Essential Utilities (NYSE:WTRG) Q1 2020 Earnings Call

0:00 Please stand by. We're about to begin. Good day, everyone, and welcome to the Essential Utilities Q1 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir. Thank you, Melinda, and good morning, everyone. Thank you for joining us for Essential Utilities, formerly Aqua America's first quarter 2020 earnings call. I am Brian Dingerdissen, Vice President, Chief of Staff, and Head of 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 on the site.

0:48 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 10Q, 10K, 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 included at the end of the presentation and also posted in the investor relations section of the company's website. After the presentation, we will open the call for questions. Our call will start with Chris Franklin, our chairman and CEO, who will discuss the highlights from the year to date and provide an update on the company's COVID-19 actions. Dan Schuller, our CFO, will then discuss our financial results and our recent financing activity. Dan will be followed by Rick Fox, our chief operating officer, who will provide an update on our operations, including at People's.

1:52 Finally, Chris Franklin will conclude the call with a review of our 2020 guidance, and open the call for questions. With that, I would like to turn the call over to Chris Franklin. Hey, thanks, Brian, and good morning, everyone. I'll start right in. We had a strong and eventful first quarter that had an end that I don't think any of us would have predicted. But let's start back in January with the final regulatory approval in Pennsylvania of the People's Transaction, of our strong start to the year. Then we closed the transaction and introduced a new parent company name, Essential, Nobody knew how appropriate that name would be when we chose it. And then we changed our ticker symbol to WTRG. And after that, we quickly followed up with a filing with the IRS to begin using the tax repair at Peoples in Pennsylvania.

2:44 We also filed our application with the Pennsylvania Public Utility Commission for approval of the Del Cora transaction, the largest municipal transaction we've ever done. Then before the quarter ended, We had to react to the COVID-19 pandemic by activating our business continuity plan. Our primary objective was of course to preserve and ensure the health and the safety of our essential employees, our customers, and the communities we serve. You'll have to excuse me, but I have to brag for a minute about our essential employees. Their dedication to our mission has never shown brighter than it has over the past eight weeks. Our people have continued to provide high-quality water, wastewater, and natural gas service that our customers depend on.

3:37 Many of our people have the same challenges as their neighbors. You know, children out of school, caring for family members, and concerns about their own personal health. But despite these challenges, Our people have continued to get the job done, and I'm very proud of our essential team. Let's take a look at the first quarter highlights. Since the beginning of the year, we invested $172.2 million in capital to improve the infrastructure in the community that we serve. Of that $172 million, $110.6 million was spent in our regulated water segment. I'll note that this number includes $53.5 million that was invested by Peoples in the first quarter pre-closing.

4:27 In the next box over, you'll see that on a non-GAAP basis, adjusted income per share rose 114.3% over last year's first quarter. Of course, most of that resulted from the acquisition of Peoples. Dan's going to give you more detail on that in just a few moments. will remain on track for another strong year of municipal acquisitions. I'll talk about that in a moment as well, and I'll review our list of signed acquisitions, which includes over $327 million in expected rate base, more than 205,000 new customers. And finally, as many of you know, we announced the closing of the $750 million investment from the Canada Pension Plan Investment Board, CPPIB, and the completion of the acquisition of Peoples on March 16th.

5:21 In addition, upon the closing and financing of the acquisition, we've added Wendy Franks from CPP IB to our board of directors. With the addition of Wendy Franks, our board is now 30% women. Yesterday was our annual meeting of shareholders, and I'm pleased to report that all of the items on the ballot were voted according to management's recommendations. I should also note that if you haven't had a chance, try to review our proxy, and I encourage you to do so. We revamped it, and this year I think it's a lot easier to read, and we provided significant updates to our various disclosures and policies. At this point, All of you know how important fair market value legislation is. As we offer our companies as a solution to municipal leaders, this is always a key part of the discussion.

6:19 This map indicates the states where fair market value legislation has been passed. And you'll recall at the Investor Day, we noted that seven of our eight states where we had water and wastewater operations had already implemented fair market value. I'm happy to report that this legislation has now been passed in the eighth state, which is Virginia. So fair market value is now available in all eight states where we currently serve water customers. This is great news. Now, based on our experience, it typically takes a couple years to get a robust pipeline of opportunities to develop after we pass the fair market value legislation. We're starting to see this materialize in states like Ohio and Texas.

7:04 For example, we recently completed the municipal acquisition of Campbell in Ohio, which is here on the next slide. This slide represents acquisitions for our regulated water segment. So far this year, we've closed Campbell in Ohio and continue to move toward closing New Garden, East Norton, and Del Cora, all in Pennsylvania. At this time, we don't expect major delays in the regulatory process due to the COVID-19 crisis, but the longer everybody works from home, the likelihood of delays could increase, and those proceedings could take a little longer.

7:50 During this COVID-19 crisis, we've ramped up communications with our regulators. So we can work together as best we can to keep our regulatory activities on track. We continue to see a strong pipeline of acquisitions in our municipal strategy, especially given the passage of fair market value laws. And now with the economic pressures that are undoubtedly arising from the COVID-19 crisis, we are anticipating that many more municipalities will be looking for solutions to their financial problems. and we stand ready to partner with these towns and cities on their utilities so that they can focus on their other vital municipal programs and community projects and we can focus on their water and wastewater issues.

8:36 I think that's a good segue to the next slide that discusses our response to the COVID-19 crisis. As I mentioned, we activated our business continuity plan on March 16th. and immediately implemented a work from home policy for any of our employees who could actually work from their home and get their jobs done. Within days, we had nearly a third of our workforce working from home. The really challenging decision was to send the people's natural gas employees to work from home on the very same day that we closed the transaction. That's right. On March 16th, we closed the people's transaction, and that same day, we sent employees home to work. As difficult as that decision was, now in hindsight, I will tell you it was the right decision.

9:34 So far, only four of our employees have tested positively for the virus. Three of those employees are already back safely at work, and we're hoping the fourth will be back soon. I will say there is a silver lining to this COVID crisis. It really accelerated the development of relationships between the two organizations, ACWA and Peoples, and we truly are a stronger company for it. Since mid-March, we've altered many of our health and safety procedures to adapt to state and federal guidance. We've also enhanced our communications to keep our employees and our customers and regulators up to date with the latest information. And as part of this effort, we've invited all employees to participate in weekly town hall meetings.

10:24 Each week, nearly 1,000 employees have participated live. Really impressive, the engagement. Lastly, we held virtual meetings with representatives from each of the public utility commissions from the states where we operate. During these meetings, we updated the officials, both staff and commissioners, on the impact of the COVID-19 on the company and the company's response. And I have to say, all of the meetings were very constructive. So at this point in time, nearly a third of our employees are still working from home. But as states begin to soften restrictions, we expect to implement a very thoughtful plan to slowly return to more normal work practices.

11:09 With that, I'm going to turn it over to Dan to update you on the financial results. Dan? Thank you, Chris. Good morning, everyone. First, reviewing the financials for the quarter. We ended the first quarter with revenues of $255.6 million, up 27.1%. The recently acquired natural gas utility contributed $38.5 million of this revenue growth, while the remainder was largely due to rate increases in the regulated water segment. As a result of People's closing on March 16th, we're reporting People's operating results since the acquisition date in our GAAP numbers. O&M increased to $106.6 million in the first quarter, up 34.4% from $79.3 million last year. This was primarily a result of an increase in People's transaction-related expenses and the addition of the regulated natural gas segment O&M expenses.

12:05 Net income was up 206% year-over-year from $16.9 million to $51.8 million, and GAAP EPS was up by 122.2%. As we discussed at our Investor Day in February, we're providing an adjusted income non-GAAP measure for 2020 guidance, really to demonstrate the earnings power of the company going forward. This metric includes pro forma results for peoples as if we'd owned the peoples for a full normalized first quarter. We'll continue providing this throughout the year and believe it best compares the combined company with the legacy aqua company in terms of both earnings power and financial results.

12:50 Looking at the adjusted income and adjusted income per share lines, which exclude people's related transaction expenses and include the pro forma adjustment for people's operating results for the period of January 1st to March 15th, this shows that adjusted income was up 209.1% and adjusted income per share was up from 28 cents to 60 cents. This pro forma income per share result aligns with the guidance we provided in February, of $1.53 to $1.58 for the full year. We did not see an impact of COVID-19 on our Q1 financials, but we're closely monitoring a number of metrics, including consumption and billing, collections and capital expenditures, some of which we'll discuss later in the presentation.

13:39 In terms of share count, both the GAAP EPS and the adjusted income per share are based on approximately 255 million shares, which reflects the nearly 21.7 million shares issued to CPPIB for the pipe, plus the TEUs on an as-converted basis, considering the share price at quarter end. Next, we'll walk through the details in the following waterfall slides, starting with revenue. Breaking down the 27.1% revenue increase for Q1, you'll see that new revenue related to our natural gas segment and rates and surcharges from our water segment were the main drivers, providing over $51 million of the roughly $54.5 million revenue increase.

14:25 Remember, this is gas segment revenue for the 16-day period of our ownership during the quarter. Regulated water growth added an additional almost $3.8 million, which was offset by volume, which was down about $1.1 million. Next, we'll discuss the O&M waterfall on slide 13. The biggest drivers of the $27.3 million increase in O&M expenses were the $18.8 million increase in the people's transaction costs and the $8.8 million in people's O&M expenses for the two weeks of ownership. On a same system basis, O&M would have been about flat year over year if not for the people's transaction. The segment reporting in the 10-Q, which we expect to file tomorrow, will clarify that.

15:12 Next, we'll spend some time on the earnings per share waterfall. Similar to the slide we showed at the Investor Day, this presentation bridges between GAAP and adjusted figures for both 2019 and 2020. GAAP EPS in the first quarter of 2019 was 9 cents. but adjusting out the people's transaction costs, which include the mark-to-market impact of the interest rate swap, brought us to 28 cents on an adjusted basis for Q1 2019. For Q1 2020, growth primarily from the people's acquisition and rates and surcharges were the biggest contributors, adding an additional almost 33 cents per share. These were slightly offset by volume and other, bringing us to 60 cents for the adjusted income per share for the first quarter of 2020.

16:02 Continuing on to the right, the 60 cents is then impacted negatively by 8 cents of people's related transaction expenses and almost 32 cents related to the pro forma adjustment of the people's operating results for that period between January 1st and March 15th, resulting in GAAP EPS of 20 cents for the first quarter of 2020. In late March, the company elected the Repair Tax Accounting Method Change, as Chris mentioned. This is permitted under IRS regulations. We adopted that for People's Natural Gas, or PNG, our largest natural gas subsidiary, with about 633,000 of our 747,000 total gas connections.

16:49 This change provides a tax deduction for qualifying infrastructure investments that were formerly capitalized for tax purposes. The company is using flow-through accounting for the repair benefit, allowing the tax impact to be reflected on our financial statements. In terms of its impact, the tax repair election reduced income tax expense by $5.9 million for the first quarter of 2020. This ongoing tax accounting change supports P&G's infrastructure investment program, benefiting customers, the community, and shareholders. It should also benefit customers by providing more time between rate cases and should mitigate future rate increases. Also, as discussed at Investor Day, this summer we'll be asking the Pennsylvania PUC for guidance on how to treat the catch-up deduction that results from the repair-eligible capital that had been invested prior to Essentials' ownership of Peoples.

17:46 Lastly, I'll note that the winter in Pittsburgh was fairly mild, with 2,421 heating-degree days for the first quarter compared to a normal winter with 2,844 days. April, however, was colder than normal with 515 heating degree days versus 387. Please keep in mind that the pro forma results are for a normalized first quarter with 2,844 heating degree days, more similar to last year's 2,900 heating degree days. Peoples, as you may recall, does not currently have weather normalization in Pennsylvania or West Virginia. Moving on to rate activity, in 2020 so far, we've completed rate cases or surcharges for our regulated water segment in Illinois, Virginia, Ohio, and North Carolina, totaling annualized revenue of $5.2 million.

18:42 In our regulated natural gas segment, we have completed surcharge filings in Kentucky and Pennsylvania, a total annualized revenue of $977,000. In the coming months, we expect to receive new base rates or surcharges in Indiana, New Jersey, North Carolina, and Ohio for our regulated water segment. At this point in the year, we do not have any pending base rates or surcharges for our natural gas segment. Let's spend a few minutes on the financing activities which were disclosed in 8Ks over the last month or so. In the early days of COVID-19, we were facing uncertain economic and capital markets conditions, and we wanted to ensure that we had adequate liquidity to continue to operate the business as normally as possible and maintain our capital investment program.

19:33 So, like many of our fellow utilities, we secured a 364-day term loan and put the proceeds, $500 million in our case, on deposit with well-capitalized members of our bank group. In April, once the investment-grade credit markets had stabilized and credit spreads had narrowed, we completed a $1.1 billion public debt offering, which was attractively priced with a weighted average interest rate of 3.06% and a weighted average tenor of 20.9 years. And with those proceeds, we paid off the PNG $181 billion term loan that was put in place in February to cover maturing long-term notes, We also paid off the essential $150 million term loan put in place concurrent with the people's closing. And finally, we paid down the essential $1 billion revolving credit facility to a balance of less than $50 million.

20:32 Just after the public debt offering, we priced $175 million of Aqua Pennsylvania First Mortgage Bonds, which closed on May 1st. This three tranche offering has a weighted average coupon of 3.52% and a weighted average tenor of 33.5 years. The proceeds of these bonds were used to pay off short-term borrowings and will be used to fund a pending acquisition. As of May 1st, after considering the effects of these financings, the company had $1.1 billion of capacity to borrow on various credit facilities. With respect to the $500 million term loan, We anticipate paying down $300 million of that next week, and then we will determine the right time to pay off the remainder based on COVID-19 progression and Essentials revenue and cash collection activity.

21:23 And then finally, as the equity markets recover, we'll look for the appropriate time to issue approximately $300 million of equity later this year. That equity, as you may recall from Investor Day, is necessary to appropriately capitalize Delcorra and other acquisitions in the pipeline. In light of COVID-19 and its potential impacts on both consumption and bad debt, we've been receiving questions about our water and gas customer bases. To address these questions, we added this slide illustrating the number of customers and revenue by customer class for full year 2019. As you can see, both of our utilities are largely residential businesses. While we have limited data, that is April, and are still in the process of evaluating it, As expected, we're seeing increased water consumption in residential and decreased usage in the commercial, industrial, and public customer classes, given the shuttering of nonessential businesses.

22:23 At this point, we don't expect a material impact on our financials, but we'll gain more insight into this impact as we move forward. And, of course, it depends on how long stay-at-home orders and business shutdowns remain in place. Also keep in mind that we're already past the main heating season in the gas business, and thus the impact there over the summer is expected to be minimal. As you can imagine, we're closely watching the customer usage patterns given the COVID-19 situation. We're analyzing things like reconnections and payment arrangements and looking at collections and bad debt expenses. As you may recall, we do not have decoupling in most of our states, and our bad debt has historically been quite low. So for aqua, that's been about 0.5%, and for peoples, about 2%. And those levels have largely been recovered in rates.

23:21 Given the unemployment levels and the moratoria on gas shutoffs and water shutoffs across our states, we expect those levels to increase, but it's difficult to say by how much. While this is a unique recession relative to what we've experienced before, for comparison, the ACWA bad debt only rose to 1.1% in 2008-2009. Additionally, we continue to track expenses related to the pandemic, but as of now, those expenses appear to be relatively immaterial. Think of these as things like reconnection costs, cleaning expenses, masks and other PP&E, overtime for certain roles, So we're tracking those for potential recovery through the regulatory process. And as you might expect, we have seen some savings from activities that are not being performed, like business travel, to help offset those.

24:16 Some public utility commissions are issuing guidance for utilities to defer COVID-19 expenses in anticipation of seeking recovery in future rate proceedings, and we're currently evaluating the impact of that guidance. And that's a good segue for Rick Fox to speak about some of our responses to COVID-19. And Rick, with that, I'll hand it over to you. Well, thanks, Dan, and good morning, everyone. Today, I'd like to provide two important updates. First, on our operations response to the COVID-19. And second, an update on our safety review of our gas business that was recently But before I get into those topics, let me start with this. It is really important to note that our water and wastewater treatment processes remove and inactivate COVID-19.

25:09 This virus is much less resistant to treatment than the other pathogens that aqua routinely treats. Now on to COVID. To summarize our overall efforts on COVID-19, but I will share some additional details. As a utility, the work that we do is essential, and our employees recognize that, and they have performed exceptionally well. As you might expect, we have taken preventative measures to ensure employee and customer safety across the company. On this slide, you can see some examples of what we have done. We limited worker interaction by minimizing gatherings.

25:55 started work from home rather than the office and utilized one employee per vehicle. We adjusted work practices to ensure that it can be done safely using social distancing. And, of course, we provided the new and necessary personal protective equipment such as masks, gloves, and face shields. As Chris indicated, only four out of our 3,100 employees have tested positive for COVID-19. None of these employees work together, and so an at-company transmission is unlikely. We care deeply about these employees and their families, and we believe our proactive measures help and continue to help prevent more employees from becoming infected.

26:45 Turning to the next slide, you can see that we reviewed what types of work could not be deferred until after the COVID-19 crisis subsides. On the water side, any emergencies are handled with some adjustments to serve our customers while ensuring the safety of our employees. All compliance work is being conducted and maintained, but our ability to collect some routine samples in customer homes or in closed businesses has been challenging. And construction work to replace aging or failing infrastructure continues. On the gas side, the situation is similar.

27:31 All gas emergencies are handled normally, but with some adjustments to procedures to keep our customers and employees safe. And leak surveys and inspections of critical operating equipment continue as normal. Lastly, in both gas and water, we did have a period of about two weeks in Pennsylvania When there is a moratorium on capital project work, we estimate that we are only about $30 million behind on our nearly $1 billion capital budget. And we expect to catch up in this work during the rest of the year and stay on track to meet our commitments for infrastructure replacement and our financial projections for rate-based.

28:22 With that, let's turn to the next slide to provide an update on our gas pipeline safety initiative. As discussed at the investor day in February, essential utilities requested and peoples engaged, Black & Beach, an industry leader in pipeline safety and integrity reviews to provide an independent examination of people's overpressure risk exposure. This included a review of existing and modified overpressure mitigation programs, industry best practices, and a detailed review of its leak management and unaccounted for gas mitigation programs. The Black & Veatch review resulted in a report that was just issued on May 4th.

29:09 I'm very happy to say that the results of this report provide a solid validation of people's overpressure protection mitigation steps as well as its existing leak management and unaccountable gas programs. It also provides various recommendations for additional mitigation measures. These include installation of additional pressure sensing equipment, use of a regulating station risk ranking model to prioritize upgrades, hydraulic modeling of low pressure systems for their , and finally, implementation of a GPS mapping project to precisely locate existing service lines.

29:58 PICOS is currently evaluating the results of this report and preparing an action plan for the adoption of these recommendations. Now, I will hand it back over to Chris Franklin. Thank you, Rick, and thanks for the update. on that new report to us, which was really good news on people's safety. In closing, I just wanted to cover a couple of learnings from the first quarter. First, I think it's fair to say that there's no substitute for true dedication to the mission. We recognize that our company provides essential services to our customers that allows them the simple comforts like cooking and bathing and the warmth in their homes. At challenging times like this, I wish every company could experience the knowledge, expertise, and commitment to the mission that I've witnessed from the employees at Essential during this crisis.

30:50 Second, you can successfully close a major transaction in the middle of a pandemic. While I don't recommend it, the events resulting from the pandemic have actually accelerated the integration of our two companies. It forced the team to immediately begin working together create standard operating policies like IT policies, cleaning policies, operating policies, and I could go on and on. So far, the results have been impressive, though, and I believe signal the overall success that lies ahead for the combined company. And third and finally, communication is critical. From the first day we began to work from home The top 35 managers across the gas and water utilities met every single evening at 5pm to coordinate the response and ensure we were communicating on critical issues.

31:44 While the calls no longer exist daily, strong and regular communications continue as we address any salient issues that arise. Steady communication with our regulators continues to be a staple of our work. and our weekly town hall meetings via video technology with our employee base has provided us with an important feedback loop as we adjust to this new work environment. It's my hope that as we look back on this time, probably many years from now, that we can be proud that the actions we took during this time clearly reflected our corporate values of integrity, respect and excellence and our commitment to our customers, communities and to each other. I'm very proud of the work we've done and continue to do to keep our company strong and our people healthy.

32:34 As investors, please know that we remain committed and excited about our strategy and we're confident that Essential's best days still lie ahead. Now in closing, I want to reiterate our confidence in the 2020 guidance that we provided at the Investor Day in February. Recognizing that Information resulting from the pandemic is still unfolding. We believe the company's strength will allow us to continue to deliver strong results for the year. We expected adjusted income to be $1.53 to $1.58 per share on a pro forma basis. That earnings growth of 5% to 7%, along with our dividend yield of about 2%, should lead to shareholder return of about 7% to 9%, which is pretty good for a utility with our profile.

33:27 We remain on track to spend approximately $550 million on regulated water segment infrastructure investments and also approximately $400 million on regulated natural gas segment, which as previously mentioned includes the capital invested during the first quarter of 2020 prior to our ownership. We anticipate investing approximately $2.8 billion across the essential platform through 2022. which we expect will drive rate-based growth in our regulated water segment of 6 to 7% and drive rate-based growth in our regulated natural gas segment of 8 to 10%. Lastly, we expect annual customer growth in water to be between 2 and 3% on average for our regulated water segment.

34:20 And with that, let's open the line for questions. Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question. And we'll go first to Ryan Connors of Benning and Scattergood. Great. Thanks for taking my questions. So I wanted to actually drill down on the rate pipeline a little bit, rate activity pipeline. I mean, Looking through the slide information there, it looks like you've either been in recently or are already in with a pending rate action in every state, maybe with the exception of Texas.

35:12 Obviously, the optics aren't great right now to be having to file a rate case. Can you just talk about what's the situation in Texas? Is there any other place where the cycle's getting long in the tooth and you'd have to go in soon? Let's start with North Carolina. We're in North Carolina, and the discussions continue despite a lot of people are working from home, Ryan. But we still have not heard or anticipate any lengthy delays in that process. and so that's one of the ones in flight currently. Dan, you want to talk about the others? Yeah, I think, Brian, you kind of pinpointed the one where we've been obviously sort of out for the longest period of time and I would say that we continue to drive capital and rate-based growth in Texas and we do see a time that in the not too distant future where we will be filing a rate case in Texas.

36:14 as of this moment don't need one, but we foresee one in the coming couple of years. Okay, so it's not necessarily imminent in weeks or months, okay. No, I think that's fair. Okay, now in terms of DSIC, DSIC is not part of the base rate, obviously, so maybe easier for someone to argue, hey, let's pull that off for a while while things are rate payers are facing stress. Has there been any talk about that in any of the states to sort of temporarily repeal desic surcharges? None that I'm aware of, Brian. I think everybody's scrambling to see what bad debt expense might look like.

37:04 Ultimately, what are the consumption issues and then what constraints do people have to the unemployment rates and but I've not heard any pullbacks in using the distribution system improvement charge at this point. Okay. Then one more just on, you know, I definitely agree with your comment that, you know, local governments are going to be seeing the budget pressures and you could see some more, you know, acquisition opportunities there. You know, with that said, what do you think is the timing of that? Obviously, you've always got, you know, presumably a pretty good number of deals that are being worked on. Have some of those already started to accelerate towards the goal line, or is that more in the future?

37:52 No, I'll tell you, our board met yesterday after the shareholder meeting, and we went through the acquisition pipeline and what's been active. I would say in the last eight weeks since we've been working from home, at least the majority of the office people here, I would say a third of the time for a lot of us has still been focused on growth given the activity. So although there can't be public meetings and group meetings, a lot of discussions continue. And I would say we've advanced a number of things. that hopefully we can talk about in the near term here. I would say to Ryan that the activity that we're seeing and we're working on continue to be larger opportunities than they have been in the past.

38:46 I think what you'll see is some longer term issues that will bubble up as a result of Financial constraints that come from COVID, but others probably that will be immediate because of the crunch some of these municipals are under. Got it. Okay. And just one last, more of a housekeeping item. I mean, obviously, it's a much smaller line item than it used to be relative to the size of the company, but the pipeline, JV, obviously, energy price situation. We have the news shell pulling out of Pennsylvania this week. They announced. I mean, what's the outlook for that asset in this energy price environment? Yeah, you know, that's one, Ryan, you saw it.

39:32 We talked about it a little bit at the investor day, that it's something that we're considering strategic options with respect to that. Yeah, we continue to have that pipeline operating when there's demand for water, and we're looking for someone, though, since it is that small line item for us, We are looking to make a change there and sell that asset. That's probably the best place to... Yeah, and the good news is, Ryan, it's not eating our bread today. It's on our books for a fairly low number. We wrote it down a number of years ago. It's about $5 million on our books, something like that, $6 million on our books. So it's really not eating any bread. So as we look for a potential new owner, it's not really hurting our numbers.

40:21 In the last couple years, Ryan, have been really strong for it in terms of just volume sold relative to what we had been seeing in, call it, 2015, 16, 17. Got it. Great. Well, hey, thanks for your time. Absolutely. And next we'll hear from Travis Miller of Morningstar. Good morning. Thank you. Good morning, Travis. And a quick follow-up to the municipal acquisition question earlier. Are there any in the pipeline that would require some kind of public input, some kind of scenario where you'd have to have public meetings of some kind that might get delayed or canceled?

41:13 The short answer is yes. So one of the ones that's been public is in the city of Chester, the Chester Water Authority. It's a little bit of a messy situation there. The city believes that they own it. The authority believes that they own it. The city has put it out for an RFP. There have been a number of bidders, and we're one of the ones who have responded, narrowed down, I think, to three bidders at this point. and that will go through what I'll call a public process. I wouldn't expect public hearings but nevertheless the city council meets a couple of times a month and there have been activities at those public meetings. So that's certainly one that we'll see some public activity and some press on it. And there might be a couple of others that are probably too early to talk about at this point that may go through a public process.

42:13 These things are always, call it, you know, a gestation period of a year or two. So that's not unusual. And at this point, we don't have any pending transactions that require a referendum. So, you know, we wouldn't have that type of public input as a concern. Okay. Okay. And then, sorry if I missed this earlier, but what were your water... Usage levels, if we think about post-coronavirus shutdowns, like shelter-at-home type of events, late March and April. On the residential and then just non-residential, I know you've got a lot of different customer classes that are non-residential.

43:00 Just generally, like you said, Rick? Yeah, let me give you a little bit of guidance there. So, you know, like other utilities, what we've experienced, and it's easier to talk about the water side because gas is more driven by weather, obviously. On the water side, though, we saw pickup in residential consumption with people staying at home, and then, as expected, we saw a fall-off in commercial, industrial, and public. And public, think of that as, you know, schools and government buildings, which really emptied out, right? So that's probably, that's where you see the biggest... But I think, you know, our view was going into this that we would expect that residential pickup to be helpful in offsetting the declines.

43:45 And in fact, we just got our flash numbers for the water business for April, and they really show that is occurring as our April numbers, our April actuals came in right at budget. So we are seeing that offsetting occur as projected. Okay. And just real quick, how much do you have decoupling on any of it, if any? We really only have – we don't have decoupling to any great degree. We have it in the state of Illinois, and that's really about it. Okay. Great. Thank you very much. Appreciate it. Yeah. Thanks, Travis. And moving on to Richard Verde of Coker & Palmer.

44:34 Hi, good morning, guys, and thanks for taking my call and also a great job on navigating the company here through the start of this COVID crisis. I just want to, excuse me, follow up on one of the last caller's inquiries on the volumes. You know, looking back, looking at July 12th, it was a lean line this quarter, but if you think about it, You have the COVID crisis, and it's causing the commercial and industrial to go down. But then if you look back at January, too, I know Liberty Electric had one of their plants down. I think it was 17 or 20-some days. And so I'm wondering how much of that from the quarter could have been from that down plant at Liberty versus COVID and maybe – kind of get a feel for how COVID is really impacting the company.

45:26 Just talk to that a little bit for me, please. Well, I would say for the first quarter, we wouldn't really see any COVID-related financial impact on that first quarter. So the analysis that I was talking about a moment ago was really just where we're able to look at April year over year, last year no COVID, this year COVID, What are we seeing in terms of those consumption differentials in those various customer classes? And to your point, and industrial is an interesting one, because as we keep in touch with all of our states, there are certain states where we see plants are still up and running at capacity, and so no real impact. But there have been some locations, including here in Pennsylvania, where there are industrial customers that have dramatically reduced production of their product and thus consumption of our product on the water side.

46:25 Okay. Okay. Thank you for that. And then, excuse me, the last question here, focusing kind of on the acquisition front here, if you look at the unemployment statistics since COVID took effect here and you look at that data point on a state-by-state basis. You know, some of your smaller states where you're kind of growing are in the top, you know, 15, 20, let's call it. And that creates an issue of, okay, well, you know, unemployment, you could lose connections, you could have a rate case set back and so on. On the other hand, you know, It creates a situation where these municipalities state financial difficulties and are going to be more quick to sell.

47:20 And so, you know, there's a two-step approach there. You could look at it and say, okay, well, we want to grow more in Pennsylvania and we'll eat the negative impact from maybe rate case setback and connection loss setback. Or you could pursue acquisitions in those states and offset negative revenue impact potential, let's say, in a near term by picking up acquisitions and then as they grow further in the future, you know, you have a positive impact. So I'm just kind of wondering if you could maybe talk to strategy a little bit going through the next, you know, year or so of the COVID crisis and with the acquisition part, how do you kind of think of those issues going through the strategy?

48:11 Yeah, it's a lot to digest there. Let's start with the fact that we still do business in states where the regulatory climate is strong. I think while we've been very sensitive and we're not shutting people off, for example, we've turned people back on who have asked to be turned back on. We try to be very sensitive. We've ramped up our programs to help customers that are struggling to pay their bills. We've done all those things. So I think we and the regulators have cooperated nicely so far. I wouldn't expect to see, and I'll maybe use a stronger word, A punishment in rate cases.

48:56 I think there's a desire in constructive regulatory states to say there's a balance here. We've got to keep the companies strong, and we've got to keep the customers in a situation where it's affordable for their bills. So I do think long term, let's talk about the next couple of years, that we will see a balance there. I don't expect anything to be draconian in terms of regulatory reaction on rate cases and the sort. The good news is, and I think you know this, Rich, the vast amount of the company's rate base is in the state of Pennsylvania, and we just came out of rates in Pennsylvania both in gas and in water. So there's no immediate term need to go in for rates to keep the company strong.

49:44 So that's good news. Now, as it relates to growth, We're going to continue to look, and we think about ourselves really as a solution rather than just strictly we're doing M&A. We really look for towns and cities and municipalities where we can help be a solution. And so I believe, and if our current list of opportunities is an example, I believe we'll have more opportunities to grow than we have hands to handle the opportunities. And so I really believe that you'll see both a steady hand of the regulator and I think you'll see nice steady growth because of generally the need and our opportunity to be a solution. So I hope that answers your question.

50:36 It's great, Collar. It's really appreciated. Thank you. Thank you for the time, guys. It's appreciated. Take care, Rich. And once again, as a reminder, that is star one if you would like to ask a question. Next, we'll hear from Jonathan Redder of Wells Fargo. Hey, guys. How's it going this morning? Good, good. How about you? Oh, hanging in. Good call, good update. Appreciate the color there. I just wanted to verify that you said the adjusted Q1 results, you know, 60 cents, reflect all the weather for the gas operations, even though, you know, people doesn't have the weather normalization clauses in PA in West Virginia and weather was below normal. Is that right?

51:24 Yeah, you're absolutely right. That's what we've reflected. And actually, as I talk through it there, and you'll be able to pick it up in the transcript, you'll see the heating degree days that actually occurred during the first quarter to the normal heating degree days and I even quoted kind of last year being a little bit above what we call normal. You know, what we did as we were going through the budgeting process and the planning process for the investor day, as we said, you know, we're not going to own the business for this first quarter or for very much of this first quarter and the most appropriate thing for us to do to give you and ourselves a view to what a whole year looks like is to use those normalized results for that period of ownership before we own people's gas. So the way the results work in even that pro forma is you have 75 days that are normalized and then about 15, 16 days that are the actual results for the period of time during which we've owned people's in that first quarter.

52:32 You know, I think it goes back and helpful for you to show it to us that way, you know, so that we have a good sense going forward like what to expect on a normal basis. But, yeah, just wanted to clarify that. And then staying on the gas side, do you think the Black and Beach report, is that going to result in, you know, potentially like meaningful acceleration in like CapEx needs to, you know, address some of Are those recommendations, or is it just further validation of the plan that you kind of previously articulated in terms of, I think it's what, 8% to 10% rate-based growth there? Yeah, yeah. I'm going to give Rick a crack at this. Let me just start by saying as we think about the capital, there is clearly opportunity to spend more capital to improve the system as a result of the Black and Veatch Report. One of the key takeaways is that we're doing really well.

53:28 People are doing a really nice job, especially when you compare them to others in the industry. So it's not like the list of recommendations that Rick provided would say, oh, my gosh, there's some real urgency and we need to get to massive capital spenders as a result of the report. That's not the case. But there is opportunity for more capital to be spent. And, Rick, why don't I kick it to you from that? Yeah, Chris, I think you answered it well. Some of these items that I mentioned are just refinement in the approach or in the focus, but it was things that would have been done. Anyways, the things that I spoke to around prioritization. There are also some opportunities in here and needs to spend some additional capital, and that would be addressed in future plans.

54:18 Some of the items in here are modest costs, and I'll point to the GPS project. It's a real important project, but it's not terribly expensive. And so I think that's the way we'll answer it for now. There is an opportunity going forward to make things stronger by investing capital. So, Jonathan, I wouldn't think about a step change. Okay. So, yeah, I mean, just you'll work it through the plan, and, you know, based on rate affordability, you know, if you can still keep, I guess, the rate impact manageable, then you could see some acceleration, I guess, in the near term. But you'll always keep that in mind. Yep. Yep. Okay, and then what do you expect to get clarity from the Pennsylvania regulators regarding the catch-up component, you know, when you make that mid-summer kind of filing?

55:12 Well, are we through the COVID process by then, Jonathan? I was going to say the same. It's a little bit hard to know. Dan, go ahead. Yeah, no, I think that's exactly right, Chris, that, you know, as we said, we'll file it in the summer, but... Where the PUC is in terms of the number of cases before them yet to be seen and thus how long it takes for that to play out, you know, just hard to tell right now. You know, hopefully at the next call we'll have a little more detail around that for you. Okay, but, I mean, it might progress more along the timeline of like a wait case. So, I mean, we could be thinking like, you know, nine months or a year type thing. Oh, I hope not. I hope it's not that long, for sure. Will there be a bit of back and forth?

56:01 Absolutely. Okay. Okay, so maybe here. Okay, great. Thanks so much for taking my questions, and stay safe. Yep, you too, Jonathan. And there appear to be no further questions at this time. Mr. Franklin will turn the conference back over to you for any additional or closing remarks. We appreciate your joining us today, and obviously we're always available for follow-up questions after the meeting. And you have Brian's numbers, Renee's, Dan's, and mine. We look forward to catching up with you. Please stay safe and healthy. Thanks for joining us. That does conclude today's conference. We do thank you for your participation. You may now disconnect.