Essential Utilities - Earnings Call - Q1 2019
May 3, 2019
Transcript
Speaker 0
Good day and welcome to the Aqua America's Quarter One twenty nineteen Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Degerdisson. Please go ahead, sir.
Speaker 1
Thank you, Katrina. Good morning, everyone, and thank you for joining us. 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 a 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 risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward looking statements.
Please refer to our most recent 10 Q, 10 ks and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non GAAP financial measures. A reconciliation of these non GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. Presenting today are Chris Franklin, Aqua America's Chairman and Chief Executive Officer and Dan Schuler, Executive Vice President and Chief Financial Officer. After the presentation, we will open the call up for questions.
At this time, I'd like to pass it over to Chris Franklin.
Speaker 2
Hey, thanks, Brian, and thank you everyone for joining us, this morning. Most of you know, this is an exciting time for the company. Now that we have the transaction financing in place, and the integration work well underway, our focus on completing the regulatory approvals in Pennsylvania is foremost for us. We remain optimistic that we'll reach a settlement with the parties, and that we'll close this transaction by mid year. This will be a transformative acquisition, and is occupying a great deal of management's time and attention.
It's important to note though that despite that attention on transaction, our core water business is coming off of a record year in compliance, capital spending, and in safety in 2018. That strong momentum is continuing into 2019. Today we'll provide some updates on the Peoples transaction, and also review some of the recent financial results, as well as other salient issues at the company. The the first quarter we reported solid financial results. Revenue rose 3.5% over last year's first quarter.
We invested $134,000,000 in infrastructure to improve pipes and plants in the communities we serve. Dan will go into a little more detail in the financials results in just a few moments. We're also on track for another strong year of municipal acquisitions. I'll review the list of signed acquisitions, which will bring us over $100,000,000 in rate base, and another 19,000 in customers this year. Additionally, our pipeline for potential acquisitions, that we're actively pursuing, totals over 400,000 customers at this point.
So we're very excited about the pipeline at this point. Two of the biggest milestones before closing the Peoples transaction were regulatory approval and financing. Financing is now complete, and we've made large strides towards our regulatory approvals.
Speaker 3
On the
Speaker 2
regulatory front, we filed for approval in Pennsylvania, West Virginia, and Kentucky. You'll recall back in November. We received formal approval in Kentucky in March, and then from West Virginia in April. In Pennsylvania, we received direct testimony from the interveners in April, and initiated settlement discussions after that. Just this week, we submitted our rebuttal testimony, and are in the final stages now of settlement discussions in Pennsylvania.
For our equity and debt offerings, we experienced really strong demand from our investors. During the offering, we received requests for more than four times the available common shares, and four times the TEUs, and the demand for our debt was five times oversold. Dan will take you through the formalities around that in just a few moments as well. I also want to point out that, for late breaking news, in North Carolina, both houses of the legislature have now passed a bill that will allow us to use something we call a CAM, or consumption adjustment mechanism. Essentially, it's a mechanism that establishes the ability for the North Carolina commission to put a collar around consumption with a true up mechanism, that if consumption is higher or lower than the collar, then there's a true up.
That's a nice step forward in a world of utilities, water utilities, as you know, consumption continues to fall at a pace of about 1% a year. With that, let me turn things over to Dan.
Speaker 3
Thanks Chris. Good morning everyone, and thanks for joining the call. Now on Slide seven, you'll see the reporting non GAAP numbers again this quarter, which adjust for the impact of the Peoples transaction. We reported revenues of $201,100,000 in the first quarter of twenty nineteen, up 3.5% compared to $194,300,000 in the first quarter of twenty eighteen. Operations and maintenance expenses were $79,300,000 in the first quarter compared to $73,900,000 in last year's first quarter.
Moving on to GAAP net income, which includes items related to Peoples transaction, we reported $16,900,000 compared to $50,800,000 in the first quarter of twenty eighteen. GAAP earnings per share, including Peoples related expenses, were zero nine dollars in the first quarter compared to $0.29 last year. When adjusted for Peoples related charges, income was down 2.2% from $50,800,000 to $49,700,000 On an adjusted basis, you can see on the bottom row of the table, income was down 3.4% to $0.28 per share from $0.29 per share in the first quarter of twenty eighteen. Now let's move on to the revenue waterfall on Slide eight. Breaking down the 3.5% revenue increase, you'll see that rates and surcharges were the biggest contributor at nearly $5,000,000 Next, regulated growth, which includes acquisitions as well as organic growth, added $3,100,000 to revenue.
Other items added approximately $1,000,000 Revenue from market based activities increased by about $70,000 Consumption was lower by $2,200,000 in the first quarter, to Chris' point about falling consumption a few minutes ago. Next, let's review the O and M waterfall on Slide 9. Operations and maintenance expenses were $79,300,000 for the first quarter compared to $73,900,000 in the first quarter of twenty eighteen. Other expenses reduced O and M by $4,000,000 which is driven in part by lower insurance claims. The largest drivers though were costs from the Peoples transaction, which increased O and M by 6,600,000.0 Walking through the other drivers, regulated acquisitions added $972,000 of expense.
Production expenses increased O and M by $744,000 Employee related costs increased by $638,000 And finally, from market based activities increased by 376,000. Excluding the transaction costs, O and M would have been down for the quarter. Next, let's review the drivers of EPS on slide 10. In walking through the EPS waterfall from left to right, you can see that increased rates and surcharges, regulated growth, and lower expenses increased EPS. Market MBAs, market based businesses, and other, which includes depreciation, interest and tax repair, those as well as consumption were negative, bringing the adjusted earnings per share before transaction related charges to $0.28 per share.
Now including the two charges from the Peoples acquisition, a mark to market adjustment on the interest rate swap and other transaction and financing fees, those together reduced EPS to the GAAP EPS of $09 per share. As I mentioned last quarter, we executed a 10 and thirty year interest rate swap to hedge the underlying interest rate risk associated with financing the transaction. At the time, we believe that interest rates would rise. Swap rates continue to trend downward between twelvethirty oneeighteen and twelvethirty onenineteen, however, and thus we have a noncash mark to market charge for threethirty onenineteen. Fortunately, the lower interest rates also resulted in lower than expected interest costs for the permanent debt that we issued, which was beneficial to shareholders for the lives of the ten and thirty year bonds.
So far in 2019, we've completed rate surcharges in Illinois, Ohio and Pennsylvania totaling annualized revenue of $4,900,000 In 2018, we filed our first rate case in Pennsylvania since 2011. In February, we filed a settlement with the PAPUC stipulating to $47,000,000 in additional annual revenue, which is expected to go into rates, or approximately 65% of our initial ask. The administrative law judges reviewed the settlement and have recommended approval. Settlement is currently awaiting approval by the PUC, the commission themselves. This is a significant rate case because it includes more than $2,000,000,000 in capital spent since the last case, more than 20 acquisitions, and is ACCA's first case to include the fully projected future test year mechanism, which reduces regulatory lag between rate cases.
Additionally, the company currently has rate or surcharge proceedings pending in New Jersey, North Carolina, and Ohio, collectively totaling 6,300,000. The timing and extent to which rate increases may be granted by the regulatory agencies will vary by state. On the next slide, I'd like to give you a refresher on Peoples Pennsylvania rate case. While we're not leading this case currently, we know this case is important to you as it is to us. Peoples filed this Pennsylvania rate case in January.
They requested 94,900,000.0 in annual revenue, and the proceedings are still ongoing. The case includes the fully projected future test year mechanism I mentioned a moment ago. The case is the first to consolidate the Peoples and Equitable divisions and supports the largest infrastructure rehabilitation program in the company's history. We don't own the company yet. We're starting to evaluate a repair tax election at Peoples, something that many gas utilities in The US have implemented.
We certainly see how it could be beneficial for our customers, allowing us to stay out of rates longer and ultimately have lower rates. But we're early in the analysis, so we'll keep you posted on upcoming calls. Next, let's let's move to a new topic. I'd like to discuss our recent equity and debt offering. Slide 13 summarizes the sources and uses of the funds.
In addition to the $750,000,000 of equity we raised in the pipe with CPPIB, our public equity offering raised another 1,290,000,000.00 through a common stock issuance. We also issued $690,000,000 of tangible equity units. As I just mentioned, we also issued debt to fund the transaction. In total, we issued 900,000,000 of strong investment grade debt, targeting an FFO to debt of 12% to 13%. As you may have seen, the size of the financings was largely in line with the original expectations we set, but there are a few things I'd like to point out.
Number one, we had approximately $314,000,000 of debt that needed to be refinanced due to a line of business covenant, which would have been triggered at closing. Number two, in addition to the $314,000,000 of refinancing, the $900,000,000 issuance included $436,000,000 for the transaction itself and $150,000,000 for CapEx and other purposes. And then finally, three, we raised a bit more equity than previously expected to account for the transaction expenses, the settlement of the interest rate swaps. So now we've raised all the capital that we need to fund the transaction. You'll recall that we secured a $5,100,000,000 acquisition bridge facility commitment in October 2018 to backstop the financings of the Peoples acquisition.
As a result of the completion of the secondary public offerings of equity and debt in April, the bridge loan commitment was reduced to $750,000,000 backstopping only the CPP IB pipe at this point. On slide 14, I'd like to talk in a little more detail about the recent debt financing activity. On April 26, the company completed its first public offering of debt. Previously, the company had only utilized private placement debt. In this offering, the company issued 900,000,000 of ten year and thirty year senior notes at a weighted average yield of 3.96% and a weighted average maturity of twenty one years.
Rating agency press releases indicate that these senior unsecured notes received or will receive strong investment grade credit ratings of BBB plus or better from S and P and Baa2 stable from Moody's. In completing this offering, the company was able to lock in long term financing at at a rate which is lower than we expected when the Peoples transaction was announced in October. While the 2019 earnings were impacted by the 34,800,000 charge or change in the mark to market fair value on the interest rate swap, the swaps were then settled on April 24. This settlement resulted in a payment by ACWA of $83,500,000 as compared to the 03/31/2019, value of 94,600,000.0 Thus, in the second quarter of twenty nineteen, a beneficial change in fair value of $11,100,000 will be recorded as income. As noted earlier, despite the settlement payment, the lower than anticipated interest rates on the long term debt are ultimately beneficial for our shareholders.
And with that, I'll hand it over to Chris.
Speaker 2
Alright. Thanks, Dan. Let's take a look at slide 16 now. You've seen some of these details before, It shows that our municipal acquisition activity in '18 and '19. In '18 02/2018, we acquired six systems with a 100,000,000 rate base.
And add to that, in the blue box there, the Tradifferin pipeline for another 28,000,000. Our pipeline of signed acquisitions has another 100,000,000 in expected rate base that we expect to close this year, 02/2019. While we've not signed any new municipal deals since our full year earnings call, we do see a strong pipeline of opportunities which we continue to pursue. And I'll go over a little more detail on the next slide. As a reminder, each 100,000,000 in rate base translates into about 5,000,000 in incremental annual earnings.
On top of that, most of these systems will need continual capital investment going forward, many of them to fix things that have been undercapitalized in the past. Now, on slide 17, we put this slide together during the offering, and it shows a high level overview of the acquisitions that we're currently pursuing. Our current opportunity set has grown now to about 400,000 customers, as you can see. We currently have some opportunities with municipalities that are even larger than 50,000 customers, and then many smaller, but still significant opportunities. This is very encouraging.
And while we don't expect to close all these deals, or expect them all to come to fruition, we do think that it's an important it's important to show that opportunity set is large, and the size of the deals are increasing in size as well. So success in even acquiring a subset of these municipals would represent significant growth for the company. So let's just spend a minute or two on the Peoples transaction. As a quick reminder, on page 17, or slide 17, you can see the company's three state footprint, and some details on the company's large scale infrastructure replacement program, and strong eight to 10% rate base growth that we expect. Also important to note on this page, is that Peoples is 98% regulated, focused almost entirely on natural gas distribution.
Now over the years, we've talked a great deal about our nation's deteriorating water infrastructure, and the huge need for investment. Here you can see the situation at Peoples is similar. Now while some gas LDCs started their replacement programs many years ago, Peoples is still in its early stages. For example, Peoples has over 3,000 miles of what we call at risk pipe that needs to be replaced, and amounts to about a 150 miles of pipe that needs to be replaced every year for the next twenty years. We see this as a fifteen to twenty year opportunity to improve safety and reliability, while growing rate base at a significant pace.
Speaker 3
On the next slide,
Speaker 2
as Dan mentioned, Peebles is in for a PA rate case. And on slide 21 here, it details how we also have the ability to earn a return, while minimizing regulatory lag between rate cases, by using various mechanisms such as the DSIC. The majority of the infrastructure spending that we showed on the previous slide, will be recoverable through the DSIC and other mechanisms. In fact, approximately 70% of the Peoples twenty nineteen to twenty twenty one capex budget is eligible for these mechanisms. When you think about this, it compares favorably to even the water business, where just about 50% is eligible for the DSIC.
Peoples' DSIC for gas is currently capped at 5%, but we expect to request that that that the PAPUC raise that to seven and a half percent in the near future, as other Pennsylvania gas LDCs have already done. Now on slide 22, you can see the steady progress we've made toward closing since the announcement back in October. We promptly filed for approvals in November in the three states, and we've as I mentioned before, we've received the Kentucky and West Virginia approvals in March and April. Then at the March, we announced a $750,000,000 investment with the CPPIB, which we view as the beginning of a very constructive relationship. In April, we successfully completed the equity and debt offerings to finance the transaction.
And as you can see, most of these items on the timeline are now complete. We remain optimistic that we'll receive final regulatory approval in Pennsylvania later this quarter, and assuming we reach settlement with all the interveners, we'll close the transaction in mid year. Additionally, we began integration planning back in October, when we announced the transaction, and that is progressing very smoothly. Now to conclude, let's talk about our 2019 guidance. I wanna reaffirm our 2019 earnings guidance of a dollar 45 to a dollar 50 of adjusted earnings per share.
As been our practice, we don't typically provide guidance when we have significant regulatory proceedings before the Public Utility Commissions. We hope to provide longer term guidance than we have in the past, after we close this transaction, and complete the Peoples Pennsylvania rate case. And, of course, also our analysis of the repair tax use, or the potential repair tax use at Peoples. As we've discussed with many of you before, we hope to get something that includes a three year guidance pace by the end of the year. Now to review today's call, twenty nineteen's been a a very eventful year for us and an important time in the company's history.
We're progressing towards the closing of Peoples the Peoples transaction, and regulatory approvals on track and financing complete. In the coming weeks, you'll see an announcement about our new organization and the new company name. At least the holding company name will hold Peoples and Aqua at the subsidiaries. We have new rates going into effect in May in Aqua, Pennsylvania. This is the first increase since 02/2011.
And importantly, momentum is continuing in our acquisition program with a strong pipeline for 2019 and the coming years. Finally, our infrastructure investment is on pace for another record year. And with that, I'll open it up for questions.
Speaker 0
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker And And our first question comes from Ryan Connors with Boenning and Scattergood. Please go ahead.
Speaker 4
Great. Thanks for taking my question. I think you've covered the people stuff So I wanted to actually spend a few minutes on the municipal acquisition front. And the one thing Slide 17 is interesting.
You talk about a 400,000 connection pipeline, which is a pretty significant number. Can you break that down by state, or at least call out some of the big ones? I assume PA is obviously big, but can you give us any quantification on how that breaks out geographically?
Speaker 2
Brian, thanks for the question. I'd love to, but for obviously competitive reasons, that's difficult for us to do. I will say that it's broadening, and while we still see a lot of opportunity in Pennsylvania and Illinois, the opportunity set is broadening to the other states. And as we see fair market value in those other states, we have increased activity. So, just difficult for me to break it down or give you names at this point.
Sure. Hopefully you'll see some things in the relatively near future.
Speaker 4
Fair enough. Now, you've got a track record of kind of favoring deals in areas with more vibrant economies with better organic customer growth. But I noticed that more than three quarters of that pipeline is now in these larger, presumably cities above 50,000, which sometimes can skew away from that type of opportunity. Can you talk about how you're what kind of parameters you have and metrics around discipline to make sure that you're maintaining a sustainable portfolio in terms of affordability and those sort of things?
Speaker 2
Great question. And interestingly, the last two days we were in Richmond, Virginia with our board reviewing operations and then holding the annual shareholder meeting and the board meeting. And our our our speaker we brought is a gentleman named Manny Theodora, who is a Texas A and M professor. Also, specialization is water rate affordability. And so, we are focused, not only at the management level, but also at the board level, on water and wastewater affordability, rate affordability.
And and soon, we'll we'll also be focused on on gas affordability as well. But, Ryan, we look very carefully at when we purchase systems, and we've had this conversation many times, that the capital needs and the purchase price are, when it's translated into rates, remain affordable for the demographics of the areas that we serve. And we're not gonna lose focus on that. It has to be holistically a positive transaction for customers and shareholders. And so that's a very healthy conversation, particularly with elected officials to talk about the balance of purchase price and rates.
So thanks for raising it.
Speaker 4
Okay. And then I guess related to that, you know, in Pennsylvania, you're now having to include these these bill inserts where you notify existing rate payers of, you know, and and having to actually quantify a potential rate impact. Obviously, that's something that the industry fought. And I guess part of that was due to the cost and the admin associated with that. But presumably, there's also an idea that that could trigger some kind of grassroots opposition to some of these transactions.
So can you just talk about that customer notification side, which is new, and how you see that impacting the market, if at all?
Speaker 2
Yeah. So now the companies are required to notify all customers when we acquire a new municipal system. And that that we've done our first one of those recently, and and the we send it out with our with our customer bills, so we do it over time, trying to to do it in the most cost effective way. Because you're right. It could be a it could be a great expense if you if you were to do a direct mail to customers' homes.
So so in in in that work, in our first one, we we've not received any pushback from customers. Customers seem to be accepting of it. Generally, I think customers understand the more of us are contributing, the more economy of scale economies of scale are built, the better off we all are. But it but it does it does sometimes take a little bit of an explanation. But at this point, there was no there was no feedback from our customers as a result of that mailing.
Speaker 4
Got it. And then my last question, just just a quick housekeeping, I guess, more for Dan. Do you plan to issue guidance for the combined entity at the time of the Peoples closing according to the same convention you've had, which is a full year EPS range?
Speaker 3
Yeah. Guess, Ryan, as we're thinking about that, really, after we closed the transaction and worked to resolve the Peoples rate case, at this point, the way we're thinking about this is we would look to provide guidance later in the year once we've gotten through a planning cycle with the combined company. So think about that as our our regular ACWA budget and planning cycle, bringing people into that cycle, then we'd be in a position to provide guidance. It as we've said in a number of of calls in different venues, we'd like to be able to provide some longer range guidance to to you as the investment community.
Speaker 2
I think importantly, Ted, just to add what Dan said, in that in our planning, some of what Dan's referring to there is how we think about repair at Peoples. And and and that that's work that needs to be done. We're doing some of it as we as as you know. Of course, don't own the company yet, but the engineering work on units of property, the accounting work, and then, of course, the regulatory work to see if there's a comfort at the state.
Speaker 4
Great. Well, thanks for your time this morning, guys.
Speaker 3
Yeah, thanks, Ryan.
Speaker 0
And our next question comes from Durgesh Chopra with Evercore ISI. Please go ahead.
Speaker 3
Hey, Durgesh, how are you?
Speaker 5
Hey, good morning. Can you hear me now? Sorry, I was on mute.
Speaker 2
Yes, we got you. Yes.
Speaker 5
Just I wanted to clarify the Dan, on the on the financing slide, the proceeds that you actually show there, are those gross proceeds, or are they are they after the financing costs? I think I believe it's slide 17, if I'm not wrong.
Speaker 3
These are really the the gross proceeds that you're seeing there
Speaker 6
in the on the side. Right.
Speaker 5
So so from those proceeds, the the the way to think about what the actual cash is gonna be less the the financing, expenses that you might have incurred?
Speaker 3
Correct. Correct. So we're rolling we've rolled that into the the, the funding needs.
Speaker 5
Okay. Okay. I see. That makes sense. The transaction cost expense.
Okay. I was missing that. And then just in terms of sorry.
Speaker 3
Go ahead. You should be able to you know, you on the on the left hand side, you should be able to do the quick math on that. If you look at the number of shares issued or the number of equity units issued in that case
Speaker 2
Right.
Speaker 3
And for equity units times the $50 per unit, you'll you'll come to this 690,000,000 you see here.
Speaker 5
Got it.
Speaker 4
When you include
Speaker 3
the 15% green shoe. Don't don't forget that when you run your math.
Speaker 5
Yep. Yep. Yep. I I think I I sort that one. The in terms of, like, this chart, I just wanna add I just wanna ask a little bit more about the acquisition potential on the water and wastewater side.
These numbers are are pretty significant and large. Do you like, the 415,000 on slide 17, could you potentially require equity? I mean, these are these seems like pretty sizable deals versus where your current customer count is. Am I right?
Speaker 3
Yeah. These are these are some there's some sizable deals that are in this 415,000 that you see on slide 17. The way to think about that is if we're doing deals of that size, we're far beyond what we call our run rate over the past couple years, so there would be a time where we would need to issue equity. But given what our scale is on a combined basis or will be on a combined basis with Peoples and the market cap, you could imagine that we'd issue that equity using an at the market or an ATM program rather than through a secondary offering because it would be relatively small compared to our our overall market cap.
Speaker 5
Okay. That that makes sense. And then my one final question just on on guidance here, Dan. When we think about, you know, when you when you put out the two year guidance out, that would be fully diluted. So so if I'm, like, in in in in if I'm thinking about it, you would have the units included in the denominator.
Is that the right way to think about it?
Speaker 3
Yeah. So so the guidance that that Chris spoke of earlier really just refers to, a denominator of, call it, a 180,000,000 shares, which is our our our share count before the offering. When we provide guidance on a combined company basis, likely as I said, late in the year Think about that, I said late in the year, I'll say, it's late in the year, maybe it's even into January at an Analyst Day. When we provide that guidance, it would be based on a full share count. It would include the equity that we've raised, the CPPIB pipe, and on a diluted basis, we'll have to look at how the TEUs factor into that as well.
We'll get to the point where we're providing guidance with that clarity around the denominator.
Speaker 5
Okay, thanks so much for taking
Speaker 3
thanks Rakesh.
Speaker 0
Thanks. Our next question comes from Angie Storozynski with Macquarie. Please go ahead.
Speaker 7
Thank you. I wanted to talk about this repair tax deduction and its potential selection for the Peoples business. So you are still in the midst of renegotiating your gas rate case for that entity. And so I understand that given the circumstances, it will be different than how you use the how you elected the the flow through accounting for tax deduction on the water side back in, I forgot, I think 02/2012. And so how should we think about it?
Should I think that that similar restrictions around this repair tax deduction will be applied to the ones that you have now included or have included in your settlement in the latest rate case in Pennsylvania, I e, that's, you know, you're not gonna be able to actually derive as much of a benefit from that, you know, adjustment of the effective tax rate as we saw back in the first time around on the water side, I. E, there's more maybe less of an upside to the realized ROE given that there will be some restrictions?
Speaker 3
Yeah. So, Angie, we're really just starting an analysis now. So we've gotta go through that that analysis, both on the engineering side and the financial side. We'll come back to this and provide more guidance as we do our work here. So I wouldn't I wouldn't start to add this into your models at this point at all.
Speaker 7
Given that you are in in in settlement discussions with this rate case, I would assume that that notion of repair tax deduction will be embedded in that settlement. Is that fair?
Speaker 3
Well so so remember, we're not we're not really in control of the rate case at this point in time. This is the this is the the people's case, and they're running it, and we have some influence over that and more control as time goes on here. But I think about this, that there are potentially three ways to think about socializing this repair concept. Could be part of the current people's rate case as that continues to evolve. It could be part of the acquisition approval, or it could be a separate filing.
There's some optionality there that we see.
Speaker 2
I think I think to underscore, Dan, the work that we're doing now on the engineering side, the units of property, and then, of course, the the, you know, looking at the impact to our financials, that that's really the work that needs to be done before we go to our our regulatory work as well. So I I would say, Angie, as you think about this, you know, probably more likely to to speak to the regulators in toward the Peoples rate case settlement as opposed to the the acquisition settlement.
Speaker 7
Okay. Thank you.
Speaker 0
Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Speaker 6
Hey, guys. So you started to answer my question related to the repairs tax, but so you need Pennsylvania PUC approval to make the election. You just can't, in theory, do it after the rate case, let the benefits flow to the bottom line, and, you know, come in whenever you need after that. You you need their approval to do that.
Speaker 3
Well, I think I I think, John, maybe the way to characterize that is, for the accounting election, you know, that's an accounting election we would make, but you're looking for some confirmation from the commission in terms of the regulatory treatment of that accounting election. Pennsylvania is is a flow through state, but, you know, we're we're as as we've said, you know, we're in this evaluation process, and and we'll continue to to do our work, you we'll continue to keep you informed as we have these these upcoming calls.
Speaker 2
Yeah. Think said said simply, Jonathan, one of the reasons why we have regulatory credibility where we do business is we is we work with the regulators. We don't we don't we don't surprise. There's no surprises. And so that discussion is yet to take place with regulators, but I think we need to do our work internally first.
I think the financial community and our investors are right to be asking these questions because for obvious reasons it was very successful at at Aqua and for not only our shareholders, but our customers. And so they're they're right questions. It's just a little early in the in the in the work.
Speaker 6
Okay. Any sense on how long that work on the internal side is gonna take? I mean, I I would think, yeah, it makes sense that during the merger approval, given that imminent, that's gonna be too soon and it'd be part of, you know, probably the rate case discussions like you you said. But any sense how long that timeline might be?
Speaker 2
Yeah. Mean, Dan hasn't had much to do lately, so, so we're we're the but, you know, I I I think it's fair to say if we if it's if there's gonna be discussion in the context of the people's rate case, and and that's yet to be determined, but that that's sometime this summer. So, yeah, I I I think you're right to think about it's not it's not long term work. It's just it's just a it's a pretty sizable work product.
Speaker 3
Yeah. And and and as I said earlier, because they and and as Chris added, you know, the idea would be it gets incorporated into that guidance we'd be providing, you know, at really, it an analyst day or similar event.
Speaker 6
Yeah. So absent, like, electing repairs, remind us, Dan, have you guys said what you think the effective tax rate is for people? Is it, like, 25%?
Speaker 3
Yeah. So we're we're, I'd say we haven't done our work yet in terms of enough work to share in terms of what that combined company tax rate looks like.
Speaker 6
I'm just saying for Peoples standalone.
Speaker 3
Yeah. If if if you go to the, the eight k that we filed as part of the, the equity offering, there's there's some information there that should be helpful for that down there.
Speaker 6
Okay. And then
Speaker 3
couple housekeeping items. Really got you'll you'll see in there the the 2018 financials for Peoples, and that'll that'll help you get to an answer there.
Speaker 6
Okay. Yeah. I mean, I I think at that point, it was, like, 28%. But yeah. Okay.
Great. And then just couple housekeeping ones. The 4,000,000 of other kinda lower o and m costs, was that the insurance claims related?
Speaker 3
Yeah. So the few things going on there, there were a couple one time things last year, and then there was a lowering of insurance claims as well. It's a big chunk of that. And we we switched insurance carriers, and the new the old carrier, the outgoing carrier is resolving a bunch of things that had been on the books for a while, and they're resolving those in a favorable way. So we're taking that back.
And so that's that contributes that benefit that you see on the income statement there.
Speaker 6
Okay. And then, the market based activity is another that, you know, lower by almost 4¢. What were the drivers there? Because that doesn't look like the the shale pipeline joint venture was anything.
Speaker 3
No. It's a good question, and I and I added a little more language around that one this morning. There are a few things captured there. Think of the market based piece as being a small portion of that. Really, it's increased depreciation over last year, increased interest expenses over last year, and then a little bit less in terms of tax repair benefit versus last year.
So those are the bigger three items and market based would be less.
Speaker 6
Okay. Okay. That makes sense. All right. Thanks for the clarity.
Appreciate it.
Speaker 3
Yes, absolutely. Thank you.
Speaker 0
And our next question comes from Richard Verdi with Coker and Palmer. Please go ahead.
Speaker 8
Hey, good morning guys and thanks for taking my questions. Just a couple of quick ones here. The drop in consumption impact on revenue this quarter, I know weather usually won't impact the tail quarters. So that consumption drop, was that from natural receding from more efficient appliances and so forth? Or was there something else that might have fueled that consumption drop this quarter?
Speaker 5
Yeah.
Speaker 3
It's been a trend that we've seen. Really, as we look at it, we're seeing that across the states. It's not isolated to one or two. It's really the majority of the states we're seeing that lower consumption. I think we probably need to do a
Speaker 1
little more root cause on that one.
Speaker 8
Okay. And so excluding weather, like, you know, excluding weather in q two and q three, could that be a a a decent runway rate to to move forward with for modeling purposes, excuse me, what we saw this quarter?
Speaker 3
I'm not I'm sure I'd take that yet and and and run with it. And and to your point, right, first quarter less weather impact, and then obviously more weather impact second quarter, third quarter, you know, as the as the cycle tends to go.
Speaker 2
If you if you think about it, this is what I mentioned earlier in the call, you know, what you're seeing here is it is 1%, which is what we're seeing on average year in year out, about about about a 1% drop in consumption, Rich. So it's not it's not out of the ordinary. And and the reason that it there's never been a really an impact on earnings is because we were in for rates at a fairly regular pace. And so although consumption drops on average 1% a year, and, you know, really, the the impact on earnings has not not really been felt.
Speaker 3
Because as you probably know, Rich, we've we've seen that that drop in consumption on a per capita basis really since the early nineteen seventies. Yeah. There's a long trend of that.
Speaker 8
Sure. Sure. No. Okay. I I I got it.
I'm with you. Thank you, guys. And then, you know, you're guiding to the the one to 2% customer growth. Can can you give us a sense on the timing of that? Could that maybe be more back end loaded for 2019?
Or just some color on that.
Speaker 3
Yes. So it's 2% to 3% customer growth is the guidance.
Speaker 8
Or two to three Yes. Sorry. I misspoke. Sorry.
Speaker 3
No. No problem at all. Yeah. Think of that as more back end loaded in the year just given the, the the timing of of get the closing schedules, getting these things through the process.
Speaker 8
Okay. And then not to dwell on it, and and I might have missed it, but that slide 17 with the 415,000 customer potential pipeline, what's the I might have missed this. What's the timing on that? Is that is that a a twenty four to sixty month horizon? Or did you guys even give a timing or any sort of color on that?
Or how could we think about that?
Speaker 2
Yeah. I would say it's difficult to put timing on these, but on the other hand, I would say that these are active discussions happening today. And so, we've talked many times about the gestation period for municipals being a protracted period time, and call that a year or two. So I would say, Rich, these are in active discussions today. Wouldn't be shocked to see some in the near term, and I would think you could think of some of these going out, at least from a closing standpoint, maybe out two to three years.
But, you know, active today.
Speaker 8
That's super. That's great color. Thank you guys, I appreciate the time. Yeah, thanks Rich.
Speaker 0
And we'll take our next question from Greg Reese with Centenius. Please go ahead.
Speaker 3
Hi, guys. Can you hear me? Yeah. We got you. Just fine.
Speaker 9
Just two quick housekeeping questions. The $314,000,000 of debt that you guys are refinancing, what interest rate was that at?
Speaker 3
Yeah. It's a good it's a good question. I that was at just under four and a half percent. Mhmm. And it had a line of business covenant associated with it that really limited the business to water and wastewater utilities, and the expansion to gas would have tripped that covenant.
So that's why it's important to bring that into the financing at this point in time. So in refinancing that, even if you include the fact that there was a make whole associated with it, we're still better off from an interest cost perspective having that refinanced as part of this 3.9 per 6% financing.
Speaker 9
Gotcha. Makes sense. And then on the rate cases that you guys have outstanding for this year, first question is just the $4,900,000 that you secured in Ohio and Illinois. When exactly did those rates take effect?
Speaker 3
So the four nine in Ohio, Illinois, I think those we're we're checking our our facts now.
Speaker 2
Yeah. It's Those
Speaker 3
are really they're they're completed.
Speaker 2
Yeah. I'm looking at the appendix here because we included some of the, some of this work in the
Speaker 3
appendix. Yeah. So so we those are those are already They've already taken effect. Ohio was January and March. January and February in Ohio, and then Illinois was, April 1.
So they've already taken effect.
Speaker 9
Okay. Great. And then, any expectation of when the remaining rate case is at 6.3 you you expect get orders? Is that something that happens midyear towards the end of the year?
Speaker 3
Let's see. So New Jersey, North Carolina, Ohio. Okay. So we'd expect, New Jersey. New Jersey is a little bit longer.
So North Carolina
Speaker 2
mid year. We just settled New Jersey, Dan.
Speaker 3
New Jersey, we just settled. Mhmm. So I would think it's relatively soon.
Speaker 5
Okay.
Speaker 3
Yeah. And we can we can get back to you, wouldn't it?
Speaker 9
Okay. No problem. And then were you able to get the repairs tax in New Jersey in the settlement?
Speaker 3
Yeah. Real real real quick on on New Jersey. So that is, 05/28. So it's it's late late this month.
Speaker 9
Gotcha. And were you able to get the repairs tax in New Jersey?
Speaker 3
Well, we're we're, we've got a settlement in place that would include repair tax in New Jersey and and and working on getting that kinda filed finalized and filed, if you will. So more more to come on that one.
Speaker 9
Perfect. Thank you. That's all I had.
Speaker 3
Yeah. Absolutely.
Speaker 0
It appears that there are no further questions at this time. Mister Franklin, I'd like to turn the conference back over to you for any additional remarks and closing comments.
Speaker 2
Thank you so much. I appreciate everyone's joining us. If there are follow-up questions, there's we're always available. Thank you for joining us again today.
Speaker 0
And this concludes today's call. Thank you for your participation. You may now disconnect.