Essential Utilities Inc (WTRG) 2018 Q4 法說會逐字稿

Good day, and welcome to the Aqua America's Q4 2018 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, Christina.

Good morning, everyone, and thank you for joining us for Aqua America's Full Year 2018 Earnings Call.

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 aquaamerica.com.

The slides that we will be referencing and webcast of this event can also be found on our website.

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

Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risk 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 posted in the Investor Relations section of the company's website.

Presenting today are Chris Franklin, Aqua America's Chairman and Chief Executive Officer; Dan Schuller, Chief Financial Officer; and Matt Rhodes, Executive Vice President of Strategy and Corporate Development; And I am Brian Dingerdissen, Vice President, Chief of Staff at Investor Relations.

At this time, I'd like to turn the call over to Chris Franklin.

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

Thanks, Brian, and good morning, everyone.

Let's take a look at Slide 5, as we reflect on 2018, to say it was a historic year for Aqua.

The strategy we initially described to many of you in the winter of 2016 is really working and it's manifested in a number of important ways and that's really thanks to the hard work and dedication of the team.

We excelled in each of the core competencies and we've described these many times to you, but it's infrastructure investment, our work on regulatory issues and operational excellence.

Last year, we built unprecedented momentum in our municipal acquisition strategy, which was largely the result of the passage of fair market value legislation in a number of our states.

Most importantly, for the future of our company, we announced our entry into the regulated natural gas industry.

I'd like to highlight a few of our significant accomplishments from 2018 for you.

First, it was another year of solid financial results, in line with guidance; adjusted income per share rose 4.4% and revenue was up 3.5%.

And Dan will get into a lot more details on the financials in just a moment.

Also, we filed our Pennsylvania water rate case, the first one filed since 2011.

And just recently, we filed the settlement of that case.

I'll mention it in more detail in a moment, but this was a significant undertaking and will really help ensure that we're able to provide reliable high quality service and continued investment in infrastructure for our customers.

The 6 municipal acquisitions we completed in 2018 helped us to reach a milestone for the company of 1 million water and wastewater customers.

It's a big deal for us.

One of the things that helped drive this growth is the passage of fair market value legislation.

And in 2018, this legislation passed in 2 more of our states: North Carolina and Ohio.

It's important to note that with all the progress we've made on growth this year, we never took our eye off of the core operations of the company.

In fact, we had a record safety and compliance result in 2018.

Also in 2018, we invested more than ever to restore aging infrastructure in our communities.

Our total spending was nearly $500 million of CapEx.

Though our mission of protecting and providing the world's most essential resource has always been at the core of our business, we took additional steps in 2018 to communicate our commitment by issuing our inaugural corporate sustainability report, and we also participated in the corporate disclosure project survey.

And, finally, and the biggest news of the year, was the announcement of our acquisition of Pittsburgh-based Peoples Natural Gas.

The integration planning and regulatory process are moving ahead nicely.

And we're excited about the opportunities this will open as we become a larger multi-platform utility company.

Now taking a look at Slide 6. We see the growth in income per share that continued in 2018, as I mentioned, up 4.4% on an adjusted basis.

And today we will roll out our standalone EPS guidance for 2019, which should continue this long-term positive trend.

As most of you know, we filed an important rate case in Pennsylvania last August, our first since the 2011 filing.

And since our previous case, we invested over $2 billion of CapEx in -- to improve our water quality and wastewater infrastructure.

On February 8, we filed a joint settlement agreement that will provide $47 million in new revenue to the company.

We expect that the Pennsylvania Public Utility Commission will approve the settlement in the coming months.

And we expect those rates to go into effect in May of this year.

Now turning to Slide 8. As I mentioned, 2018 was a really strong year in our municipal growth strategy.

In December, we closed 2 new transactions: East Bradford Township and Treddyfrin Township, both in Chester County, Pennsylvania.

Treddyfrin was notable because it was a nonregulated transaction of a trunk sewer system that connects 5 municipalities to the Valley Forge sewer treatment plant, which is a large municipal plant.

So this brought the total to 6 municipal transactions in 2018.

It brought the company approximately $100 million in new rate base.

Our pipeline of signed municipal acquisitions that are expected to close this year, 2019, is also really strong, with 7 transactions totaling more than 19,000 customers and another approximately $100 million in new rate base.

This is really significant.

Fair market legislation played such an important role in the -- in our acquisition plan in 2018.

And as I mentioned, fair market value legislation was passed in North Carolina and just signed in January into law in Ohio.

So this is moving across our platform nicely.

With the passage of that legislation in Ohio and North Carolina, we now have the legislation in 6 of the 8 states where we currently do business.

And I should also mention that in Virginia, though fair market value legislation has not yet passed there, the Virginia commission allows a similar treatment of municipal acquisitions, essentially the purchase price as a -- as rate base in many cases.

Now Pennsylvania and Illinois, where fair market value was first passed, have seen significant acceleration in new transactions, and we are optimistic that, that similar acceleration will occur in North Carolina and Ohio once it becomes established there.

Bottom line is that as municipalities face the challenges of replacing deteriorating infrastructure and increased regulatory requirements, we believe we provide a viable and valuable solution to communities by bringing our expertise, our economies of scale and our efficiencies.

And fair market value just helps facilitate that solution and gives local governments the opportunity to pursue other key priorities with the proceeds from the sale of their utilities.

Let's take a look at Slide 10.

I'm really proud of this slide.

And 2018 was a record year for safety and compliance.

Our incident rate has been down in each of the past 5 years and reached 3.5 per 100 workers in 2018.

This really speaks to our corporate culture and to the values that we hold firmly.

Similarly, our compliance, our environmental compliance for water operations is up the last 5 years, hitting 99.7% in 2018.

And to put this in perspective, at any given time, roughly 7% of water systems across the United States have health-based violations.

In our company, only 0.6% of our systems had a violation, so this means that our rate is about 10x better than the national average.

We're very, very proud of that.

And when you think of safety and compliance as core strengths at the company, these will continue to be important priorities in the new combined company.

From time to time, we acquire sometimes small- and midsized water wastewater systems that already have environmental compliant issues.

These issues also arise sometimes just in the normal course of operations or result of regulatory changes.

But we continue to respond quickly by aligning CapEx improvements and process changes to address any compliant -- environment compliance issues that might arise.

Over the last decade and a half, we have invested very heavily, as you know, in pipe replacement in southeastern Pennsylvania and the result is a 53% reduction in water-quality-related service orders and a 60% reduction in main breaks -- again, significant numbers.

As many of you know, there's a dire need for water and wastewater infrastructure replacement in the United States.

Infrastructure improvement is such a key part of our mission and improves the lives of the people in the communities where we serve.

In 2018, we invested nearly $500 million, and this includes installing about 190 miles of pipe, which we laid out in 2018.

We expect to invest $550 million in '19 -- 2019 and $1.4 billion through 2021.

Those of you who follow this, know that this represents about 7% rate-base growth in our water and wastewater business.

Now the next slide, our mission, and as I said many times of protecting and providing earth's most essential resource is at the core of everything we do.

And though we've -- have a strong commitment to be a corporate citizen, in 2018, our efforts to communicate our many initiatives by issuing an inaugural corporate social responsibility report.

And by the way, this is available on the website today.

We also participated in the CDP survey, the Carbon Disclosure Project survey for the first time and we received an exceptional first-time score by reaching the awareness level, which puts us already in our first one at -- in the top 40% of all companies registered with CDP.

We expect to incorporate Peoples gas into both of these in the near future, probably in 2020 or 2021.

With that, let me pass the call over to Dan to discuss our financial results.

Dan?

Thanks, Chris, good morning, everyone, and thanks for joining the call.

Turning on Slide 14, you'll see that we're reporting non-GAAP numbers this quarter, which adjust for the impact of the Peoples [both] transaction.

I'm going to focus our discussion on the full year results, but you can find the quarterly results and the quarterly waterfalls in the appendix.

We reported revenues of $838.1 million in 2018, up 3.5% compared to $809.5 million in 2017.

Operations and maintenance expenses were $308.5 million in 2018 compared to $282.3 million in 2017.

Moving on to GAAP net income, which includes items related to Peoples transaction, we reported $192 million compared to $239.7 million in 2017.

GAAP earnings per share, including Peoples-related expenses, were $1.08 in 2018 compared to $1.35 in 2017.

When adjusted for Peoples-related charges, income was up 4.6% from $239.7 million to $250.8 million.

Now moving to the bottom row of the table, on an adjusted basis, you'll see that income rose 4.4% to $1.41 per share, up from $1.35 per share in 2017.

Now let's move to the revenue waterfall on Slide 15.

Breaking down the 3.5% revenue increase, you'll notice that rates and surcharges was the biggest contributor at $20.6 million.

Next, regulated growth, which includes acquisitions as well as organic growth, added $6.6 million to revenue.

Other items added $2.5 million and these other items included additional wastewater revenues of $2.9 million due to increased treatment volumes at one of our Indiana utilities.

Revenue from market-based activities declined by $1.2 million, and as you'll recall, we've been exiting many of our market-based businesses and we've done that over the last couple of years, so you see the impact here.

Next, let's review the O&M waterfall on Slide 16.

Operations and maintenance expenses were $308.5 million for 2018 compared to $282.3 million in 2017.

Lower expenses from market-based activities reduced O&M by $2.4 million.

The largest driver, though, was advisory and finance-related cost from the Peoples transaction, which increased O&M by $14.2 million.

Walking through the other drivers.

Employee-related costs increased by $8.3 million, including the full year impact of the market-based salary adjustments that we implemented for non-officer level employees in late 2017 as well as merit increases in healthcare, offset by pension.

Other increased O&M by $4.3 million.

Regulated acquisitions added $1.4 million of expenses and increased production costs contributed $560,000.

Excluding the transaction costs, the increase in O&M was more in line with historical levels.

Next, let's review the drivers of EPS on Slide 17.

In walking through the EPS waterfall from left to right, you can see that increased rates and surcharges and regulated growth increased EPS.

Other operating expenses and MBA and other were negative, bringing the adjusted earnings per share before transaction-related charges to $1.41.

This reflects an increase of 4.4% over the 2017 EPS.

The 2 charges from the Peoples acquisition, a mark-to-market adjustment on the interest rate swap and other transaction financing fees, reduced EPS to $1.08.

Let's talk about the swaps for a minute.

As you probably saw in our various filings at signing and as we discussed on prior calls, we executed 10-year and 30-year interest rate swaps to hedge the underlying interest rate risk associated with financing the transaction.

At the time, we believed that interest rates would rise.

Swap rates have actually gone the other direction and thus we have a noncash, mark-to-market charge for 12/31/18.

We'll eventually settle these swaps when we place our permanent acquisition debt.

If we do end up issuing at lower than anticipated rates, it will be reflected in the income statement for the 10- and 30-year terms of the debt.

So you should expect to see a mark-to-market impact in each quarter leading up to and including the closing quarter.

In addition, during this time period, we will have transaction- and integrated-related -- integration-related expenses flowing through the income statement.

Now let's turn to Slide 18 to discuss our rate activity for the year.

We completed rate cases or surcharged filings in all of our 8 states, resulting in $22.5 million in additional annualized revenue in 2018.

So far in 2019, we've completed rate cases or surcharges in Illinois, Ohio and Pennsylvania totaling annualized revenue of $4.4 million.

We also have rate cases or surcharges pending in New Jersey, Ohio and Pennsylvania, where we are requesting an additional $75.1 million in revenue.

As Chris mentioned, we have a settlement to file in Pennsylvania for approximately $47 million on an annualized basis.

We're awaiting the review and approval of the settlement agreement by both the administrative law judge and the Pennsylvania Public Utilities Commission.

As a reminder, this was our first rate case in Pennsylvania since the filing of the 2011 rate case.

The $47 million annualized increase is in addition to the 7.5% DISC that's been in place, so we expect new rates to go in effect in May at which point the DISC will be reset to 0.

For further detail on rate activity, please refer to the slides in the appendix.

And now I'd like to turn the call over to Matt, who'll provide an update on growth.

Thanks, Dan.

Moving to Slide 21, fair market value legislation has been a major catalyst in our municipal growth strategy in 2018, and we completed 6 municipal transactions totaling over $100 million in rate base.

In addition to the 5 regulated transactions in the table -- and to be clear, Peotone water and wastewater is counted separately -- in December, we also completed the acquisition of the Valley Creek trunk sewer system from Treddyfrin Township Municipal Authority for $28.3 million.

This was a unique opportunity to own a wastewater system that connects 5 municipal systems to a treatment plant and includes 49,000 linear feet of gravity sewers as well as 2 pump stations and force mains.

When we add these acquisitions to our organic growth of approximately 8,500 customers, our total customer growth was over 22,700 customers, or about 2.3% in 2018.

This was in line with the guidance we set for 2018.

Turning to Slide 22, you can see that we expect another year of strong customer growth performance in 2019.

This is largely a result of the fair market value legislation-driven municipal activity we are seeing.

We currently have signed purchase agreements to acquire 7 municipal systems and 1 additional privately owned system Northern Neck in Virginia that we expect to close in 2019.

This totals approximately $100 million in additional rate base and approximately 20,000 additional customers.

Looking further ahead to future opportunities, we are also seeing a solid pipeline with an increasing number of municipalities showing interest in turning to Aqua as a solution.

Our list of top prospects includes over 250,000 new potential customers.

And now I'd like to give you an update on the Peoples' acquisition process.

So starting on Slide 24, for those of you who are new to our story, Peoples is a transformative transaction and a unique fit.

Both Aqua and Peoples share a deep expertise in infrastructure rehabilitation and all aspects of delivering essential utility services to customers.

Both are focused largely in Pennsylvania, which has a constructive regulatory environment, where both companies have served their communities for over 100 years.

Peoples will operate as a subsidiary under a to-be-named holding company and is expected to have strong rate base growth of 8% to 10% per year from 2019 and beyond.

And the transaction will add an additional 740,000 customers.

In January, Peoples filed a rate case for its Pennsylvania subsidiary, and on Slide 25 I'll provide more details on that rate case.

While we do not expect to close on the Peoples transaction until mid-2019, we know many of you are looking for details on the Peoples rate case.

Slide 25 provides those details.

On January 28, Peoples announced that its -- Peoples Natural Gas LLC subsidiary filed a rate case with the Pennsylvania PUC.

Peoples Natural Gas accounts for approximately 620,000 of Peoples' total customers.

This is the first-rate case for Peoples Natural Gas since 2012 and it requested $94.9 million in base rate increases, which is primarily to recover the costs of Peoples infrastructure replacement program.

Peoples long-term infrastructure improvement plan or LTIIP is the largest infrastructure initiative in the company's history.

In 2018, through LTIIP, the company replaced 146 miles of pipe.

The rate case also requests the consolidation of base rates for the Peoples and Equitable divisions.

Since Peoples acquired Equitable in 2013, the company has invested nearly $600 million to replace over 400 miles of aging pipelines.

This rate case is also the first to use the fully projected future test year method.

Rates should be in place by the fall of 2019 based on the Pennsylvania PUC rate case process.

Slide 26 is a reminder of the size of Peoples pipeline replacement program.

Peoples has identified over 3,100 miles of at-risk mains to be replaced under the LTIIP by 2034 in Pennsylvania alone, and the majority of this capital, approximately 70%, is eligible for DISC-like mechanisms.

This plan allows for 20 years of capital spending in Pennsylvania, assuming 150 miles of pipe is replaced each year.

This replacement program should drive 8% to 10% rate-based growth for Peoples.

Moving on to the financing of the transaction on Slide 27.

As we explained in the acquisition announcement and later updates, the transaction will be structured to maintain strong investment-grade credit ratings and the proforma -- in the proforma company and to allow for the continuation of the successful municipal acquisition program that we've described on the call today.

As we approach the equity and debt offerings, we will continue to evaluate our options for the structure and timing of the financing.

We still anticipate primarily equity financing, including equity-linked securities for the transactions with a smaller portion of debt financing.

We continue to meet with existing and prospective investors about the transaction and look forward to completing the equity and debt offerings once we have line of sight to regulatory approval in Pennsylvania.

We are reviewing all options to ensure a successful financing of this transaction.

To this point, we have had over 200 investor meetings with many more planned in the near future.

On Slide 28, you will see a reminder of the key milestones related to the Peoples transaction.

In November, we filed for regulatory approval in the 3 states where Peoples operates.

Kentucky has a 4-month statute and, thus, regulatory approval should be in March.

We expect West Virginia to follow and as mentioned, once we have line of sight to Pennsylvania approval, we will then consider doing the equity and debt financing.

As you would expect, we have certain windows when financing can be completed based on the need to provide full year or Q1 financials for both companies.

I'd now like to pass the call back over to Chris.

All right, thanks, Matt.

And I think as you would agree, 2018 has been a truly remarkable year for our company and a year that I think as we look back on it, we'll consider it a milestone in the company's history.

Let's conclude the formal part of our discussion today by providing the 2019 guidance.

On Slide 30, you'll see that -- Aqua's standalone guidance for 2019.

As we discussed previously, we were waiting on the Pennsylvania rate case to be finished before we published our guidance for this year.

We expect income per share for Aqua alone to be in the range of $1.45 to $1.50 on an adjusted basis.

We plan to invest approximately $550 million in infrastructure in 2019, another record amount for us, and approximately $1.4 billion of CapEx will be spent over the next 3 years, call it, through 2021.

And just a reminder we always give, that this CapEx doesn't include any investment in the purchase of systems that we would acquire or the CapEx that would then be spent to fix those systems in that period.

Aqua's water and wastewater rate base growth is expected to be approximately 7% through 2021 and we filed a joint settlement agreement of our water and wastewater rate case in Pennsylvania on February 8, as we've said, and we expect a PUC approval in Pennsylvania sometime in -- so that rates can be in effect in May of this year.

For year-over-year, we expect total customer growth to be between 2% to 3%, and we expect the Peoples acquisition to close midyear in 2019.

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

(Operator Instructions) And will take our first question from Ryan Connors with Boenning and Scattergood.

So I got a couple on water and then one on Peoples as well.

So starting on this NARUC panel last week regarding fair market value.

And there was some talk about affordability as an emerging concern, particularly where there is the potential for rate shock in more, I guess, economically challenged areas.

So obviously you've got a track record of closing deals in communities where that's not likely to be a problem, Treddyfrin is a great example of that.

But can you give us your take on those panel comments about affordability?

And how that plays into your fair market value strategy assessing opportunities going forward?

Absolutely.

And we've told the story before, Ryan, that we've actually walked from opportunities and sizable opportunities at that, where we believe that the rates wouldn't be sustainable in communities from an affordability standpoint.

And we continue to look at every deal with that same eye so that it's got to be a win for customers as well as shareholders and employees.

And if it can't be a win all the way around, then we have to seriously evaluate whether that's a real opportunity for us.

And I would say this, that annually we review our position in rates across our platform with our Board of Directors because we have a team focused not only at the management level but also at the board level on the continuation of making rates affordable for our customers.

And one last comment I'll make and it's really about the incremental increases that are allowed by the distribution system improvement charges: customers don't like sharp rate increases.

They do appreciate an investment in their infrastructure that makes sure that they have reliable, clean, safe drinking water and they would prefer to get those increases on an incremental basis as opposed to sharp increases.

And so we work carefully to try and make that happen.

So I'll just include that piece , Ryan, by saying we have a sharp eye on affordability.

Got it.

Okay.

My other one on water was there's kind of been a bit of breaking news but a lot of movement on PFAS the last couple of weeks.

You had EPA saying they wouldn't regulate it, then they're saying they will, and then Pennsylvania came out saying they are going to regulate it, it looks like.

I want to see if you had a chance to look at any of that and give us any comments.

And my particular question is, if, in fact, that is going to be regulated, both federally and in Pennsylvania, are we right to interpret that as a rate-based tailwind as those -- presumably those investments will become deemed prudent and you can move ahead with some additional capital investments there?

Yes.

So let's think about this.

First, let's state right out loud: we are in full compliance with the federal health advisory standard, right?

And so we meet that 70 parts per trillion.

In most cases, we are well below that.

We are in the process currently of going through every system in our company to make sure we've thoroughly tested all systems to make sure that whatever PFAS or PFO we find, we address.

And, yes, we believe that any treatment or requirement of treatment from the EPA or DEP in each of our states would be fully recoverable through rates as we -- as it benefits the customers.

And in fact, in some cases we've already put treatment on, I would point to our plant in Bucks County, Pennsylvania where we put treatment on and that is -- we'll be in rates in -- as of this case.

So I would say this, though, Ryan, as you think about the tailwind, it's an opportunity for us but given the size of the company, I wouldn't say this is a massive investment that we would expect to have to make across the company.

PFAS and PFO are -- have been found, but it's not -- they're -- it has not been found in all of our systems.

Got it.

Okay.

And then, my only one on Peoples was, you mentioned the rate case.

Obviously there's a lot of data they threw out there as part of that rate case, which is great, but on the other hand it raises some questions.

And my question was on the tax rate.

When we look at their stuff, it's pretty clear that they've been operating at a higher tax rate, considerably different from Aqua.

And I presume that has to do with them not having the same repair tax type of treatment.

How should we think about the tax rate of the combined entity, the hypothetical combined entity going forward?

Is that closer to your rate, their rate?

Somewhere in the middle?

Any guidance there?

Yes, Ryan, this is Dan.

So I think, yes, you're absolutely right.

They do have a higher tax rate than we do and it is tied to the fact that they have not taken the repair tax election, they've not implemented that.

So I think going forward, still work to be done in terms of that resulting tax rate, but you can presume that it's between the 2, but you'd have to think about it in terms of the scale of the 2 entities that are being -- coming together here as well.

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

Just -- can you help us on the $47 million, Dan, just to clarify, does that include the DSIC revenues or does it not?

And then, ultimately, like what are the drivers of that number?

So if I'm thinking about the -- what, ultimately, goes to the bottom line, is that the complete 47%?

Or some of that is depreciation expense?

Yes, so a good question, Durgesh.

So the $47 million is -- does not include the DSIC or DISC that's already in place.

We have a 7.5% DISC that's in place, so that is about $28.9 million, call it, $29 million and -- in terms of revenue.

And so you add the $29 million plus the $47 million to get to really the increase in base rate that come when you reset the DISC to 0. Does that help?

Yes.

And then, as part of the -- that helps.

And as part of the rate settlement, unless I missed it, I'm assuming that DSIC would be, sort of, available to you prospectively, after these rates go into effect?

So following the fully projected future test year, so you can't implement the DSIC during the fully projected future test year but subsequent to that, for capital invested after that point, you can.

Okay, so year 2. Perfect.

And then, just one last question, just in terms of -- just -- I think you've said this earlier but I just wanted to make sure because the CapEx plan was extended another year.

So when you look at the CapEx projections both on the water side and the gas side, fair to assume under normal course of business, you would fund that with internally generated cash and/or debt with like kind of modest or no equity issuance needed, under normal course of business, the CapEx plan as you laid out?

Yes, that's correct.

So I think as we've said on prior calls, we would expect further equity issuances in the event that we need to fund significant municipal transactions, but in terms of funding the CapEx program for the businesses, we would expect that to come from combination of operating cash flows and debt.

Perfect and appreciate the additional color on the timing of the financing of Peoples acquisition.

That's super helpful.

We'll take our next question from David Katter with Robert W. Baird.

I have a quick question on the prospect list you guys talked about for your municipal acquisitions.

How has the Peoples acquisition impacted that list?

Have you seen any turnover there?

And more broadly, how are the municipalities responding to the Peoples deal?

So the 250,000 of perspective customers that I mentioned is something that sometimes changes but we have good line of sight to a lot of those acquisitions and so that's why they're included on that list.

As we think about the Peoples acquisition and what that has added, obviously it will put us in a different part of the state than we currently operate, for the most part, and could potentially open up different opportunities in that -- in the Pittsburgh area.

And so we'll be closely monitoring those going forward once the Peoples acquisition has closed.

It also puts us in 2 new states, West Virginia and Kentucky, and we're just starting an evaluation of the opportunities, both on the water and the gas side, for municipal acquisitions in those 2 states as well.

So that's something we've started looking at and will continue to look at as the Peoples acquisition comes closer to closing.

I would say, Dave, just on the last part of your question, the municipals that we're talking to now, I think they find it interesting that we're -- we've opened up another platform.

As you know there's not nearly as many municipal gas -- natural gas systems as there are water, so I would say generally no impact from the acquisition of gas to those interested in water.

They're primarily interested to understand the impact of the fair market value legislation and that seems to be the nature of many of their questions.

Got it.

That's helpful.

Then, congratulations on the settlement in Pennsylvania.

Don't want to get too far ahead of ourselves here, but can you kind of walk us through where your next focus is on the ratemaking front, which rate cases are coming due?

Just while you're pulling that up, Dan, I would say, as we think about -- although we don't own Peoples yet, David, but that's certainly going to be a focus of ours.

We have responsibility to -- of sign off on any settlement discussions and that rate case could certainly be concurrent or nearly similar timing on with the acquisition case itself, so -- and that's assuming a settlement.

If it were to go more towards a fully litigated case, it could push deeper into the summer or early fall, but assuming a settlement of that case, it could be as early as, call it, July.

And we would hope that the transaction could be completed at that point.

So the Peoples rate case is one that we'll be keenly focused on, in addition to our water and wastewater cases.

And, Dan, I'll turn the water, wastewater stuff over to you

Yes, so the quick answer there, and the 2 that are coming, or ones in progress, it's the New Jersey water case that's in progress and we would expect the New Jersey wastewater case late in 2019.

And we'll take our next question from Richard Verdi with Coker & Palmer.

I jumped on a little bit late here, and so I apologize if I might have missed my 2 questions, but I -- my first question is this.

For the Peoples acquisition, I know it -- that we're very early in the whole concept here and -- but when you think about it, it's a good strategic fit for Aqua, right?

And when we think back to Aqua back in the '90s, it was Philadelphia Suburban and now it's grown, it's over -- it's more than half a dozen of states, where Aqua has a regulatory footprint.

Thinking of it over the long term for Peoples, I mean, could that be something where 5 years, 10 years from now, we're in more than 3 states, maybe we're in 6 states, maybe we're in 10?

Could you just talk about the long-term vision for Peoples for us?

Sure.

I think what we -- the way we've thought about this, Rich, initially, is, you're right, it's a great strategic fit.

Obviously, a key state, and puts us in 2 additional states.

There's a lot of reasons that the strategy works.

As we think about long term, what we said is, let's take this a chunk at a time.

First, for the next couple of years, we've got a good-sized integration to do.

We've said this is not about synergies, this deal is not about synergies and so as we roll the Peoples SAP platform over Aqua, right?

We are not on SAP today, there are probably opportunities for efficiencies as we roll that across, so that's going to take us a little bit of time.

And as we think about this digestion period, what we're also going to look at is, whether or not our hypothesis is correct and that is that the multiple that will survive this transaction, with a 70% water, 30% gas transaction and the multiple will be either on top or very close to the water-only multiple.

And so we want to see how the digestion goes and then, how the multiple fares.

And then, let's take a look at how the growth occurs.

I think, also considered in that formula is, throughout that period of digestion, we will continue to do municipal transactions and that will continue to, at least temporarily tax the balance sheet, while we bring those units in for rates and get full revenue associated with them.

And then, we'll look at what opportunities are there in gas and Matt Rhodes has already begun to look at opportunities in gas.

But I would just caution you that for the next couple of years, I think we would say you won't see major M&A in gas as we digest this one and then, depending on where the multiple lands and how strong our currency is, maybe there's opportunities to do some other things.

Last thing I'll say about it is -- we are obviously not shy about getting into additional states.

We'd love to expand our platform, both in water and in gas.

And so as we think about new and additional states, I will say that we have a -- or own a couple already and so don't be surprised if you see expansion into other states in the coming years.

That's great color, Chris.

And just for the second question, for the guidance range, this is what I'm concerned I might have missed, so I apologize if you need to repeat this.

What would cause the company to come in closer to that $1.45 mark?

And what will cause the company to come in closer to that $1.50 mark?

Of course you always have the weather component that can always impact and we always say, that can be a couple of pennies either way in any of that, that's one of the reasons you provide a range.

But as we think about the progress of this year, there's a lot happening in 2019, not only with the transaction -- obviously that's considered separately.

But there are other things that could come up.

And, Dan, I don't know if you have any additional color you want to put up beyond that?

No, I think that's good, Chris.

Okay, so you guys would say it's just more maybe weather-based than anything else?

Right.

Yes, I mean, weather and some things that are kind of beyond your control, but comes into the cost structure, right, that either break in your direction a little bit or break the other way.

Perfect.

And I just want to follow up actually on the first question on your commentary, Chris, regarding the SAP.

That's something -- am I understanding that right?

You're going to take what Peoples has with SAP and then overlay that into the water format there at Aqua?

That's the plan.

Okay.

And then, so I'm assuming that if you -- that cost savings then could generate additional dollars to put back into CapEx and the rate base then, right?

I think the right way to think about it is, #1, we would do like we do all CapEx, we would spend it prudently so we would expect to recover any costs associated with SAP in terms of it's all -- that would be a capital project.

And then, further, if we can find efficiencies in our back office, then I think there's opportunities to do that, maybe some efficiencies in the field over time.

But as we've said, Rich, we see the need to keep all the people and so we don't see a reduction in force in any way.

Over time, might there be opportunities to attrit some people in areas where we find the efficiencies?

I would say the answer is probably yes.

We'll take our next question from Jonathan Reeder with Wells Fargo.

So the water settlement, is it silent on the traditional rate of return parameters, in particularly ROE, as has been the case in the past?

It was, so it's a black-box settlement.

So no specificity around those things.

Okay.

Can you share your perspective on how the Peoples regulatory approval process has been going in all 3 of the states so far?

Yes, so we testified in Kentucky just last week; Dan Schuller and I were both in Kentucky as well as management from Peoples.

And we felt very comfortable with the line of questions, the answers we provided and the discussion, I would say, was a very constructive hearing.

And we had some follow-up questions from the commission and the attorney general who's acts as consumer advocate essentially in Kentucky.

And those follow-up questions are questions that we'll need to answer in the coming days.

They were nothing -- it was nothing that was of any concern.

They were standard questions.

And so we expect that the commission will stay on track.

They want to be finished on time; which would be, put it, like March 20 time frame, Jonathan, for approval and then we would hope that West Virginia would be soon to follow the Kentucky approval.

Those discussions with West Virginia continue in terms of discovery and answering questions.

And then, of course, Pennsylvania would follow that and just to give you an idea of timing, the testimony from the interveners of which there are 11 is due on April 5 -- 2nd, I'm sorry, April 2. In Pennsylvania, yes.

Yes.

And so we would expect that informal discussion while discovery's being promulgated and answered, we would expect informal discussion around settlement to occur in the coming weeks and it would be our hope to get to a settlement in early April.

And then, that would allow us to proceed.

We'd like to have a line of sight to that settlement before we put the bulk of our equity out, Jonathan.

So that's timing as we think about it now.

Obviously, it's very dynamic.

Okay.

Now you said, you'd like to have the line of sight before you put the bulk of the equity out.

Does that mean you're still considering maybe a private placement, something like that?

And if so, are there any like barriers or milestones that we should think about, whether it's quiet period -- anything along those lines?

So, yes, we are still interested in a private investment, call it, pipe-type arrangement and so the hope would be that, that would be either just before or concurrent with our equity raise, our larger equity raise.

And so those discussions continue.

Okay.

And then, that's great color too, by the way, Chris.

But did PA ask Peoples to file the rate case while the merger proceeding was ongoing?

Or was that completely up to them?

And then, since it is kind of ongoing and like you said the timing of that case and a potential settlement is potentially shaping up around the timing of deal close, should we expect those 2 to kind of merge together like a global settlement, if you will, or anything like that?

So the answer to your first question is no, there was no -- they were not called in.

So the decision to file a rate case at that timing was solely that of Peoples Natural Gas and Steel River Partners who owns them.

So that was -- the timing was theirs.

In terms of putting the 2 cases together, the acquisition case, approval case and the rate case, I can only tell you that history would tell you that Pennsylvania does not do that.

They take very separate issues and they keep them very separate and I think there's a plenty of cases which would suggest that, that's the history of Pennsylvania.

And I would say and even more recently I would point to our case during the Pennsylvania Aqua rate case, despite the fact that the acquisition case was ongoing, it was -- the 2 were not intertwined.

They were kept very, very separate.

And so we would expect the same treatment of the Peoples case and the acquisition approval case in Pennsylvania.

Okay.

And then, last question, I know it was really a modest amount but you kind of bumped up the equity portion on the Peoples deal to $2.5 billion from $2.4 billion.

Anything that prompted that?

Or anything we should read into it?

No, it's Matt.

It's really just about making sure that we have plenty of dry powder on our balance sheet for additional municipal water acquisitions.

And just making sure that we maintain the strong investment-grade credit rating.

But nothing really more than that to read into it.

Our last question from Angie Storozynski with Macquarie.

So I have a question -- actually 2 questions about the rate case settlement in Pennsylvania.

So #1, I see the -- that the settlement includes a regulatory [set of] liability associated with the repair tax deduction and so how does it compare to the previous setup before the rate case?

And, secondly, based on this outcome, you remember before the rate case you were saying it might take you a couple of rate cases just to see an increase in earnings more commensurate with the rate base growth.

Given that there is a stay-out until the next rate case until early 2021, how do you see this EPS versus rate-base growth?

Yes.

Why don't I jump in there, Angie.

So in terms of the repair tax, previously there wasn't any sort of limit to the repair tax deduction.

So what's incorporated into this case and as you recall, as we've talked about this case, what we've said is, through this case, the repair tax benefit really shifts from the shareholder to the customer because a lower effective tax rate is being incorporated into this case.

So that's one piece of this.

And a piece of then the settlement is this concept of a limit on the amount of capital eligible for the repair tax.

So, again, repair tax benefit going to the customer and limiting the repair tax eligible capital so there's not any, kind of, wiggle room around that or there's very little wiggle room around that.

Is that helpful?

Yes.

So how does it tie into your earnings growth expectations in Pennsylvania?

I see the 7% growth in the rate base, I understand that this is for the entire company.

So on the standalone basis, when or if, when will we ever get to that 7% earnings growth?

So you'll see that occur over a period of time here that includes a couple of rate cases, think about it that way, that your effective tax rate will step up from case-to-case and as that effective tax rate returns to a more normal level, you'll see the rate base growth and the earnings growth become more aligned.

Okay.

So we're talking more like 2023?

Or even beyond, right?

Because we -- you cannot file the next rate case until April of 2021?

Yes, I think that's fair.

That concludes today's question-and-answer session.

Mr. Dingerdissen, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you all for joining us today.

Look forward to any follow-up you might have.

We're always available and appreciate your time today.

Thanks so much.

This concludes today's call.

Thank you for your participation.

You may now disconnect.