, adjusted income of $322.1 million and adjusted income per share of $1.27 excluded Peoples-related transaction expenses and transaction-related rate credit. When compared to the adjusted income in 2020, earnings on a per share basis in 2021 increased 31.5% to $1.67.

Next, let's walk through the full year variance details in the waterfall slides, starting with revenue. In 2021, revenues increased to nearly $1.88 billion on a GAAP basis. You'll notice that the main driver was the additional $315.8 million from the first full quarter of gas revenue in 2021 compared to the partial first quarter in 2020.

The recovery of higher purchase gas costs, rates and surcharges, 2020 rate credits and growth from our regulated water segment provided an additional $115.5 million towards the revenue increase, which was then offset slightly by decreased volumes in both our water and gas segments.

And with that, let's review water consumption by customer class on the next slide. Once more, we want to take the opportunity to update you on water usage trends as we continue to return to pre-COVID lifestyles. As you can see here, overall water usage in 2021 was neutral when compared to last year, and 2021 consumption was less than 1% higher than 2019 levels.

With this return to normalcy, residential consumption has fallen back to its 2019 level and commercial consumption has risen to its prepandemic level as well. And as a reminder, historically in the water business, we typically see a natural decline of about 1% annually in water usage as customers change out older appliances and fixtures.

You'll recall that weather has a very direct impact on gas consumption and associated revenue. So we closely monitor the heating degree days as an indicator. 2021 started out relatively normal with the first quarter ending between the 5- and 10-year heating degree day averages. However, the fourth quarter of 2021 was warmer than normal, resulting in total heating degree days recorded of 5,139, which was similar to the 5,162 heating degree days in 2020.

The chart on the right shows how residential natural gas consumption in Pennsylvania was distributed throughout 2021. Note that the largest portion of gas was sold in the first quarter and in total, about 80% of the gas was consumed during the heating season, meaning the first and the fourth quarters of the year.

This winter, 2022, for our regulated natural gas segment, year-to-date weather through February 15 was 10.8% colder than normal, and this compares favorably to last year's winter when year-to-date weather through February 15 was 0.9% colder than normal. Thus far in 2022, heating degree days were 9.3% higher than during the same period last year.

Next, let's move on to the operations and maintenance waterfall. Operations and maintenance expenses were $550.6 million for the year compared to $528.6 million in 2020. Similar to the revenue slide, you'll notice the main driver was the additional $42.9 million from the full first quarter of expenses for the gas business in 2021 compared to the partial first quarter in 2020.

Other expenses, employee-related costs, growth and production in our regulated water segment contributed another $23.2 million for the year. These increases in expense were offset by $25.4 million related to the Peoples acquisition, an $18 million reduction in COVID-19 costs and a small amount of nonrecurring expenses from 2020.

Next, let's review the earnings per share waterfall. GAAP EPS for the full year of 2020 was $1.67, which as I mentioned, was just above the midpoint of our guidance range. We start on the left side of the chart with the 2020 GAAP EPS of $1.12 and then we add back $0.082 of Peoples' transaction-related expenses and $0.063 from the 2020 rate credit, that brings us to an adjusted income per share of $1.27 for the full year of 2020 with 9.5 months of gas operations.

Building from there, the full year contribution of the regulated natural gas segment versus the partial year in 2020 added $0.414. Rates and surcharges added $0.071 and growth in our regulated water segment added another $0.024. These were offset by other items of $0.053; lower volume for both our regulated natural gas and regulated water segments of $0.039 combined; and another $0.008 from expenses, which results then in the GAAP EPS of $1.67 for the year.

Given that we're in the second full year of operating the natural gas segment, we brought this slide back as a reminder of how we think about net income by quarter as a water, wastewater and natural gas company. This should provide some assistance in constructing quarterly earnings projections that reflect the seasonality in water and gas usage as we move into 2022.

Moving on to rate activity and other regulatory matters. In 2021, we completed rate cases or surcharges in 7 of our 8 water states and in 2 of our 3 natural gas states with a combined total annualized revenue increase of $30.1 million. So far in 2022, we've completed rate cases or surcharges in 4 of our water states with a total annualized revenue increase of $8.2 million as well as a rate case in one of our natural gas states with annualized incremental revenue of $5.2 million.

We currently have base rate cases underway for our regulated water segment subsidiaries in Ohio and Pennsylvania. And as many of you are aware, in our Pennsylvania water rate case, the administrative law judge provided a recommended decision last week on February 18. Our primary objection of this recommended decision is the suggested 8.9% ROE.

We simply don't believe the ALJ's stance on the ROE is in alignment with long-standing precedent decisions on this matter. As a data point, although American had a black box settlement, they estimated an ROE of 9.9% in their most recent case in Pennsylvania.

And additionally, the published quarterly DSIC ROE is currently 9.8%. So next, we will file exceptions that will then be included in the materials considered by the commissioners while they're drafting their order. And in these exceptions, we will vigorously advocate to support our position on ROE.

In accordance with the statutory time line for Pennsylvania, we expect this case to be on the May 12 commission agenda, and we would then implement new rates in May of 2022. And with that, I'll hand it back over to Chris to discuss the municipal acquisition program.

Thanks, Dan. Appreciate it. Listen, each year, we supplement our base strategy of investing in infrastructure in our existing business with the acquisition strategy to supplement it, buying water and wastewater municipal systems essentially, right?

This slide shows the acquisitions we closed in 2021 for our regulated water segment. The 2 acquisitions include the Commons Water System in Texas and the Village of Bourbonnais Wastewater System in Illinois. Together, these acquisitions added about 7,700 customers and about $63.3 million in rate base. Combined with organic growth, the combined -- the company increased its customer base by over 21,000 customers in 2021.

Now since 2015, we've added over 94,000 customers and $361 million in rate base through our water and wastewater growth through acquisition program.

Now on this next slide, you've seen this before, I think, or versions of it. We have 8 signed asset purchase agreements pending which will add nearly 235,000 customers or customer equivalents and total over $471 million in purchase price. This includes the Southern Oaks Water acquisition that we just announced earlier this month. This is the second fair market acquisition -- fair market value acquisition in the state of Texas.

Based on the approximate rate base of $471 million, these signed agreements are expected to generate approximately $23.5 million of incremental annual income once they're fully earning. And this is before any incremental capital that these acquisitions might require in the future.

We continue to remain confident that we will close the DELCORA transaction. The litigation with Delaware County regarding the enforceability of our asset purchase agreement with DELCORA was heard by the Pennsylvania Commonwealth Court panel last October, and we are awaiting that decision could be here any day.

We are also hopeful that we can still reach a settlement with the county which would help accelerate the closing of this transaction. Now in addition to the signed pending municipal transactions on the previous slide, our pipeline of municipal opportunities remains really healthy and strong. Many of you are familiar with this slide at this point, which illustrates acquisition opportunities where we're engaged in active discussions with municipalities.

Currently, we are actively pursuing approximately 415,000 potential water and wastewater customers. Now there's a number of contributors that get us to this strong pipeline. Number one, we have fair market value legislation in all of the 8 states where we have water utilities. Number two, we currently operate in states that I believe have fair regulatory environments. Number three, is our continued ability to offer strong low-cost capital solutions. And of course, number four would be our industry expertise and our long-term rate stability that we provided over the years.

So regarding Chester Water Authority, you might recall that last fall, the Pennsylvania Commonwealth Court ruled in a 5-2 decision, that the City of Chester is the rightful owner of the Chester Water Authority. And that was immediately followed by the Chester City Council unanimously passing a public ordinance declaring Aqua as the winner of its RFP process and requesting that the receiver expeditiously provide consent to sell the Chester Water Authority to Aqua.

Because the court-appointed receiver and the city must agree to the ultimate solution to the city's fiscal crisis, we continue to wait to hear the public position of the receiver. However, given the City Council's action, it's really unclear to us why there is any confusion in the market as to the city's preference to partner with us going forward.

All right. Now in 2021, we overcame significant external obstacles, and we had a very successful record-breaking year. We now look forward to building on our successes in 2022 and remain focused on integration, growth and operational excellence this year. A good portion of that focus will be on all of the acquisitions we announced and the opportunities in our pipeline.

One of the benefits of the combination with Peoples is that we are leveraging the Peoples' reputation in Pittsburgh -- in the Pittsburgh area to purchase water and wastewater systems. Last year's acquisition of Beaver Falls is a great example of leveraging the gas utility to grow the water utility.

Integration of new acquisitions will remain a core competency and focus for the company going forward. Our plan is to ensure that we seamlessly onboard customers and employees to our world-class platform. So excluding DELCORA, we expect to add close to $200 million in rate base in this year or early next year based on expected regulatory approval time lines.

Additionally, we expect to sign agreements for at least another $100 million of acquisitions and potentially much more in 2022. These would not close, of course, until at least 2023. We'll invest another $1 billion in infrastructure. Sometimes that sounds easy. But this does require a very sophisticated planning and day-to-day effort to complete the work.

We'll continue to -- our ongoing progress on ESG commitments to maintain our leadership position among our peers. And lastly, we expect to resolve the Aqua Pennsylvania rate case before the Pennsylvania Public Utility Commission.

So let me wrap up by reviewing the 2022 guidance released earlier in the month. For '22, we expect earnings to be between $1.75 and $1.80 per share. We're confident in our 3-year earnings per share growth of 5% to 7% through 2024, but we'll always be respectful of our regulators and ongoing rate activity as we've discussed many times. On CapEx, we expect to spend approximately $1 billion annually to rehabilitate and strengthen our water, wastewater and natural gas systems through 2024.

Rate base will continue to grow between 6% and 7% for water and between 8% and 10% for natural gas. Customer growth is expected between 2% and 3% on average for water and stable for gas. And we remain committed to our environmental stewardship, our sustainable business practices, employee safety, diversity and inclusion, customer experience and community engagement and are always happy to not only reaffirm our ESG commitments today, but also to share the progress we've made toward our targets.

And with that, I'll conclude my formal remarks and take some questions. So Madison, let me turn it back to you.

(Operator Instructions) We'll go ahead and take our first question from Durgesh Chopra with Evercore ISI.

Just -- can you -- in your 2022 guidance and the 5% to 7% growth rate, can you remind us what sort of equity or financing needs are embedded into that plan? I'm thinking base business plus acquisitions, any color there?

Yes. Let me take that, Durgesh. So as we've said a number of times on these calls, we intend to support our credit metrics in order to maintain our credit ratings, so we will be investing. As you know, we're investing $1 billion a year. We're making a number of municipal acquisitions.

So from time to time, we will issue equity to keep our credit metrics in balance. In terms of specifics for 2022 and beyond, really waiting for some more clarity on our larger transactions before we provide much additional color. However, I will say we're likely to announce an ATM program at some point later this year to raise equity as needed.

Got it. That's helpful. And maybe just, obviously, Chris, just high-level strategic thoughts. We've seen a ton of transactions in the marketplace. You referenced it in your opening remarks, obviously, today. Just any updated thoughts or -- on sort of your portfolio of assets and some of your peer utilities have kind of taken sort of -- made some opportunistic moves to recycle capital back into the business, eliminate equity needs? Just any thoughts there.

Yes. Clearly, on a lot of levels, natural gas is front and center in the news today, whether it's internationally with the events of -- with Russia and Ukraine or other transactions in the market. So natural gas is really an important thought now.

What I've said before, and while I'll just underscore again today for you, Durgesh, is, we know the value of our gas utility. We know that it's a valuable commodity, not only -- or I should say, entity not only in the general market, but specifically in the private market, which we continue to see.

Having said that, though, we'd like to see what happens with the public market multiples this year. We like this company. This company is operating in excess of all of our projections, meaning financial, safety, operational. It's a really nice company. And so at this point, we're going to continue to march forward this year, knowing that we have options, but also that we see probably a return at some point to more reasonable multiples in the natural gas market.

And potentially here, if this country wants to remain energy independent, refocusing on the importance of natural gas in the United States. So we're going to stand pat for now and continue to look at this as we move forward.

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

First question, on the 3-year CapEx through '24, the $1 billion a year, again, '22 through '24, relatively consistent with the '21 through '23 range. Just wondering no dollar amount increase there. And if you just think about the rate base CAGR with the base getting larger typically, with the roll forwards, you see other utilities raising the CapEx. Just wondered how conservative this assumption is and whether the missing piece on sustaining the growth is coming from expectations for accelerated pace of municipal M&A?

Yes, let me start with the CapEx. We think for the size company we are, spending $1 billion a year is right in our sweet spot, both in water and in natural gas. This is a careful exercise. I know many of us in the utility business talk about spending CapEx, like it's just coming to work every morning.

And it's obviously a lot more than that. And we need to do these things with precision. And again, so for the size company we are, we think the $1 billion is a good fit for us. Now as we continue to do acquisitions and particularly acquisitions of size with follow-on capital, there might be other opportunities, but we have to judge those unit by unit. We can provide some color on the follow-on capital as we do these transactions. But that's generally how we think about it. Dan, anything to add to it?

Yes. I think that's absolutely right, Chris. Maybe the only thing to add is -- the only -- when we think about growth, the only thing we would include from -- into our CapEx is CapEx associated with acquisitions, which have already been signed, which are in the process of being approved. That is included in our CapEx. But if you think about DELCORA, for example, the CapEx -- the step-up in CapEx for DELCORA is really out beyond this 3-year period. So you don't see it in these 3, call it, $1 billion numbers that you referred to. It would be beyond that.

Right. Now that makes sense. On the Pennsylvania, the Aqua Pennsylvania case, it seems like based on the read, that to your point, it was largely more on the ROE side that was the most, I guess, resonating with us versus rate base or other items. When you think about some of the points that came up in [Aqua] case or other recent Pennsylvania cases out there, anything the ALJ here pointed to on the reasoning for the ROE that kind of differs from what others have said in other cases.

No. I would say here, what we saw is the ROE that the ALJ had used is -- came straight from one of the statutory advocates. And so it was a fairly -- it appeared to be a fairly straightforward kind of selection of the ROE. As we said, it's just not in line with historical precedent in Pennsylvania. PECO received 10.24%, their most recent rate case. Columbia Gas received 9.86%. So we do think that -- well, first of all, I should say, the ALJ supported a number of our other positions.

So on those things, I think we felt that the outcome was appropriate. It's really the biggest issue. There's a few other things. The biggest issue is this ROE, and we think that with our exceptions being filed here shortly and the PUC commissioners considering those exceptions, that ultimately we'll end up with an ROE much more in line with historical precedent here.

Yes, I think, Dan, the ALJ, if I'm not mistaken, referenced the pandemic, the effect of pandemic in the recommendation, which, listen, we all have been living through that. The whole country has been living through that, the whole world really. But to have an effect like that on a recommendation, probably overreaching, I think, at some level. So hopefully, the commissioners see fit to stay with continued -- with the long-standing precedent decisions on ROE.

And we'll go ahead and take our next question from Ryan Connors with Boenning and Scattergood.

I wanted to just follow up on this issue with the natural gas peer takeout this morning. Obviously, a huge premium raises an eyebrow. I'm with you, Chris, that when there's an inefficiency here in the market being driven by ESG, you want to be a buyer, not a seller, right? So we would kind of be on your side.

But my question is, you can't really obviously delve into specific deals, but do you get approached. Not on that deal specifically, but in general? I mean, are you being approached on when things are up for sale? And sort of just turning that down? Or is it pretty well known that you're not interested in expanding gas? Or are you interested in expanding gas? Does that change your viewpoint on that at all?

Yes. I think we've been really public in our position on this at this point, Ryan, and -- for some time now, saying that we are not pursuing any natural gas growth by acquisition. And so no -- I mean, listen, we're always...

You're aware of them?

Yes. I mean, bankers are always talking, so we're always aware. But I don't think -- I wouldn't say anybody is pursuing us hard, knowing our public position. I just don't think that in today's environment, it would be beneficial for us to buy more natural gas, given the differential in the PEs. So it's going to be interesting to see how this year plays out, though, in terms of what the public market response is to all that's happening. So we'll see. But we're -- our position is pretty firm now. And fortunately, the water market is very hot, and we're doing real well, growing in the water side.

Yes. Now speaking of that water growth, I mean, one of the compelling things about the multi-utility format to us is the opportunity at some point to build certain franchise territories where you've got both water and gas because there are huge synergies there. We know that from municipal towns that do both and they can coordinate their digs and things like that. Is there any -- are there any water deals where you think you would be able to create some actual overlap between gas and water over the next few years?

Well, listen, the easiest one to call out, and I wouldn't be divulging any secrets, but the City of Pittsburgh is -- needs a solution. And while there's been a change in administration there, I think they're still getting their feet wet in the issues that they're dealing with in Pittsburgh. But that would be an obvious one where we could provide a solution.

But I think in that whole Pittsburgh region, there are opportunities for growth and for solutions that we could provide. And while we're in the street, as you talk about here, we could make infrastructure improvements by opening the street once rather than multiple times. Even with coordination among utilities, often, we still see streets being opened at different points in time, and it just adds to the cost for customers. If we could combine -- well, I'll tell you what, it's a power -- those would be powerful combinations.

Good. And then one last one for me. Just I wonder if you can give us an update. There was a House Bill in the Pennsylvania legislature called 1936, 1-9-3-6, and it was floated last, I think, October, it kind of went dormant. I guess that the idea behind it was to limit fair market value to distressed systems, and we've been looking around, can't seem to find any update there. Is that moving ahead at all? Or any color you can give us on that one?

Yes. To my knowledge, that has not gone anywhere. I think -- and I've spent time in the state capital regularly. And I don't find leadership, particularly in the Senate, but even many leaders in the house interested in limiting that. These -- why would they want to take away a tool from municipal governments that they have today, they can opt not to use it if they don't want to use it, but this is an important tool that they have in their tool belt.

Listen, there's some municipal authorities who I think would be out there advocating against it and maybe promoting it with their favorite legislature -- legislator because they want to stay independent despite what their overall constituency or customers might want. And so you'll have some of that chatter. But I don't see that going any place, Ryan.

And we'll go ahead and take our next question from Ryan Greenwald with Bank of America.

So maybe just starting on the financing. Any good way to think about the percent of that additional acquisitions from here that would be financed with equity?

Yes. I mean, Ryan, I think the simple way to think about that is, from here for -- obviously, things changed with the Peoples acquisition. If you remember, before the Peoples acquisition, we had credit metrics that were very high with lots of room on our credit metrics. And so we could make municipal acquisitions and do those exclusively with debt.

With that acquisition, we really reset our credit metrics. And so at this point, as you think about us doing transactions, you should really think about each of those transactions effectively being financed half equity and half debt. So I think that's the simple way to do that, Ryan.

Got it. That's helpful. And then not to push too hard, but just in terms of the gas business, another transaction here at 2x rate base, and as you alluded to earlier, all 8 states have the fair market value legislation in place here. You can deploy it back into water at one time. It seems like you guys are being a bit patient here in terms of the public market, but can you just dive a bit deeper in terms of your strategy and how you're thinking about that relative to the onetime on the water side, particularly given the fact that your financing is 50% equity?

Yes. I am happy to revisit again. But I think we've been pretty clear on how we're thinking about this. Listen, I think as a general matter, if you think about who should own gas utilities and others may have different opinions, but I'll say, I would rather have a strategic own a gas utility. We make the investment. We're improving the environment while we do it, and we're doing it with safety and all of the concerns tied to the compensation of the management team. You want companies like ours running gas utilities in this country.

Now it appears to be a shifting tide where it's moving to infrastructure owners that are not strategic necessarily. And so we know that, that option exists. But let's see what the market is doing here in 2022. And let's see where we are this year. I just -- again, we've only owned this asset for about 2 years.

We are a company that's 135 years old, and we've been successful in our business, not because we thought short term but because we always think long term. And I think that applies to our thinking here as well. So we're going to stand pat for now. Hopefully, that answers your question.

Absolutely. That's helpful. And then maybe just lastly, it sounds like DELCORA developments could be any day now. Any thoughts around timing expectations for Chester?

Chester is a little bit more complicated. The Chester Water Authority applied for what they call [ale carter] or it's really an application to appeal before the Supreme Court. That's been months and months ago. So I don't know whether the Supreme Court is going to take that case or not. But in the meantime, we wait for the receiver to publicly disclose where he is on it.

I recognize he had pensions to fix and all kinds of cleanup to do with the city finances. So that takes time, and we've been patient. But at this point, there is alignment in the city around a sale to us and there is -- there will be continued developments at the authority level. I think there will be another turnover of that Board -- of the authority's Board this summer.

And so I think there will be developments. But -- in the meantime, I think the key factor here is what will the receiver's next move be? And there's no specific time frame associated with his next move.

And we'll go ahead and take our next question from Travis Miller with Morningstar.

Thinking about inflation. If inflation stays at these elevated levels for a while, what does that do to the water acquisition strategy? Does that make municipals more likely to go ahead because the investments become more expensive or most likely for some reason. What are your thoughts around that?

It's a great question. And I think -- let's assume a sustained inflation, not just the transitory, if you would. And I think sustained inflation would require municipals to consider rate increases. That is a nightmare for most municipals. They don't want to go near a rate increase because it's the same thing as tax increase, and therefore, they'd put their reelection in jeopardy.

So I would tilt the weighting here toward helpful rather than harmful as we think about inflation impacts on the purchase of future water and wastewater municipals.

Okay. That's great. And then also looking at the opportunity set and then, obviously, the deals you have in the works right now, it seems weighted toward wastewater and let's just take out DELCORA because, obviously, that's a big one. But even the other ones, is there something about wastewater either today or within your business strategy that, that looks more attractive right now and might be ongoing a larger share of your acquisition?

Yes. Yes. No. Some people would say wastewater stinks. We don't think so. I think the way we look at wastewater is the same as water. It really is the same economic model. It's the same regulatory process. It's the same recovery. And yet, I think the reason that wastewater gets a little more traction is because most towns, municipals are less -- they have no affinity to the wastewater, where often, we say water is local. And so often, we see local water authorities being considered strongly with the City Council or whoever the local officials might be, they feel some affinity toward the water.

So -- and then on wastewater, it's -- it gets expensive because you have to put -- replace wastewater pipe or make improvements to plant. Those are really hard for municipals to stomach. And so they often look at exit. And I just think that, that -- it's fairly straightforward, and that's why we see more wastewater transactions than water.

(Operator Instructions) We'll go ahead and take our next question from Jonathan Reeder with Wells Fargo.

Just one question remaining for me. What's the process for the PAPUC determining the 9.8% DSIC rate because I think they have another quarterly review on that in April?

Yes. I'm probably not going to be able to give you the detail that you maybe want, which we could follow up, but it's a calculation that they publish publicly each quarter, as you know. I probably can't get into the formula necessarily without revisiting it, Jonathan.

Yes. Probably something to follow up with Brian and Renee on, and we can help you with that process.

Okay. Yes. No, that would be useful. I would think that would perhaps be the most recent, I guess, indication of maybe [where their mind] might be on the ROE. And to be honest, I'm not familiar with how that DSIC ROE is kind of determined. So that would be helpful.

Yes. And we agree with you that it really is a very strong reference point here.

It appears there are no further questions at this time. Mr. Franklin, I would like to turn the conference back to you for any additional or closing remarks.

Thanks, everybody, for joining us today. And as always, we're available for follow-up, Brian, Renee, Dan and myself and look forward to talking to you. Thanks so much.

And this concludes today's call. Thank you all for your participation. You may now disconnect.