Essential Utilities - Earnings Call - Q4 2020
February 25, 2021
Transcript
Speaker 0
Good day, everyone, and welcome to the Essential Utilities Incorporated's Full Year twenty twenty Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Brian Dingerdenson. Please go ahead, sir.
Speaker 1
Thank you, Christie. Good morning, everyone, and thank you for joining us for Essential Utilities twenty twenty full year earnings call. I'm Brian Dingerdisson, Vice President, Chief of Staff and Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website. The slides that we will be referencing and the webcast of this event can also be found on our website.
Here is our forward looking statement. As a reminder, 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 included at the end of the presentation and also in the Investor Relations section of our website.
After the formal presentation, we will open the call up to questions. Here's our agenda for the call today. We'll start with Chris Franklin, our Chairman and CEO, who will provide a company update on our successes from 2020, including our municipal acquisition program. Next, Dan Schorr, our CFO, will discuss our fourth quarter and full year financial results. Chris will then conclude the presentation with a review of our guidance.
At the conclusion, we will open the call up for questions. With that, I would like to turn the call over to Chris Franklin.
Speaker 2
Thanks, Brian, and good morning, everyone. Thanks for joining us today. Let me start, with a discussion, of the impact of this bitter cold winter weather that so many of us experienced in February. In terms of the impact on our operation, it's really been a tale of two cities. Let's start in Texas.
First, our our hearts go out to those who are impacted then and and living with for days, without electric and water service, some frigid temperatures, particularly last week. Water systems and wastewater systems are highly dependent on power to operate our pumps and our plants. So when the power went out in Texas, many of our community well systems went down as well. In fact, at the peak of the winter weather, we had approximately two thirds of our Texas customers impacted, which is largely due to those rolling blackouts we heard or brownouts. As we as the power went down, we we and then we'd restore it, and then we have to go back out again once the once the rolling brownout went through.
We quickly activated our incident command system to marshal the necessary resources to bring service back to our customers as quickly as possible. We brought in teams from our other state operations to supplement the Texas workforce, and they also brought with them supplies like bottled water, repair materials, and equipment to supplement what we had in Texas. We'd always think about it, but as our employees were working to restore service to our customers, they themselves were dealing with personal hardships resulting from the storm too. I'd like to thank those dedicated employees and contractors that worked around the clock to restore service to customers. While we still have some systems under boiled water advisories in Texas, at this point, I'm proud to say that we have nearly all service restored, only one system left impacted, and we're working as quickly as we can to restore there as well.
Just to remind you that we don't have natural gas customers in Texas, and so there were no financial or operational impacts to our natural gas customers, are in Pennsylvania, Kentucky, and West Virginia. Now I mentioned the impact of the weather was a tale of two cities. And despite the extreme cold temperatures here in the Mid Atlantic, where the majority of our operations are, we had very good news this winter, particularly in Pennsylvania where we have been replacing water mains for nearly thirty years now. We really saw the benefit of that investment over the last few weeks and last few months even. It's impressive to see that even during a difficult winter, we're seeing fairly low numbers of main breaks.
As a result, we have fewer service disruptions and less overtime than we had in previous years. And you can see by the chart on the right here, there is real benefit to investing in infrastructure. Alright. Let's talk about some of the 2020 highlights. We invested about 900,000,000 in infrastructure in the communities we serve during 2020, of which about 53 and a half million was invested by Peoples in the first quarter before we owned the company.
This is once again a record amount of capital spending for our company. On a non GAAP basis, adjusted income per share was a dollar 58 for the year, up seven and a half percent. Dan will take you through more details around that when he presents the financial results. Our municipal acquisition strategy remains strong with six signed municipal agreements pending closing, totaling 438,000,000 in purchase price. Finally, coupled with organic growth, the company increased its water and wastewater customer base by 2% and increased its rate base by 9.6%, ending the year with nearly 1,800,000 customers and 8,000,000,000 in rate base across our regulated segments.
Very good year. Alright. On the next slide here, you can see a more comprehensive summary of the execution of our 2020 objectives. These were the three primary themes we set for 2020. We've talked with you before about this.
You saw at our investor event. And despite the challenges of 2020, we still delivered on all three of these objectives in one of the most historic years of our company. Throughout the year, we adapted our new combined water and gas business to overcome the effects of a pandemic. And through the dedication and resiliency of our people, we remain focused on the mission of providing essential natural resources to our customers. As I mentioned, our commitment to infrastructure improvement drove us to executing a record investment, ensuring that our customers had safe and reliable service.
Now as we approach our one year anniversary of the closing of the Peoples transaction, I'm pleased to report that we have successfully integrated our employees and customers, and we will continue to work to adopt the best practices from both utilities across the platform. I feel confident that our team's integration experience and expertise will prove will prove that invaluable as we continue to acquire water utilities across our footprint and beyond. Here's a reminder of the municipal acquisitions we closed in 2020 for our regulated water segment. The six acquisitions include Campbell Water System, you've seen that one before in Ohio, East Norton Wastewater System in Pennsylvania, Rockwell Utilities, that's water and wastewater in Illinois, New Garden, that's wastewater in Pennsylvania, and a small one in North Carolina called Dogwood Knowles. Together, these acquisitions added over 12,000 customers and nearly 63,000,000 in rate base.
Combined with organic growth, the company increased its customer base by over 20,500 customers in 2020. Here on this slide, we it's we updated it since our presentation at the guidance event. You can see that we now have six municipal acquisitions that have been signed and are pending closing. The addition of Willistown Township in Pennsylvania, which we announced just last month, along with the other transaction will add close to 227,000 customers or customer equivalents when closed. It's important to think about this.
Bay based on the approximate rate base of 438,000,000, these signed agreements are expected to generate about 22,000,000 of incremental annual income when they're fully earning. And these are great examples of our acquisition strategy at work, and we look forward to serving these communities and having them join the Essential family. Now, DELCORA is never far from our minds, and I'm sure not from yours when you think about Aqua and Essential. Let's bring you up to date. You'll recall that we received a a very favorable ruling in late December from the Pennsylvania Common Pleas Court Judge in a lawsuit with Delaware County.
Subsequently, we county appealed that decision. And in January, the PUC administrative law judge recommended that the transaction be denied for three reasons. Right? The first reason was we had some outstanding municipal interveners. Second reason was, they felt that, we we didn't include a rate stabilization plan in our application.
And the third one was the ongoing litigation with the county. So since the ALJ issued the recommendation, we have made significant prior progress in trying to remedy these situations, these issues. And several municipal interveners have already withdrawn from the process. We've been in constructive conversations with the remaining municipal interveners, and we're hopeful and optimistic that they will also withdraw before the Pennsylvania Public Utility Commission rules on the case. We've also taken measures to address the argument that we don't have a rate stabilization plan.
We we we feel good about the progress on that issue as well. Now the Pennsylvania PUC is expected to render their decision at one of the two regularly scheduled public meetings in March. So we'll stay tuned. With that, now I'll turn it over to you.
Speaker 3
Thanks, Chris, and good morning, everyone. Before we go to the full year, let's start by taking a few minutes to review the fourth quarter highlights. We had revenues of $474,000,000 up $248,000,000 from $226,000,000 last year. The natural gas business contributed $240,600,000 of that revenue increase. This figure includes the impact of 18,900,000 natural gas utility customers as a condition of the Pennsylvania PUC approval of the Peoples acquisition.
And it also includes $92,800,000 in purchased gas costs incurred in the quarter. O and M increased to $157,200,000 up from $85,300,000 in the fourth quarter of last year. Again, this was primarily a result of the addition of natural gas operations and maintenance expenses of $72,600,000 Net income increased from $64,200,000 to $102,700,000 and GAAP EPS was up from $0.28 to $0.40 as compared to the fourth quarter last year. Adjusted income was up from $61,400,000 to $116,200,000 and adjusted income per share increased from $0.34 to $0.46 Next, let's discuss the full year financial highlights. As Chris noted earlier, 2020 was a very strong year, one where we achieved or overachieved our financial objectives in light of the pandemic.
We ended the year with over $1,460,000,000 in revenue, up 64.4% from $889,700,000 last year. The Natural Gas business contributed approximately $521,000,000 of this revenue growth. Adjusted revenue for the year was $1,490,000,000 which excludes approximately $23,000,000 of rate credits issued to water and natural gas utility customers as a condition of the Pennsylvania PUC approval of the Peoples acquisition. O and M increased by 58.7% from $333,100,000 to $528,600,000 This was primarily a result of the addition of natural gas operations and maintenance expenses. We'll discuss that further when we show the 0 And M Waterfall.
Net income was up 26.9% year over year from $224,500,000 to $284,800,000 and GAAP EPS increased by 7.7% to 1.12 After adjusting for transaction related expenses, rate credits issued to utility customers and adding the pro form a adjustment for the normalized first quarter of GAAP results, adjusted income was up from 139,600,000.0 was sorry. It was up a 139,600,000 or 53%, and adjusted income per share was up seven and a half percent from a dollar 47 to a dollar 58, the top end of our 1.53 to $1.58 guidance range. As we noted in our guidance call, strong water usage contributed incremental earnings in 2020. Thus, think about a normalized $1.56 or so as a baseline for future earnings growth. Next, let's walk through the details in the following waterfall slides, starting with revenue.
In 2020, revenues increased $573,000,000 or 64.4% on a GAAP basis, of which $520,900,000 was related to our natural gas segment. This figure includes $165,700,000 of gas costs and the impact of $18,900,000 of rate credits to those natural gas customers. Rates and surcharges, increased volume and growth from our regulated water segment provided an additional $59,800,000 towards the revenue increase, which was then offset by 4,100,000 of rate credits issued to the water utility customers. The 15,700,000.0 increase due to volume reflects both water consumption and wastewater volumes. Let's review water consumption on the next slide.
We've been talking about consumption since COVID started because, frankly, we didn't know exactly what to expect when, we went into this situation last March. In the fourth quarter, overall usage was down 0.9%. However, we continue to see strong residential usage, which was up 2.7%, offsetting the declines in the other customer classes. As we review twenty twenty versus 2019 and consider the impact of COVID nineteen on our business, for the full year, we saw that residential water consumption increased close to 6% with more people working from home and with favorable weather. This increase more than offset the declines in the commercial and industrial customer classes, both declining about 6% versus prior year.
So overall for the year, usage was up 0.8%. Next, let's talk a little about weather and gas usage for the people's business. As a reminder, a heating degree day is a measurement designed to quantify the demand for energy needed to heat a building. It's the number of degrees that a day's average temperature is below 65 degrees Fahrenheit. As you can see on the chart on the left, 2020 started out relatively warm with below normal heating degree days in January and February.
The chart on the right shows how people's residential gas consumption in Pennsylvania was distributed throughout the year. And in 2020, about 78% of the gas was sold in the first and fourth quarters of the year, right, those those cold seasons. This winter, for people's natural gas, year to date weather through February is projected to be 3.9% colder than normal based on actual weather through February 21. This compares favorably to last year's mild winter when year to date weather through February was 12% warmer than normal. But do recall that our 2020 adjusted income includes a normalized first quarter, really normalized for the first seventy five days where we didn't own the business.
Speaker 4
Next, let's move on to
Speaker 3
o and m expenses. Look at the waterfall. You will see that the addition of Peoples o and m of a 199,900,000.0 is the primary reason for the increase in o and m expenses for the year. Other contributing drivers include COVID related expenses for our water segment, including COVID related employee costs, growth and normal employee related costs, which were then offset primarily by savings in other costs, which reflect a number of onetime items. Next, we'll spend some time on the earnings per share waterfall.
Bridging between GAAP and adjusted figures for both 2019 and 2020, you will notice that GAAP EPS in 2019 was 1.4 but adding back the almost 44¢ from the Peoples related transaction costs and the dilutive effect of the equity offering brought us to a dollar 47 per share on an adjusted income basis for 2019. Continuing to the right, the Peoples, including the full year pro form a adjustment, added $0.21 followed by regulated water segment rates and surcharges, expenses, volume and growth, which together contributed over $0.20 These were then offset by 31¢ from other items such as increased depreciation, amortization and interest as well as decreased Aqua Pennsylvania tax repair benefits relative to last year. So this then results in a dollar 58 for the adjusted income per share for 2020. Continuing to the right, the $1.58 is then impacted negatively by almost $0.32 related to Peoples full year pro form a adjustment, approximately $08 from Peoples transaction costs and $06 for the rate credits we discussed previously, resulting in the dollar 12 of earnings per share on a GAAP basis that we mentioned right at the beginning. Before handing the call back to Chris, I wanna take a moment to provide an update on the Peoples tax repair filing.
Recently, we reached a verbal settlement on the key issues with the parties in the case, and we'll file a settlement agreement on March 11. Consistent with the party's positions, we'll give repair benefits, the tax benefits related to catch up adjustment back to our natural gas customers in the form of a credit over a five year time frame. This outcome should not have an impact on earnings Rather than using a portion of the catch up deduction to stay out longer as originally proposed, we'll be filing our next rate case on a more normal cadence. After review by the ALJ and the PUC, we expect a PUC order in the second quarter. However, there's no statutory time line for this proceeding.
And being respectful of the process, this is really about as much detail as we can go into at this point. With that, I'd like to turn the call back over to Chris to speak about our 2021 priorities and guidance.
Speaker 2
The unflappable Dan Schuler. I tossed to you a slide earlier. I skipped over an important slide. Well done. Thanks.
I I won't go back to that slide, but it's it's in the deck. You've all seen it. But other than to point out that we have a nice strong pipeline and, you know, we're in current discussions with systems that total over 375,000 customers. So we feel very, very good about the pipeline of municipal acquisitions. And we we still remain confident that the the the fact that we have fair market value in eight states where we do business will continue to be a main driver of that healthy pipeline.
And so, let me come back now to to the proper slide, our 2021 priorities. So let's take a look at these priorities. They're very similar to what we saw in 2020. The, we intend to remain focused on integration, growth, and operational excellence this year, 2021. I'd tell you that the emphasis on operational excellence and ensuring quality service is ingrained in our culture, and it's part of our history at Essential.
And so we'll work to instill those same values in our new colleagues that join us from each of the acquisitions that we do once they're integrated. We'll remain focused on our capital program, that continuously improves our customer experience, and we'll continue to build on the strong ESG initiatives that we announced earlier in the year. Let's talk about guidance now. This slide is just a reminder of what we've shown you already. Adjusted income is expected to be a dollar 64 to a dollar 69 per share.
Our capital plans include spending of about a billion dollars on regulated infrastructure this year and nearly 3,000,000,000 in 2020, between now and 2023. Rate based growth is expected to be six to 7% for water, eight to 10% for gas. Customer growth is expected to be between 23% on average for our regulated water segment. And lastly, we set achievable, I think you would agree, yet aggressive ESG targets, including a 60% reduction in greenhouse gas emissions by 2035 using 2019 as our baseline. And we'll continue to work to ensure that our water throughout our entire footprint never exceeds 13 parts per trillion of PFAS.
And finally, as we approach our one year anniversary as essential utilities, we're reminded that our one hundred and thirty five year old company has now been on the New York Stock Exchange for fifty years. Our company remains strong and dedicated to our mission of providing essential natural resources to our water, wastewater, and natural gas customers, and we believe we're well positioned to play a critical role in solving our country's infrastructure challenges while recognizing our responsibility to keep rates affordable and to be an industry leader in protecting the environment. So that concludes our formal remarks, and we are happy to take questions from here.
Speaker 0
Thank you. Make sure your mute function is off to ensure your signal can reach our equipment. The first question we have today is from Insoo Kim from Goldman Sachs. Your line is open.
Speaker 5
Hey. Thank you.
Speaker 3
Hey. Good morning.
Speaker 5
It doesn't seem like ages ago when we met when we met in New York for the last Analyst Day last year.
Speaker 6
It's been a while.
Speaker 5
Yeah. Definitely. Feels like a while. My first question is, you know, regarding Texas. I know, you know, Texas for your water business is, you know, about, what, six percent of rate base or so, the total water rate base.
But could you just give a little bit more detail on, you know, the type of crops that were incurred through this the past couple weeks and the relative process of recovery and and all of that.
Speaker 2
Sure. Yeah. I think from from the ability to recover, our operations team really did an exemplary job, And it was it was across the the platform. We had people from our purchasing group looking at where you can purchase fuel and with generators moving. We had the pallets of of bottled water coming to communities equipment all all brought in and and teams brought in as well.
So I I thought the response was was exemplary, given given the circumstances of the, closure of roads and the ice conditions and everything else. So feel very, very confident that we did a nice job there. Now in terms of cost, I I I would not call the cost material cost. You know, these these these things we did to recover will capture. We always do we're to capturing these costs as a result of summer storms, typically hurricanes and others.
So this is not unusual for us. And and in terms of we we we shut down our our delinquency on on our customers in Texas for a while so that that they weren't getting phone calls about late bills. We'll turn that back on soon. We wouldn't expect a major impact there either. And so I I don't expect there there would be a a material impact, but let me let me toss to Dan here to get his opinion as well.
Speaker 3
Yeah. I think, Chris, you're right on. And and then to just give you a sense of it, think of Texas as about 4 and a half million dollars a month in revenue. So if we lose a few days there because customers are using less water, you know, it's just not a material impact on the overall essential business. And and as you started out and and and Chris added, that we are aggregating these costs, be they, you know, non capitalized repair costs or overtime expenses or bottled water, and we'll look to recover them just like we have for hurricanes and so forth in the past.
Speaker 7
You want just one last
Speaker 2
thing to add to that. The the the impact really wasn't about our system not being winterized at all. It was really about lack of power. And so we we when when the lines went down, the cold snap, you know, we did have some main breaks, but but we we didn't have major pump houses or or wells go down.
Speaker 3
Yeah. And they want and to add to that, Chris, too, we think about powering those well houses and such. You know? And so we've got contracted power in place with with one of the major players for wholesale power that covers the majority of our systems in Texas, Now their systems should get power from local co ops or authorities, but all under regulated rates. So when you see things on the news with very high electric bills, we've been insulated from, from those those peak type electric prices.
Speaker 5
Got it. And and if you're saying the costs weren't that material, I guess when we think about the
Speaker 6
2021 guidance, and the midpoint of that, you'll you'll still be able to to monitor this and, and meet that guidance?
Speaker 2
That's correct. Yes.
Speaker 5
Got it. Just one more broader question, and sticking to Texas. I you know, just given acknowledge, I think a lot
Speaker 6
of the issues that happened were because of the electrical outages. But
Speaker 5
do you think that out of all of this, does it present to you from your standpoint a an increased CapEx opportunity in the state or potentially just an increased focus on expanding your footprint there?
Speaker 2
Well, I think there's there's a a key consideration. The the the only the question when you have a series of community well systems throughout a state like we do in Texas, North Carolina, even Virginia. The question is how many standby generators do you do you you purchase and and keep at the ready? We typically regionalize those, and then we then we move them to storm zones and and and, you know, position them well before storms and that sort of thing. But we don't have one per system.
And I'm not sure that that's the prescription here either. But I think it's safe to say that we'll want to go and get more generators. There was that natural rub between a regulator saying, how much are you really gonna spend for a generator that sits there, you know, a huge percentage of its time and is never used? You know, the regional approach seemed like a good approach. But, you know, you have a an event like this, you could certainly make an argument that we should own more generators.
And so I think there are capital opportunities there, and and we'll we'll pursue those. And then there the ongoing capital, that we're spending even prior to the storm is, you know, will put in the SCADA category, which is, our ability to operate, or sense when a well house is down, out of power, or in some cases, they even remotely control it. But that was already, work in progress, and so that will be capital that we'll we'll be spending in addition.
Speaker 5
Got it. Thank you so much.
Speaker 2
You bet.
Speaker 0
And next, we'll go to oh, sorry. Just one moment. And next, we'll go to Ryan Connors from Boenning and Scattergood. Your line is open.
Speaker 3
Hey, Ryan. Ryan. Good morning. Thanks for taking my question. How are you?
Speaker 6
Very well. Good. So I hadn't thought hadn't intended to ask about Texas, but since you're on the topic, just bigger picture, there's a lot of talk about how that the situation there is sort of indicative of a broader problem with the grid in terms of reliability, more renewables being less reliable and so forth. So if you look at your states that are material to the earnings stream, do you have any other vulnerabilities, any other states where something like that could happen that there might be an impact?
Speaker 2
Yeah. It's a good question. I I I and I'm gonna say not that not that I'm aware of today. We're we're largely in PJM PJM up here, not not in ERCOT. But I I think the you know, if you if you think about this storm as a never before, then, you know, you you you say what what else could happen, and and it's a it's a good time to revisit these things and say, okay.
What are the, you know, once in hundred years or five hundred year issues that that we should be thinking about and be prepared for? But, and that's my initial thoughts. Andy, you have something to add to that?
Speaker 3
Yeah. And I think I think, Ryan, ERCOT's a Right? It's a it's an energy market. You know, the lead by ERCOT is that when power was needed, someone would show up to deliver that power, but they didn't really regulate those power producers.
And the power producers who didn't have to weatherize or winterize That led to problems. We also have power producers in ERCOT who don't have to hold firm capacity on pipelines in order to ensure their ability to generate power. So PJM is very different in that regard that you've gotta have that pipeline capacity capacity in order to to to bid into the market. So, yeah, we do think it is it is different.
And as you know, ERCOT really doesn't have the interconnects to allow power in to any degree from outside of ERCOT. So when they have a problem there, unfortunately, it's it's gets entrenched, if you will.
Speaker 6
Got it. Got it. Okay. Now on DELCORA, I wanted to just I wonder if you could drill down for us a little bit, Chris, on your comments. You mentioned that one of the issues was the rate stabilization fund was one of the issues that we sort of raised in that adverse proposed rule.
And can you just let us know, just conceptually, what exactly they took issue with and and how you're, you know, getting them on board and more comfortable there on that particular issue.
Speaker 2
Yeah. I'm gonna I'm gonna oversimplify this just for the call, but but I'm happy to go into it more detail. But but a lot of it has to do with the putting the credit on the bill, on the customer's bill. Right? So the easiest way to do these things is to say, you know, the customer used so much in volume and they have base facility charge.
That comes with total, then subtract out the dollars that would come in and offset it from the trust, and then you have a net total. That that to to us was the simplest way to do it. I think because because the rate stabilization is not in the tariff, technically, there are some of the advocates who believe that it should not be on the bill. And I think we're willing to concede that at this point. There are listen.
There's a there's a lot of ways to skin the cat. We happen to think that was the most efficient way to do it. But, certainly, there's other ways to give that that that those trust dollars back to the customers. And so we we've now proposed to to remove it from the bill. And I I I think we've addressed the issue.
We'll see.
Speaker 6
Okay. Well, I'm glad you oversimplified it because that's that's as complex as I can take down. Now on the on the the one last thing. On the PUC, you know, with that decision looming now, what's going on with that fifth seat there? I mean it seems to me I know you don't have any inside baseball on that necessarily than anyone else, but it seems like it's that's coming up on a year since that seat was vacated.
That seems like a longer time than usual. Is that the case? And I guess what's driving that? I assume maybe COVID and so forth. But any color there on that open seat?
Speaker 2
Yes. I mean, listen, I'm an observer like everybody else. But the the governor did send a name over. He sent the same name over twice. And the republican senator the democrat the governor is democrat in in in Pennsylvania.
The the republican senate that has to approve the PUC commissioners is And so the the senate has decided not not to approve that individual twice now. And so it it's it's a bit of a stalemate. And and as you know from from Ryan, I know how close you watch the commission here in Pennsylvania. There have been plenty of votes that have been a two two vote.
And so it it is a, it's a difficult situation. So I think, I and I know it's on the mind of the governor. I I, I I and I also know that commissioner Sweet, his seat is coming up in the next month here as well. So now we have to allow potentially two seats. I I haven't heard formally whether commissioner Sweet is staying or whether he'll retire, but we'll we'll have to see how that develops.
But then then then you have two names that need to come over to the senate. So I I assume in all of that, Ryan, there will be a deal between the Republican senate and the Democratic governor.
Speaker 6
Mhmm. Mhmm. Okay. Yes, we'll watch that one. And then lastly, if I could sneak one more in, Dan.
This is, I guess, for you more. But if you could help us gas novices out a little bit. Obviously, you had purchased gas costs really ramped in the fourth quarter. I assume based on the weather, that's going to be another pretty big sequential ramp there. I mean, you've given the annual guidance, but can you kind of help us out on the seasonality on that line, how to think about that as we move into the first quarter?
It just seems like it really jumps all over the place.
Speaker 3
Yes. And I think for now, what we probably need to do is kind of point you back to what we had shown before in terms of the usage percentages. And we showed those again at the analyst day. What's what's potentially used, you know, in each quarter and then the the net income for the quarters. If you go to the analyst day presentation, page 41 Mhmm.
You'll see what we showed is really an approximate breakdown by quarters. And and, of course, these are ranges because there is that seasonality in in gas usage and also the summary of the water usage. But at least it gives you a guide to help quarterize. And I think as I said at the on the Analyst Day two, you know, we have the ability to you know, over time, as we start to see the way this this manifests itself in the financials, you know, we'll all be able to refine what that that quarterly mix of net income should look like.
Speaker 6
Mhmm.
Speaker 3
That slide that I mentioned, it's actually it's actually in the appendix for today's today's presentation as well.
Speaker 6
Okay. Okay. Okay. Good. Well, have a look.
Thanks again, guys.
Speaker 3
Yeah. Thanks, Ryan. Take care.
Speaker 0
And next, we'll go to Durgesh Chopra from Evercore ISI. Your line is open.
Speaker 7
Hey, Durgesh.
Speaker 4
Hey, Durgesh. How are Thanks. Hey. Good morning, guys. Thanks for taking my question.
Just one quick one. On the repair tax catch up filing. Can you just remind us
Speaker 1
Yep.
Speaker 4
What was the original plan for Pennsylvania rate case filing? Was it late in this year?
Speaker 3
Yeah. So so wait. I I guess, you're asking about the repair tax, the people's repair tax, or the Aqua Pennsylvania rate case?
Speaker 4
I'm sorry. So, you mentioned, yeah. And I am mixing, I guess, the people. You mentioned
Speaker 0
that the hiring.
Speaker 3
Yeah. Yeah. Let me let me take you there. That so that's really the, the catch up deduction on the repair. And you for for Peoples, for the PNG subsidiary, what we had originally proposed there was a a splitting of that catch up deduction with some of that going to the customer, with some of that coming to the to the the shareholder.
But what the piece to the shareholder would have done is it would effectively would have just kept us out of rates longer. It was about adding to a stay out period. It wasn't ever about incremental earnings. So, you know, the outcome here, the conversations that we've had with the statutory advocates is really leading to a situation where a 100% of that catch up deduction would go to the customers and over a five year time period. And what that means is we would be backing for rates on a more normal cadence.
So rather than stay out because we had some of that catch up, we would just come in sooner than that. But, think about it as, you know, no impact on the guidance earnings because the guidance earnings are the '21, '22, '23, and really shouldn't be any impact beyond there because we'll have, you know, new rates at some point.
Speaker 4
Understood. And thanks for clarifying that. And, yes, I did have a green freeze because I I was mixing the water rate case with that. So thank you for clarifying that. Essentially, it it basically Absolutely.
You have the you have customer credit and on the on the gas side, you'll be going in for more regular waiting phases. That's sort of that's the end result of the dispute.
Speaker 3
Yeah. We'll just go in
Speaker 1
sooner than we would have otherwise.
Speaker 4
Perfect. And then one last one real quick. Any color on timing of the equity in the plan? The incremental equity, will is this sort of more predicated on as you announce deals, do you have a particular time frame within the next few years when you plan to do this? Yeah.
What we've said at the
Speaker 3
on the last call is really we we'd give more specificity there as we get closer to those issuances. And, you know, we're not we're not really at a point where we can do that today. You know, as you think about that forward sale that we did last August, you know, we would look to use that equity at the time that we do the DELCORA transaction. So we draw that down, you know, with a little bit of cushion before the the transaction itself. And then on further issuances, we'll give you more details as things get closer.
Speaker 4
Alright. Thanks, guys. Much appreciate the update today.
Speaker 3
Thanks, Rakesh. Take care.
Speaker 0
And next, we'll go to Travis Miller from Morningstar. Your line is open.
Speaker 7
Good morning, Travis. Travis.
Speaker 3
Hey, Travis. If I could,
Speaker 7
I wanted to go back to the Texas thing and think a little higher level, get your thoughts here. It seems like whatever the utility industry has some kind of big headline issues and that happens, it leads to industry wide policy changes and developments. And I was wondering if you kind of put a crystal ball here, on the look into it. What type of water related policy changes do you think might take place either in Texas or or even more broadly across the water industry?
Speaker 2
Yeah. I I would think that one of the outcomes is, you know, sort of what I alluded to a little bit bit ago, which is additional redundancy on power. What that what what form that takes probably varies by by company. As I mentioned, we we have a system of of small community wells across Texas where we that's how we serve our customers in large part. We have one surface treatment plant.
But, when you think about that versus the city of Houston versus Austin and the challenges that larger systems have in place redundancy and you know, as you think about pump stations throughout and for wastewater as well, I would think that power redundancy is is is gonna be a a big component. And that's that that could be a cost item, pretty good sized cost item, depending on what people have in place today. As as as you know, the the the challenges around winter weather just didn't appear to be as large of a a a risk in in areas like Texas as they did in the North where we've hardened ourselves to to to that kind of weather before. Dan, you have anything to add to that?
Speaker 3
No. I think you're right on there, Chris.
Speaker 7
Yeah. Okay. And then on the gas side of it, kind of similar thing. It appeared that the gas distribution utilities down there did quite a good job in terms of reliability and despite the pricing spikes, but pretty good on the reliability. Do you think this perhaps changes some of the conversation that's been going on in terms of electrification of heating and maybe moves gas up a little bit in public perception?
Speaker 3
Well, you know, certainly, what we saw there in Texas where about seventeen, eighteen percent of the power comes from wind power. You know, when that wind power goes down, you need generation to come in to fill that gap and and and natural gas stepped in to fill that gap. But, you know, given that natural gas production facilities are reliant on power as well, when rolling blackouts started, they were impacted. Services couldn't get out to service wells, especially to deal with handling the produced water, so things started to freeze up. And and and, you know, that's what kinda created the issue for for the natural gas companies.
You know, they they too need to you know, if we're going to con if we're continue to have, you know, fairly dramatic weather, you know, winterization matters for them too. And, of course, if you think about gas supplies, the Marcellus or the Utica, these these the whole natural gas supply chain is pretty well winterized to to make sure that it's protected from those events.
Speaker 2
Yeah. When you think about conversions, we we just don't see them in the areas where we serve conversions from natural gas to to electric for for heating. We we just don't see it. I I I would assume that we wouldn't see it further here. Fortunately, many of the customers, most of the customers we serve, sit on top of the Marcellus Shale region.
So we're we're unique in that the local gas is is is right there. And, obviously, we're hardened for for wintertime. Winters have always been cold in Pittsburgh and, and even in in Smears and Kentucky and West Virginia where we serve as well. So I think that we're we're well positioned not only to to hold our customers, but developers continue to put natural gas into new developments in in the regions where we serve. So I I I don't I don't see any movement in the areas we serve away from natural gas to to electric.
Speaker 3
Absolutely, Chris. In in cold regions,
Speaker 1
you know, there's there's, you
Speaker 3
know, no more efficient heating source than, you know, direct fire natural gas.
Speaker 7
Sure. Sure. No. I appreciate that. Thank you very much.
Speaker 0
And next, we'll go to Ryan Greenwald from Bank of America. Your line is open.
Speaker 8
Good morning, guys.
Speaker 3
Hey, Ryan.
Speaker 8
So to clarify on the commentary around Peoples Gas and the ketchup component, under the terms of settlement, you'd expect to file in '23 for new rates in '24?
Speaker 4
Think about it. I mean,
Speaker 3
that's in in that time frame, I mean, you'll you'll see you'll look for the settlement agreement when that comes out on March 11, and it'll give clarity around these things.
Speaker 8
Got it. And then can you guys just kinda help frame how you're thinking about the COVID impacts in '21 here? And then maybe looking out a bit further, any thoughts around more structural shifts in low demand among classes and sustainability of cost cuts?
Speaker 2
Yeah. Let me start off. You can kick it over to Dan. You know, first of all, you know, like most utilities and and probably most companies, we remain with the majority of our employees coming to work every day servicing, natural gas and and water and wastewater customers. So the the majority of our people have not never stopped working in the field.
Our our two primary offices in Pittsburgh and in the Philadelphia area, both remain largely skeleton crews. But we we we see a return to a rotation of work, hopefully coming in the next month or so, where we could get a third of our employees in a given time and rotate them through. So, we know what? I I think from an employment standpoint, we're we're in pretty good place. Now our bad debt expense, continues to be one that, you know, we we're we're working through here.
We we obviously have, receivables aging at a level we've not seen before. Having said that, in, in most areas where we do business, we do have the ability to to take a reg asset and and see if we can get some recovery of those. And I I I do believe that once we're we're we're able in in in every case to get back to full collections mode, we will get payment from those who can afford to pay, and we'll help provide help to those who can't. And and I I I you know, given the fact that we reserve on our accounts with eight accounts receivables, I wouldn't expect to see a major issue there because that expense has already been taken as we go. We also continue to collect any additional costs.
For example, we have some retrofitting going on in in our offices, So we continue to collect those costs and aggregate those. I would not consider those to be material at this point. But, but, nevertheless, they're you know, as we prepare to bring people back into the office, we want we want to to, to capture those costs. And and, Dan, why don't you why don't you kick in from here?
Speaker 3
Yeah. Thanks. Thanks, Chris. And, Ryan, I guess, as you think about where the consumption occurs and will we continue to see more people working from home and higher consumption there, I think, marginally, but I think lots of people are ready to return to work and sort of get back to normal. And and with that, you'll see that that residential consumption will come down a little bit more toward normal, and commercial consumption will naturally pick up as people are in the business, you know, in the workplace and, you know, using local businesses and such who are our customers in that in that commercial category.
So I I think this I think we kinda come back to a more normal picture of where the consumption occurs. If it's you know, when that when that is, you know, it's first half of the year, it's like I would think second half of the year, we start to see some return to normalcy once vaccinations are more wide spread.
Speaker 2
Yeah. What I I'm involved with the large employers here in the Philadelphia region and and get anecdotally, we as we get together, we expect that probably 80% of employees will be back to their normal schedule, 20% will not. And and that could be rotational aspect of of that 20%, but they they do expect to see 80% back in the office.
Speaker 8
Thanks, Chris. Great. I'll leave it there. Thanks, guys.
Speaker 3
Yep. Thanks, Ryan.
Speaker 0
Again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad at this time. Next, we'll go to Jonathan Reeder from Wells Fargo. Your line is open.
Speaker 2
Hey, Jonathan.
Speaker 5
Hey, Good morning, Chris and Dan. How are you guys doing?
Speaker 7
Pretty well. Thanks.
Speaker 5
A couple of cleanup questions perhaps. So how should we view the benefits to WTRG, the repairs tax settlement? Or what was your for reaching it if it doesn't help push out the timing of the next rate case as you guys proposed?
Speaker 2
Well, think about it in this term, John. And, you know, listen, we are still in the midst of COVID. Regulators are are are are doing their job in in in trying to hold utility costs down. And so it's in that atmosphere that we're that we're that we're in right now. And so I think as a Pennsylvania regulator, they're they're they're they're thinking about what what can come to the customer and not the shareholder at this point.
I, you know, I think that's happening across the country. And and so I just put that as a backdrop. I mean, there's there's whole lot of discussions that that occurred in the context of of that. But Dan said, we can't talk a lot about a settlement that that is not fully public or or inked yet. I should say approved yet by the by the ALJ and the and the PUC.
But, I mean, that think about it in that context.
Speaker 5
Okay. No. That makes sense. Maybe a bit of a goodwill gesture or so. So are you still actively trying to reach settlement with Delaware County on the Del Cora dealer?
Is that ship sailed at this point?
Speaker 2
It's a great question. I would love a settlement with Delaware County. I would love a settlement with Delaware County. I I think they are spending millions now millions of dollars of taxpayer money to to fight a battle that that ultimately I I don't believe that they can win. And so if there was a way to settle this, then, then I would like that.
We, I I I think now probably everybody's focused on the next couple of weeks to see what the Pennsylvania Public Utility Commission does. So let let's see how that decision comes out, and maybe there's an opportunity to to get back to the table. But I I you know, I'll I'll speak for for the essential team. We we we we'd love to see a settlement.
Speaker 5
Okay. I could see. We kinda segue into that, with the the PAPUC. Do they have the option to extend the, you know, March '4 deadline in order to say open the record and consider new evidence? Or, you know, what exactly are the rules around their ability to consider, these more recent developments, you know, and with
Speaker 2
that, the ALJ concerns? Yep. Yep. So so there's several. And and Kim Kim Joyce has outlined these.
We we had our board meetings last two days, and so this is widely discussed in the inside. But but the the commission has several options. One, obviously, is a an approval. And remember there's four commissioners. Two would be, I'll call it a stalemate, a two two vote, which then would it would it would sit.
Three would be a denial. And four would be something like a remand where the the the the commission could say, Aqua Essential has done more work on on the issues raised by ALJ. ALJ, you should you you should reconsider the work and the and the evidence and send it back to ALJ, and then the ALJ would send it back up to the commission again, which I think is a possibility as well. So those are those are probably the the more likely options that that the the PUC has in front of them.
Speaker 5
K. So if it is two two, it's like what's the path for them? It does it's not approved, but it's not denied? Or
Speaker 2
Yep. It it could it could just sit for a while until the commission has an has has another member or one of the members changes their mind. I am, hopeful that that's not the case, Jonathan, but, you know, we'll we'll see you in the next couple weeks.
Speaker 5
Okay. Okay. Now be eagerly watching, and and good luck with that. Appreciate the additional info.
Speaker 2
You got it.
Speaker 3
Take care, Jonathan.
Speaker 0
And at this time, I'd like to turn it back to Chris Franklin for closing remarks.
Speaker 2
Hey. Thanks, everybody, for joining as always. Brian, Dan, myself, the whole team here are open for follow-up questions should you have open issues that you wanna chat about after this. Thanks for joining us today.
Speaker 0
And that does conclude our call for today. Thank you for your participation. You may now disconnect.