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Edited Transcript of WTR earnings conference call or presentation 27-Feb-20 1:30pm GMT

Q4 2019 Essential Utilities Inc Earnings Call & Investor Day

New York Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Essential Utilities Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Dingerdissen

Essential Utilities, Inc. - VP & Chief of Staff, IR and Communications

* Christopher H. Franklin

Essential Utilities, Inc. - Chairman, President & CEO

* Christopher S. Crockett

Essential Utilities, Inc. - Chief Environmental Officer & VP

* Colleen M. Arnold

Essential Utilities, Inc. - Deputy COO

* Daniel J. Schuller

Essential Utilities, Inc. - Executive VP & CFO

* Kimberly Joyce

Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs

* Matthew R. Rhodes

Essential Utilities, Inc. - EVP of Strategy & Corporate Development

* Richard Scott Fox

Essential Utilities, Inc. - Executive VP & COO

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Conference Call Participants

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* Durgesh Chopra

Evercore ISI Institutional Equities, Research Division - Associate

* Ryan Greenwald

BofA Merrill Lynch, Research Division - Associate

* Ryan Michael Connors

Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment

* Travis Miller

Morningstar Inc., Research Division - Director of Utilities Research and Strategist

* Joseph Gregorini;Peoples Gas Company;SVP and Chief Operating Officer

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Presentation

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Brian Dingerdissen, Essential Utilities, Inc. - VP & Chief of Staff, IR and Communications [1]

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of what the 2 operating utilities look like. Following Rick's (inaudible)

Following this panel, Dan Schuller will provide a financial overview of the company. Finally, Chris will provide a summary of the day, reiterate the guidance and then open the floor for questions.

Following the Q&A period, we invite you to stay for lunch, during which time the management team will circulate between the tables.

With that, I'd like to turn the floor over to Chris Franklin to start today's formal portion of the meeting.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [2]

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Thanks, Brian, and thank you all for being here. I feel like we've spent a lot of time together over the last year or so. So nice to see familiar faces in the room. Let me start by just saying what an honor it's been to be able to run -- lead this company for the last almost 5 years now. We've had a lot of activity in the last 5 years, and it's hard to believe that it was nearly 4 years ago that we had a meeting in this room or a room similar in this building where we talked about our renewed corporate growth strategy.

I'm proud of the strategy that we put together. I'm proud of the shareholder value that it's created over that time. And I'm really excited about the future. The value that we create really is not just a reflection on the strategy itself, though. It's really a reflection on the team that we fielded. And I think it's a great demonstration of the value that they've built together. We've spent a lot of time with many of you, as I mentioned, particularly over the last couple of years. And I know you know Brian and Dan and Matt. And today, I'm excited for you to get to know a few other members of our team and some relatively new members of the team.

During the presentations today, we're going to provide some new information not only on our longer-term guidance, which I know many of you have been asking for, but also some exciting news on our ESG work. And I'll get to that in just a moment.

But first, let's take a look back at the growth strategy we unveiled in 2016. This format may look a little different in the new template, but it's the same strategy we introduced 4 years ago. Our growth strategy is rooted in those same core competencies that we've discussed and consistently demonstrated. These same core competencies will remain critical to our operational execution in the coming years. So let's talk about what that focused strategy has yielded over the last several years.

Let's take the first prong, which is municipal acquisitions. We've seen more progress in municipal transactions than I think any of us really expected. In fact, we've added over $520 million in new rate base when you consider the deals announced or closed since January of 2016. Now that progress also includes our largest municipal acquisition that we announced in the fall called DELCORA. DELCORA is the equivalent of adding what we're now saying, 198,000 customer equivalents. That's a revised number, and Matt will talk about that in a few moments -- revised up.

Now the second prong, which we'll talk about is strategic M&A. We identified a unique strategic opportunity in Peoples, which presents us with a great opportunity to put a second platform in place for growth in a state that we know very well, Pennsylvania, with significant organic rate base growth opportunity, replacing nearly 3,000 miles of gas main and as customers sit on top of the Marcellus Shale region. I'll discuss the status of that transaction in just a moment.

And lastly, and maybe not well illustrated on this slide, but we've really deemphasized the nonregulated or market-based activities at the company. Some of you may recall that when I became CEO, we really shifted our focus away from MBAs and really onto the regulated business opportunities. And we only kept the royalty insurance business and some small local operating contracts. And I really don't see a shift in this strategy moving forward.

So as you listen to our presentation today, I hope you'll walk away with the same confidence that we have in the team's ability to continue to execute against our already successful growth strategy.

Now for those of you who maybe are new to the story or haven't followed it as closely, I think it's important to outline our rationale for the Peoples transaction. Now to be clear, we're not looking to buy just any natural gas company. We're looking for a natural gas distribution company that was not complicated with other lines of business. It was constructed in a constructive regulatory state and it didn't participate in exploration or fracking and that had strong growth opportunities. When we found Peoples, we found a company that's 99% regulated, operates primarily in Pennsylvania, sits on Marcellus Shale, had 3,000 miles of pipe that need to be replaced and does not have an exploration business. Furthermore, the LDC has many similarities to the water business, not the least of which were both underground pipe companies.

Now for these reasons, along with the fact that Peoples came along with a strong management team, we'll hear from Joe Gregorini today, we believe that Peoples was and still is a great opportunity. And by the way, that 3,000 miles of pipe, which is slightly less than that today just given the work that's been done between the announcement and today, is still a great opportunity for us to give highly visible rate base growth for the next 15-plus years, while we provide customers with increased reliability and reduced methane emissions, all while providing transparent earnings growth for our shareholders. This is truly a win for all of our stakeholders.

Now this is a bit of a busy slide, but it graphically outlines our progress toward closing of the Peoples transaction. You may recall that the Pennsylvania Public Utility Commission took formal action to approve the transaction on January 16 of this year, which cleared us to close now on our date we've announced of March 16. We continue to believe that the -- it was possible to close this transaction much more quickly if it weren't for one issue that became somewhat contentious. We've talked about this with many of you already. The issue centered around a gas gathering system in Southwest Pennsylvania just below Pittsburgh, called Goodwin and Tombaugh. The issue was resolved by the Pennsylvania Public Utility Commission's order, which concurred with the administrative law judge's order that she put up and basically said that the system should be replaced and fully recovered in the context of a rate case.

Given that we didn't own the gas utility for the first quarter of the year, the guidance that we'll present today will be pro forma on financials, and we'll basically demonstrate what a full year of 2020 would look like, had we owned Peoples for the entire year. I think that's what you're looking for, which will provide a better idea as to the earnings power of this new combined company. And Dan is going to cover that in much more detail in a few moments.

Now let's take a look at a view of the combined company here. As you can see, the combined pro forma utility profile is really interesting. You can see on this slide that we're combining the second largest stand-alone regulated water utility in the country with the fifth largest stand-alone regulated gas LDC in the country. The unique water-gas combination will have operations in 10 states with over $7.3 billion in rate base. More than 75% of that rate base will be in the constructive regulatory environment in Pennsylvania, and the overall business mix will be about 70% water, 30% gas.

As we continue to see more and significant opportunities in water like DELCORA, that mix of 70-30 could shift more heavily toward water. We'll continue to look for opportunities to expand our regulated operations in all of our states, and we'll talk a little bit more about that with Matt in a few moments as well.

So this is how we think about the organization of the combined company. The publicly traded name is now Essential Utilities, you know that. The water business will continue to operate under the name Aqua and the gas business will operate under the brand of Peoples. We believe that this structure will allow us to serve all of our stakeholders very effectively.

Though our publicly traded name has changed, the missions of the respective utilities will not. We'll remain focused on providing an affordable, essential service to both water and natural gas customers. Our mission, as stated in the next slide, is a natural blend of the current missions of both utilities. The corporate cultures of both companies have already begun to blend with the interaction that is taking place between the companies since announcement up until today. And that interaction has been very positive. The good news is that both companies have similar cultures focused on employee and customer safety, integrity and excellence in operations.

Now let's talk a little bit about ESG. ESG Is always at the top of our minds at Essential. Our Board and management have spent substantial time considering opportunities to improve ESG, and I want to share some of those initiatives with you this morning.

Let's start right at the top with the company's Board of Directors. Board refreshment has been a key theme. We've talked about that with many of you. In fact, in the last 5 years since I've been CEO, 7 of our 9 Board members are new. The Board we've built has a diverse set of experiences and has worked carefully to adopt modern Board governance practices. The Board is -- the Board just this week adopted a new peer group and a new compensation plan that we discussed with many of you over the last year. Our renewed and hopefully easier to read proxy will provide more details on both Board governance and management compensation. You can also find many of these details on our website.

Now staying with the ESG theme. Back in January, we announced the new leadership team that we've built. The team has what I believe to be a mix of longtime leaders at the company along with those who have joined us more recently in the last few years, bringing new and fresh ideas. Many of our members of the team, you'll meet today, and we say that diversity and inclusion is not just a box we check, it's core to our strategy and we align the makeup of our management team with that of the customers and shareholders we serve. Our management team has grown in diversity, and we're not finished yet.

Since becoming CEO, I have appointed 9 women to officer-level roles and have recently announced 2 new diverse senior leaders just in the last couple of weeks. Key to our diversity program is that we find not only diverse candidates, but the best, most qualified candidates, all in one. I am incredibly proud of the team that we've assembled and expect great things in the coming months and years from our team.

I'll wrap up my ESG thoughts by just saying that we continue to work on improving the basic blocking and tackling associated with ESG. In 2019, we completed the CDP survey for the second time and increased our grade from a C to a B minus, which is a significant accomplishment for us. We spent portions of 3 Board meetings on how we think about each of the E, the S and the G. The results of this you can see on the tear sheets we published to our website just this week. In order to ensure the right level of attention to ESG, we've also added a full-time resource whose principal focus will be ESG. That person will report to Brian as my Chief of Staff and thus, be very close to me with a primary charge of ensuring that we consider ESG in everything we do at the company.

Now we acknowledge that in some regions of the country, there are elevated concerns about the use of natural gas. Some have even suggested that natural gas is a bridge fuel. We must also acknowledge that the clean-burning natural gas is a key component of our country's energy independence, and we further believe that in places like Pittsburgh, Pennsylvania, natural gas will continue to be a key piece of the energy solution for a very long time.

Now as we enter the world of fossil fuel with our purchase of Peoples, we remain focused on a reduction of the company's carbon footprint. And in this regard, I have what I consider pretty exciting news. We recently entered into a contract that will significantly reduce our carbon footprint. In fact, our New Jersey, Pennsylvania, Ohio and Illinois subsidiaries will be purchasing 100% renewable power by 2022. This put our water utility in alignment with the Paris Accord and will allow us to make a significant contribution toward the environment.

At Essential, we'll do our part to limit long-term global temperature rise to less than 1.5 degrees Celsius, which is an aggressive goal for our company. I will also mention that we will achieve this level while simultaneously lowering our overall cost of energy in those same states. Pretty important accomplishment. These commitments to renewable energy reduce Aqua's overall absolute greenhouse gas emissions by nearly 60% from our 2018 baseline. We would have set a standard for the industry to follow in this important work.

Additionally, once we close Peoples, we'll begin to ramp up the capital program at the company. We'll also be significantly reducing methane emissions by tightening up the natural gas grid. We'll quantify the environmental impact in our updated ESG report later this year. Remember, we don't own the company quite yet.

Now I have one other ESG-related announcement to make, that we believe is very important and I think you will, too. You're all likely to be familiar at this point with the family of PFAS chemicals at this point. It's been written up in the newspaper many, many times. In fact, the recent movie Dark Waters is centered around this contaminant that they call "the forever chemical" because it takes a very long time to break down. Today, the federal government has not regulated this contaminant other than to set a health advisory level of 70 parts per trillion. That's for PFOA and PFAS.

As a result of federal government's inaction, many of the states where we do business are adopting their own standards and they vary significantly. Most people hadn't even heard of PFAS before just a few years ago, and now it's a regular topic on the news, as I mentioned. Beginning over a year ago, we took the important step of testing every water system, every point of entry, more than 1,500 across our 8 states for this contaminant, resulting in over 2,600 tests to date. So today, unlike many water systems across the country, we know exactly where any traces of PFAS and PFOA enter our water systems. That's unique.

Today, we are announcing that we will take a step that no other multistate utility has taken yet. We'll provide water in all of our states that meets one standard, which is far more protective than the federal health advisory level and even the CDC recommendations that build on scientific health-based standards developed in New Jersey.

Beginning this year, Aqua will begin the process to install mitigation at all of our states that exceed 13 parts per trillion of PFAS, PFOA and PFNA, individually. We anticipate spending approximately $25 million across our platform to do this. And this is a major step in addressing PFAS in our country. But we'll also -- we're continuously evaluating if further action is needed as additional science comes to light on these chemicals.

We're planning to work closely with both our environmental and our economic regulators to address this important issue. To the best of our knowledge, Aqua is the only water supplier in the country that intends to install treatment for these chemicals in our systems without having an exceedance of a EPA health advisory to prompt that action. And you should know, we discussed this vigorously among our management team. And in the end, we unanimously concluded that we needed to be a leader in this work and determined to set a standard that we believe protects our customers and all of those who consume our water. I hope you'll agree that this is a bold, but prudent step to protect public health by investing in the appropriate utility assets to address these contaminants.

Now before we transition to presentations by the other leaders of the company, I want to make a point to wrap up 2019. As a team, we discussed this a few weeks ago, and it was amazing to comprehend all of what we accomplished in a single year of 2019. So let's start with maybe the not so obvious. First, we installed a record amount of infrastructure, over $550 million to improve and enhance service to our customers. Now we don't always take the time to recognize this massive effort. The role of electric utilities, this might be a single project for $550 million. But in our world, we literally undertake thousands of projects that are carefully coordinated and engineered and executed by our professionals to deploy that level of capital.

Second, we met the financial expectations of -- that we laid out for the year, coming in right at the center of our guidance at $1.47 non-GAAP. Dan will get into this in more detail in a couple of moments. But we often forget, we also saw the settlement of our Pennsylvania rate case, the first one after 7 years. Third, last year we completed 5 municipal deals. We signed 3 more, including DELCORA, which is the largest at $276 million. In addition, we secured fair market value legislation in 2 more states, Ohio and Texas, generating hopefully more growth. Fourth and most obvious, we continued down the path of closing our Peoples transaction. While it's taking longer than we had hoped, we are proud to today be really on the 1 yard line to closing this important transaction.

Related to this, we developed the comprehensive integration plan and came up with a new name, a new logo, a new ticker symbol and worked through regulatory approvals in 3 states. Very, very busy year. We accomplished all these things while continuing our operational excellence in providing service to our customers every day. I continue to be amazed by what our people can accomplish, and I'm so proud of this company and proud to lead it. And I think that this company has a very, very bright future.

Now before I turn to Matt, let me just discuss a little bit what we have in the coming year for 2020 and lay out the groundwork for what you'll hear today. I would say there are 3 primary themes for 2020: Integration, growth and operational excellence.

Let's start with integration. It's going to be a year of integration. We're integrating 2 almost equally sized utilities in Aqua and Peoples, and we'll prepare to onboard the DELCORA customers right after that. Secondly, and since I've become CEO, we've been focused on growth. This will not change. As Matt will share, our municipal pipeline is robust and we'll likely not do something the size of Peoples every year, but we'll continue to pursue strategic acquisitions as they make sense. And finally, the third theme for the year is really the first theme, above all always, that is often taken for granted, but we'll continue to maintain standards of operational excellence. It's an exciting time in water and we'll continue to be industry leaders. In gas, we'll begin our ownership of the company by having a third-party conduct a full safety review of Peoples. Rick and Joe are going to talk more about that in a few moments. While doing this -- all of this work, we'll continue to invest now about $1 billion of capital a year in infrastructure improvements.

So with that as our vision for the next year or so, let me turn it over to Matt to discuss our growth plans. Matt?

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Matthew R. Rhodes, Essential Utilities, Inc. - EVP of Strategy & Corporate Development [3]

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Thank you. Thanks, Chris, and thanks to all of you for joining us today. I'm Matt Rhodes, and I lead strategy and corporate development for Essential, having joined the company in June of 2018. Since then, you can say we've been a little busy, and I'll discuss that in more detail.

As we think about growth, we have very sizable capital opportunities to grow rate base organically. In addition, we have a very robust municipal acquisition program with a proven track record of success. Our municipal program truly has been our core rate base and customer growth engine over the last several years, and we expect it to remain our primary focus for consistent year-over-year growth going forward. In fact, we continue to see significant opportunities ahead of us in water and wastewater for municipal transactions of all sizes. We are emphasizing the point that our municipal initiative is our most important growth driver by listing it first on the slide and making it the largest portion of the box on the right. With that being said, we will continue being opportunistic as we evaluate larger strategic transactions in both water and gas, but we'll remain disciplined buyers.

I will note that we would not have pursued many other opportunities the size of Peoples. As Chris previously alluded to, the Peoples opportunity was unique and that is predominantly located in a state that we are very familiar with, Pennsylvania. It has -- it's a pure-play gas LDC with no material unregulated businesses and it has significant infrastructure investment needs, which will drive organic growth.

We are quite happy with our existing mix of utility platforms at approximately 70% water and 30% gas. Going forward, we will be very selective with future gas acquisitions. If water and wastewater is 80% of our company, for example, going forward, that would mean we've been very successful in our water and wastewater municipal acquisition program, and we'd be very happy with that. We are certainly very mindful of valuation differences across the utility sector and continue to be.

Lastly, our approach to MBAs or nonregulated opportunities has not changed. We believe that our best opportunities for growth are regulated and fall in buckets 1 and 2 on the slide. Peoples does bring with it some MBAs, and we are excited about that, but it was not a major piece of the business and not a driver of our interest in the company. As Chris said, we've sold many of our other non-MBAs or our other MBAs over the last several years.

Going back to Peoples, the MBAs that they do have, which I'll talk about in more detail later, only represent about 1% of their business as well. From time to time, we will evaluate new MBA opportunities, but we're not really spending a lot of our time here.

Turning to the next slide. Let's review our water and wastewater municipal acquisition program in more detail. First, we are seeing more municipals expressing interest in selling their systems. This is due to several factors, including the municipal's need for proceeds to invest in community needs or economic development, to have an experienced operator invest the capital needed to improve the infrastructure and to address the challenges with increasing and more stringent environmental regulations.

Fair market value legislation, which I'll discuss more in a minute, has given municipalities an opportunity to realize the appropriate value for the water and wastewater systems and repurpose capital into other community needs. When we think of what we evaluate in pursuing a municipal opportunity, there are a variety of considerations. Without giving away any secret sauce, here are a few items that we think about: the upfront purchase price and the future capital requirements; the impact to customer rates; the returns we will realize and win, among many other factors. Each deal is different with its own set of opportunities and challenges, but we feel confident we can provide an ideal solution for many municipalities and are excited about the numerous opportunities that we have in front of us.

This next slide discusses one of our key drivers of the municipal program. This illustrates where we have fair market value legislation and where it's been passed in the U.S. You will note that 7 of the 8 states where we currently have water and wastewater operations has fair market value. This legislation is a powerful tool for municipalities to solve their infrastructure challenges. FMV was first implemented in Illinois in 2013, and we've been able to complete several transactions utilizing fair market value in the state. In Pennsylvania, where we also see significant activity, fair market value was passed in 2016. We observed that it typically takes a couple of years for a robust pipeline of opportunities to develop after fair market value legislation is enacted.

We're starting to see this in states like Ohio and Texas, and we recently completed our first municipal acquisition in Ohio. The simple explanation of how this legislation works, and it varies a bit from state to state, is it allows the municipality to get multiple third-party appraisals for its water and wastewater system. We, as an acquirer, can then pay that appraised amount and include it in our rate base as part of our next rate case filing.

Prior to FMV legislation, it was difficult for us to pay a municipality more than the depreciated costs on its books because we would incur goodwill. The depreciated cost -- the depreciated asset value on the municipalities books is often very low because this doesn't include potentially significant amounts of contributed property from developers. Therefore, the purchase price we were previously able to pay before fair market value often didn't generate much excitement at the municipality.

You'll recall that we and the broader water utility industry have been leaders in innovative legislation. Fair market value is just the latest of these. We originated the DSIC or the Distribution Service -- Distribution System Improvement Charge in the 1990s, which is effectively a tracker for capital spending between rate cases.

Another piece of important legislation is called the Water Quality Accountability Act. This legislation, which is in 2 of our states now, is meant to level the playing field, our compliance requirements between regulated utilities and municipalities. It allows us to be a potential solution for municipalities that are facing compliance-related issues.

Moving to the next slide. You can see the deals that we closed in 2019 and already in 2020. If you look back over the last couple of years, you would see that we have been approaching a run rate of about $100 million in annual rate base through these acquisitions. Sometimes deals take longer to close than expected, unfortunately. This happened with 2 deals for over $50 million in rate base that we originally expected to close in 2019, but have slipped to 2020. I'll discuss that more on the next slide. I would note that we've completed nearly 400 acquisitions of water or wastewater systems, both private investor-owned utilities and municipals, in the last 25 years.

Starting in 2016, we refocused our efforts on municipal acquisitions as opposed to smaller private systems. This shift in focus has provided more sizable opportunities for us. Since 2015, we've closed 57 deals, many of them municipal, adding approximately 48,000 connections and approximately $237 million in rate base. While municipal acquisitions, such as the one shown on this slide, are great long-term investments, I think it's important to point out that when we initially close the acquisition, we have to assume the municipal's existing rates, which are often much lower than ours. So these investments don't reach our full cost of service until the next rate case, meaning there can be some delay in achieving full earnings.

Finally, with this level of municipal acquisitions and organic growth, we continue to think that 2% to 3% customer growth is a realistic target for our water and wastewater business going forward.

Turning to the next slide. Here, you can see the acquisitions where we currently have signed agreements in place but are not yet closed. New Garden and East Norriton, which I mentioned a second ago, which are expected to add over $50 million in rate base, are now expected to close in 2020. We continue working diligently to move these through the regulatory process. This also includes DELCORA, which I'll spend more time on in a minute. Once these deals are closed, we will add an additional 205,000 customer equivalents and nearly $330 million in rate base.

Next, onto our pipeline of municipal deals. The BD team in our headquarters and in each of our states continues to foster and develop our robust pipeline. To be included as part of our pipeline, it means that we're having active discussions with the municipality. You can see from the slide that we now have many sizable opportunities and over 300,000 customers in our pipeline. While we do not expect to announce a large municipal deal like DELCORA every year, other opportunities like this are out there, and we have a very experienced team working on them.

While most of our historical deal flow has been in 2 states, Illinois and Pennsylvania, we did recently close on our first municipal acquisition in Ohio for the water system of the City of Campbell with 3,200 connections. We foresee this as a precedent-setting transaction, which we hope will enhance our momentum in the state.

We also expect municipal acquisition activity to accelerate in other states that have recently enacted fair market value legislation such as North Carolina and Texas. Many of our recent municipal acquisitions have been wastewater assets rather than water, given the operation and compliance can be more difficult to manage. We see the same trends in our pipeline opportunities, with the majority of the potential customer additions coming from wastewater systems, which are effectively regulated the same way as water systems.

Now let's move on to DELCORA. As Chris previously mentioned, in September, we signed an asset purchase agreement with DELCORA for $276.5 million. DELCORA is headquartered in Chester, Pennsylvania. It serves 42 municipalities and approximately 500,000 people in Southeastern Pennsylvania and marks the largest municipal acquisition in our company's history. It is also the largest-ever municipal acquisition in the state of Pennsylvania.

DELCORA system includes 189 miles of pipe and has a customer base consisting of large wholesale agreements with other municipal authorities, along with retail, commercial and industrial customers. We estimate that DELCORA provides wastewater service to approximately 198,000 equivalent dwelling units or EDUs.

Now let me take a minute to explain the concept of an EDU. Wastewater EDU is deemed to constitute the estimated amount of domestic sanitary wastewater discharged by a single-family dwelling unit in a single day. We take the total wastewater flow of the system and divide by this amount to estimate the number of EDUs. You may have noticed that our estimated number of EDUs for DELCORA has increased since we announced the deal. This is primarily due to changes in how we're accounting for the flow of DELCORA's large municipal customers, including the number of gallons each residential house is estimated to use. However, there is no change in our estimated revenue, net income or actual customer connections for DELCORA as a result of this updated EDU number.

Post acquisition, DELCORA's 50 million gallon per day wastewater treatment plant in the western service area will be the largest wastewater treatment plant that we own and operate. The eastern service territory currently conveys wastewater to Philadelphia Water Department, or PWD, through a contract that is set to expire in 2028. Given this, DELCORA is responsible for a portion of Philadelphia's EPA-mandated cost to separate its combined storm and sewer systems.

If DELCORA were to stay with PWD over the long term, its total expected costs related to Philadelphia along with its own capital program is expected to be $1.2 billion through 2042. This capital would have increased DELCORA's stand-alone customer rates substantially over the long term, which is why we began looking -- which is why they began looking for a partner and decided to pursue a transaction with us.

To mitigate the rising costs from Philadelphia, DELCORA plans to build the infrastructure to divert wastewater flows from PWD and double the size of its existing wastewater plant to accommodate the additional flows.

Essential is uniquely positioned to make these investments, given its extensive experience in large and complex projects. Total DELCORA CapEx under our ownership through 2028 is estimated to be $700 million with the majority to be spent in 2026 to 2028. DELCORA intends to use net proceeds from the sale after debt repayment to establish a trust, which will help offset future rate increases due to the large capital costs I just described. So we feel that the combination with DELCORA is a win-win for both parties involved and is also a win for the customers of DELCORA.

We will file the transaction approval application for DELCORA with the Pennsylvania Public Utility Commission next week and is expected to close in late 2020 or early 2021. We plan to fund the DELCORA acquisition with a combination of debt and equity. And importantly, we also expect future opportunities to acquire other collection systems, which currently convey wastewater to DELCORA.

In addition, turning to the next slide, as you can see here, Aqua already operates in many of the same communities as DELCORA. You can see the overlap on the slide. There is a significant overlap in the 2 footprints, between Aqua's water service territory and DELCORA's wastewater service territory. Aqua is already deeply entrenched in these local communities where DELCORA operates and is well positioned to serve its customers and those communities.

As we've been working on the integration planning for Peoples, we continue to evaluate and enhance our knowledge of the water and gas landscapes in Kentucky and West Virginia, both of which will be new essential states upon the close of Peoples. A brief summary of our analysis is shown on this slide. We're still in the early stages of getting to know these states. However, we see significant municipal opportunities in Kentucky, in particular, and are working with the Delta Natural Gas team on this effort. Delta, which is part of the Peoples acquisition, already has deep roots in Kentucky.

And finally, as I previously mentioned, we have really deemphasized our focus on MBAs or nonutility businesses over the last 5 years, in particular. At Essential today, we really only have 2 nonutility businesses. These consist of a royalty payment we received from Homeserve as they provide home warranty services to our customers and a pipeline joint venture that was constructed several years ago to provide water to natural gas drillers in North Central Pennsylvania. The performance of this pipeline has been up and down. And as you may recall, we wrote off a significant portion of its value in 2015. However, the pipeline has performed well in the last 2 years and we are currently in the market to sell it.

Peoples does have a few nonregulated businesses in Pennsylvania and Kentucky. Peoples has a home warranty protection program, somewhat similar to ours for water, sewer and gas lines and other services in the home under its Peoples Protection Plan and Homeworks brands. Through both of these programs, Peoples provides service across approximately 150,000 contracts. Peoples is also developing combined heat and power projects, or CHP projects, and find its first 2 contracts with the Pittsburgh Airport and Alleghany Health Network's Wexford Hospital.

Peoples continue to look for additional CHP opportunities because they produce additional demand for natural gas and generate nice financial returns. And there are other projects that Peoples has in early development.

Finally, Peoples has investment in an early stage fuel cell company that is attempting to commercialize its technology. In Kentucky, Delta has small nonregulated businesses that own land and gas production and it processes and then sells the gas. We will continue to evaluate and optimize these businesses in the future, but I want to emphasize again that they comprise less than 1% of our total net income. Our focus has been and will continue to be on our regulated operations going forward.

With that, I'll turn it over to Rick to discuss the operations of Essential.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [4]

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Thanks, Matt, and good morning, everyone. As an 18-year veteran of the company, I am honored to lead a workforce that, once we include Peoples, will have more than 2,300 experienced operations professionals. These employees are dedicated and mission-driven to provide high-quality utility service while using excellent safety and operational best practices every day.

Now while the leadership team is here in New York meeting with all of you, the water and gas continues to flow at our current and our future customers. And this is due to the strong organization and operational excellence that our team prides itself on.

Today, I'd like to share a little more about that organization that will ensure continued service to both our water and gas customers. First, Colleen Arnold will be the leader of our water business at closing. Colleen is a 27-year water industry professional with prior experience in technical consulting and at a large municipal, the City of Wilmington and finally, with Aqua for the past 8 years. She has also been the Deputy Chief Operating Officer, working for me for the past 4.5 years. We are proud that she will be the first female to lead our water business in the company's history. We will talk more about her organization in a moment.

Next, we have Dr. Chris Crockett, who's our Chief Environmental, Safety and Sustainability Officer at Essential. He joined us 4 years ago from the City of Philadelphia, where he was the Deputy Commissioner at the Philadelphia Water Department. There, he directed one of the largest water -- municipal water systems in the United States for 21 years. And with 25 years of total industry experience, Chris is a true water expert and he leads our water quality efforts across the company. His organization is responsible for oversight of compliance reporting for all our water and wastewater systems. He is also responsible for Aqua's centralized water laboratory.

On that note, I am proud to announce that we are finalizing plans to build a new state-of-the-art lab at our headquarters building in Bryn Mawr. We are quickly outgrowing our existing lab as we add more testing capabilities and more customers.

In addition, Chris also leads the team that will ensure our combined safety efforts across both operating units are aligned.

Next is Jim Barbato. He has been with the company for 13 years and has a total of 21 years as a professional engineer. Jim became our Chief Engineer 3 years ago, having previously served in our New Jersey operation. He is responsible for roughly $0.5 billion capital budget at Aqua and will assume leadership for the combined capital budget of Essential, which is now approaching $1 billion per year. Jim's group is ultimately responsible for managing the thousands of projects that make up those budgets. It may surprise you that we typically only have a few really large projects and most projects are more modest-sized distribution system projects, and the average project size is only $250,000. So you can imagine the effort to manage all of those projects. Jim will look to share his expertise and Aqua's expertise that we've gained over the years with the Peoples team to help ensure effective management of their growing capital program.

And finally, I'd like to introduce Joe Gregorini, who will be our President of the gas business. Joe has been with Peoples for 33 years. And prior to closing, he leads all operations as Chief Operating Officer. And as we've worked on this deal and this transaction, I've gotten to know Joe and Joe's team. And I'm so impressed with both him and his team's knowledge, expertise and dedication. Joe, Colleen and Chris are here today and they will be on the panel that's coming up next, so you'll get to hear from them in a little bit. Jim is back in Bryn Mawr, investing in infrastructure.

Now let's turn to Aqua specifically. For those of you who are familiar with Aqua may already know how we've been structured for the past few years. Reporting to Colleen are state presidents in each of our 8 Aqua states. And these presidents are responsible for managing the operations, maintaining regulatory relationships and looking for acquisition opportunities. We are so lucky to have a team this experienced and very good at what they do. And we also have a nice mix of leaders who have been in the roles for more than a decade to those who have just recently joined Aqua. In fact, you may have heard some recent announcements of Larry Carson and Kari Bennett as Presidents of our New Jersey and Indiana operations, respectively. In addition, just this week, Mark McKoy was announced as the Vice President of Aqua reporting to Colleen, and Mark will join us in early March.

For those of you that may not be as familiar with Aqua, company -- the company originated nearly 135 years ago in suburban Philadelphia. Today, we have over $5 billion of rate base with approximately 88% of that in water and 12% in wastewater. You may recall that until 1999, the company only had operations in Pennsylvania, and then it was only water, no wastewater. We've grown a bit since then. Aqua's 1,600 employees provide water and wastewater service to over 3 million people in 8 states. This is done through a combination of large surface water systems like we have in Pennsylvania, to small groundwater systems like we have in our southern states and nearly 190 wastewater treatment systems of all sizes. It is our job to maintain and operate these assets to provide around the clock service to our customers.

Now most of you have probably seen variations of this slide in the past. What it depicts is the state of the United States' water and wastewater industry. There are 3 main points: First, as a whole, the university -- the industry needs an enormous amount of capital investment. The country's water and wastewater infrastructure has largely been under-invested in for decades. Second, the industry is highly fragmented with over 50,000 water systems and 14,000 wastewater systems. And third, most of the United States population receives water and wastewater service from a municipal system. We view this as a significant opportunity, which Matt already discussed.

At Aqua, we take our role of providing excellent service to our customers seriously. One of the ways we provide service is by investing in required infrastructure to maintain system reliability for our customers. This slide shows the increasing investment we have made in infrastructure since 2014. Importantly, we are now investing over $0.5 billion annually in water and wastewater infrastructure. And in 2019, we invested a record of $550 million and we intend to do the same in 2020. Keep in mind, this does not include capital for acquisitions.

Certainly, all of this investment has an impact on our customer bills, and we take pride in trying to minimize this impact. One of the ways we do this is through projects we refer to as 8:1 projects. These are situations where we can reduce $1 of operating expense or O&M by investing up to $8 of capital. These types of projects have zero impact on our customers' bills, but they solve an important operational need for those customers. This slide highlights one project where we developed our own water supply to reduce the need to purchase costly water from another provider. And the other project is where capital investments and an innovative design allowed us to save power and treatment costs at a wastewater plant. And by the way, that project won the 2019 National Association of Water Companies' Management Innovation Award. Most importantly, these projects provide improved service, quality or reliability for our customers.

Now let's shift to Peoples. This slide shows the operations organization that has been in place at Peoples for the last several years. I've already introduced Joe Gregorini, who will lead the gas business. It is important to note that we are retaining all the employees and operational expertise from Peoples, as we need their skill and experience to ensure that gas utilities continues to operate safely and effectively.

Concerning the organizational structure, except for the Kentucky operations, which will be led by John Brown as State President, kind of like we do at Aqua, the Peoples organization, for logical reasons, is structured by function rather than geography. Reporting to Joe are executives responsible for key functions of operations, engineering and construction, reliability, and sales and marketing. This team is very experienced, and they have worked together for a long time. As a fact, between them, they have more than 263 years of natural gas experience. And they are also dedicated, because of those 263 years, 248 of them were with Peoples or its predecessors. I'm looking forward to these executives officially becoming part of the Essential family.

Now Peoples is also nearly 135-year-old utility, and it is based in Pittsburgh. They have been owned by SteelRiver, a private infrastructure fund, for the past 10 years. And during that time, and through 3 subsequent acquisitions, Peoples has grown to serve approximately 750,000 customers in 3 states, and they have about 1,500 employees. The largest number of customers are in Western Pennsylvania, representing 93% of the total, and the rest are in West Virginia and Kentucky.

This slide provides more information for you on the makeup of the Peoples pipeline system. There's an ongoing need for pipeline replacement at Peoples and this will allow increased capital investment in the coming years. Of Peoples total distribution pipeline miles, about 2,700 miles are bare steel or cast iron and need to be replaced. Peoples has already been replacing these pipes. But under Essential ownership, we've committed to further accelerate the replacement over the next 15 years. This accelerated pipeline replacement will be done through the Pennsylvania Public Utility Commission's Long-term Infrastructure Investment Program, also known as LTIIP.

As shown on this next chart and discussed on the previous slide, Peoples said that it has been committed to investing in required infrastructure to maintain system reliability. We intend to grow the replacement program and increase our capital expenditures by over 40% in 2020. And later, Dan will talk about how we plan to implement repair tax as a treatment to finance that process.

Let's switch gears to safety and the environment. At Essential, we've always maintained a primary core value that is committed to public safety. And when we began the process of acquiring a gas utility, we wanted to make sure that this business had that same commitment, and we found it in Peoples. Peoples already has extremely strong gas safety and compliance programs and a culture committed to public safety. In fact, Peoples is proactively implementing a few new initiatives to further enhance its existing commitments to gas safety.

Let me go through them. First, in response to a 2018 non-Peoples gas industry incident in Massachusetts related to an overpressuring a pipeline system, Peoples initiated an overpressure protection self-review. That effort reviewed its procedures and developed and implemented enhanced procedures to avoid such incidents in their system. Further, at the request of Essential, Peoples hired Black & Veatch, an industry leader in pipeline safety assessment, to provide a third-party review of Peoples' systems, procedures, incident risk exposure and mitigation measures and to conduct an industry best practices review. This assessment has already started and a final report will be issued in May.

Lastly, in 2019, Peoples began a process to proactively adopt a Pipeline Safety Management System, known as PSMS. This is recommended by state and federal regulating agencies. The program will be implemented later this year, and it uses a structured framework to identify, manage and continuously improve gas pipeline safety. In addition to safety, Essential has a strong focus and commitment on ESG, as Chris already discussed. So I want to share with you some important environmental initiatives at Peoples that may not be obvious when you think of a typical gas utility. When started, the accelerated pipeline replacement program will remove about 200 miles of old bare steel pipelines this year. And as a result, based on calculations provided by the United States EPA, Peoples' annual methane emissions will be reduced by 353 metric tons. And that equates to greenhouse gas reductions equal to eliminating about 1,900 automobiles. Importantly, this benefit will compound each year as more and more pipes are replaced.

Also, because Peoples has a program to capture and use methane from local landfills, this provides enough gas each year to fuel 19,400 homes and reduce greenhouse gas emissions equal to eliminating 75,000 vehicles. And lastly, Peoples has a program for natural gas vehicles or NGV. It involves expanding the use of NGV at Peoples and also serving 26 public NGV fueling stations. NGV use reduces greenhouse gas emissions by 20% to 30% when compared to gasoline or diesel fuels.

Okay. Let's talk about some of the infrastructure investments we plan to make. As a combined company, we expect to invest just under $1 billion in infrastructure annually. And for the 3-year period, between 2020 and 2022, we expect to invest $2.8 billion. I will note that this does not include capital for acquisitions or for the capital that those acquisitions will require. This capital is mainly for distribution pipe replacement and source treatment in the water business and for pipeline replacement in the natural gas business. It is also important to note that approximately 50% of this capital is eligible for recovery under surcharge mechanisms like the DISC. Now we won't necessarily recover it that way, but it is eligible.

The CapEx discussed on the previous slide will translate into significant rate base growth. In the Water business, our rate base is growing roughly 6% to 7% from infrastructure improvements. Note, again, we do not factor in acquisitions, as they can be lumpy. For example, we expect to have close DELCORA by early 2021, and that will cause our rate base to grow by an additional $276 million, but we don't count that in this calculation. We believe the 6% to 7% rate base from CapEx is sustainable in the water business. And for gas, the rate base growth should be in the 8% to 10% range due to the pipeline replacement needs at Peoples.

So hopefully, that provided an overview of the company and our strategy. And we're now going to take a 15-minute break, and then we will reconvene for a panel on operational excellence and regulatory affairs.

(Break)

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [5]

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Welcome back, everyone. I think my mic is working now. Welcome back. All right, very good. There we go. We have sound. Welcome back. I hope you all had a great break, and thanks for returning because you're going to hear from a panel which I hope you will find interesting.

The purpose of this panel is to give you a bit more exposure to our leadership team and a different part of our leadership team and cover some of the more industry-specific items in a deeper way than we typically do for Investor Relations purposes. Now I already introduced Chris Crockett, Colleen Arnold and Joe Gregorini, who are on the stage with me now, when I walk through my organization.

But I would now like to introduce Kim Joyce, who's been with the company for 13 years and is our Vice President of Regulatory and Government Affairs. As Regulatory Counsel for the company, she oversees and manages regulatory filings including base rate cases, acquisition applications and the implementation of federal and state legislative and regulatory policy at the Public Utility Commissions that regulate Essential. She is responsible for maintaining awareness and providing advocacy on governmental and legislative issues that impact the company. In addition, Kim is proud to lead the company's volunteer and corporate giving initiatives. Welcome, Kim.

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [6]

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Thanks, Rick.

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Questions and Answers

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [1]

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So Colleen, let's start with you. You've been a consultant to and an employee of, as a director, a large municipal water utility. How do you compare what you saw when you were at a municipal to what you see when you're at Aqua?

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Colleen M. Arnold, Essential Utilities, Inc. - Deputy COO [2]

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Thanks, Rick. Good morning, everyone. I think the key difference, especially when I think about the small to medium-sized municipalities I interacted with is that on the municipal side or in city government, the water utility can often just become another city department or a government service. And there's not necessarily an understanding or tie to cost of service. Or in plainer words, what that means is, water rates become a tax or they think of it as a tax. And so what that means is that it can become subject to political discretion or the will to actually get anything done. And when you have a key public health service that can really lead to dangerous things and the system can break down. And honestly, I think we saw that to a certain extent with Flint.

And along those lines, again, the city officials, they're not necessarily thinking, first and foremost, about water and wastewater. A lot of the issues there are complex and they're not seen -- they'd much rather focus, again, on economic development or talk about crime or even potholes or something that they are more willing to talk about than water mains under the street. And so without that focus, I think we're losing at a critical time, a kind of key communication on water with our country. And the issues that are out there today, you hear them on the headlines in terms of PFAS, water quality, water treatment, it's getting increasingly complex. So with our leaders that aren't focused on that, I think, again, we're losing a little bit of our public trust, and we're not necessarily making the investments that we need to in that critical service.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [3]

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All right. Great. Thank you. So Chris Crockett, Colleen mentioned water quality and technology. Now most of this group probably has no idea what it takes to manage a system with 1,500 points of entry. Can you tell us a little bit about your team, what you do and what's involved?

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Christopher S. Crockett, Essential Utilities, Inc. - Chief Environmental Officer & VP [4]

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So as you mentioned, Rick, most people don't realize all the things that have to happen to make sure that, that water that comes out of your tap is safe every day. And all the things that we need to do, and it's a big job done by a large team of people and it's done 24/7. And sometimes, it takes something as simple as a tour, like we did with Joe's team, where they came to the water treatment plant and went through the lab, for them to even remind you how much work you do some days because we take it all for granted. Now when it comes to testing, it is done by a big team, including technicians and operators at the plants and in the field, to engineers and scientists, to folks in the laboratory and that information is looked at the whole way from the field level, the whole way up to the corporate level every day.

And in addition to that, there's equipment -- process equipment and probes monitoring water quality 24/7 all the way from where it comes in from the river, all the way out to the tap in places. What people don't realize is just last year in 2019, we collected over 120,000 samples for compliance as a company. Of those 120,000 samples, 35,000 went to our central laboratory in Bryn Mawr. Our central laboratory in Bryn Mawr runs about 40 different methods that can detect up to 240 different constituents in the drinking water. Only 90 are regulated. Those 35,000 samples generated 308,000 tests and analyses in our laboratory. So that's just one year for a portion of our work. In addition to that, and we mentioned the process monitoring, the probes, and equipment, we're also looking at and using intelligent systems like Fontus Blue, which harness all that water quality data that we're gathering and allow us to look at that to predict future water quality for things like algal blooms as well as provide tools to allow us to optimize treatment faster and cheaper to remove those kinds of chemicals to make sure the drinking water is safe.

In addition, we have early warning systems on systems of vapor water from rivers and streams. And those early warning systems allow us to get a heads up in advance if there's a spill or an accident upstream that would require us to either shut down our water intake, change to another source or put on additional treatment. All those things are happening 24/7 behind the scenes to deliver that safe glass water to you. So we know, from river to tap, exactly what's going on and to make sure that you're safe 24/7. Thanks, Rick.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [5]

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Very good. Thanks for the detailed answer. So Kim, let's turn to you now. Everything that Colleen and Chris just talked about sounds really costly. How do you think about how the company is going to earn a return on that investment, while still taking care of our customers?

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [6]

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Sure. Good morning, everybody. Happy to be here. Talk a little bit about the DISC. And I think those that follow the water industry are fairly familiar with surcharge mechanisms. They have different acronyms in different states, but I'll refer to it as the DISC. It started out in Pennsylvania in the water industry in the early '90s, and it was really meant to incentivize investor-owned utilities in Pennsylvania to focus on replacing a 75-year old distribution pipe, 100-year-old distribution pipe. But since that time, we've seen significant expansion of DISC mechanisms. And a lot of states have gotten very creative in what they're incentivizing investor-owned utilities to look at and replace. And one of the projects that I was really proud to be a part of was in North Carolina. We have water and wastewater operations in North Carolina. We serve about 80,000 water customers, about 18,000 wastewater customers. But just to put this in perspective, to serve those customers, there's about 1,400 wells. We have customers in 51 counties, and there's 750 different water systems that we own and operate to deliver service.

And what was happening in parts of North Carolina and parts of the pockets of the communities that we serve, we were experiencing iron and manganese issues, naturally occurring iron and manganese in the water. And certainly, that was very unpleasant for our customers, right? These are not health-related issues. We call them secondary water quality issues, but not a good thing for our customers. And certainly, we wanted to do something about it. Our regulators wanted to do something about it and our consumer advocates. And so we all work together collaboratively. And that particular infrastructure mechanism in North Carolina is aimed at addressing that issue. So it incentivizes to put filters to address those issues. And since the [WISC] in North Carolina was passed, we've put in 41 filters in different communities, 12 of those this past year. So I just think that's a really good example of how they've expanded and address different issues in different states.

There's other examples as well, right, just adding wastewater to the list of eligible [plants that we can replace.] That's happening in New Jersey right now. Obviously, expanding to more than just distribution pipe. And I think a lot of this, because the mechanism has worked so well, typically had a cap involved. And so states have moved and increase those caps on the amount that you can run through a mechanism. And then certainly, just expanding the treatment. So there's states like Illinois and Ohio that have expanded the list of eligible [plant] from basically the source to where the customer gets the water out of the tap.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [7]

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Kim, fair enough. But how do these mechanisms actually benefit customers?

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [8]

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Yes, that's a great question, and we have those discussions all the time. I think one of the challenges we have as water and wastewater industry is a lot of what we do our customers don't see, right? So pipe is underground, and customers don't really see work that's being done as the treatment plant or at the wastewater treatment plant. And so most of these mechanisms were required either to put our long-term infrastructure plan, put that in writing ahead of the projects that we do or after the projects that we do. So it really is an opportunity for us to be transparent and lay out what our plans are going to be and educate our customers and show them this is the work that we're doing in your community. It will have an impact on your bill, but at least they get that connection and can understand the work that's being done.

In addition, we know our customers do not like large spikes, right, so these mechanisms allow gradual increases. And then there's other operational issues, right? We see decreases and unaccounted for water. We can see decreases in customer water quality complaints. And then lastly, I'll just note, rate cases in our industry certainly serve a purpose, and there's a need for them. But again, they are unpleasant for our customers. It takes a lot of work, a lot of work from the management team, a lot of work from the staff, internal staff who put them together, and then a lot of work for our regulators. So to the extent that we can have more time between our base rate cases and use these types of mechanisms, that's a win-win for everybody.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [9]

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Very good. Thank you so much. Let's switch over and ask a question on the gas business. So Joe Gregorini is not yet an employee of Essential. He will become one on March 16, when we close. So Joe, when you become the President of the gas business, what are your priorities?

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Joseph Gregorini;Peoples Gas Company;SVP and Chief Operating Officer, [10]

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Well, there's a number of priorities. There are very important things that we need to take care of. The 2, I guess, of note: One is the opportunity to accelerate our pipe replacement. We've already got an accelerated program of Peoples. We're going to have a more meaningful accelerated pipe replacement program on the distribution side, and so we're going to ramp that up. But also of note is on our gathering pipelines. We have about over 2,000 miles of gathering pipelines that were built to move gas from the wellhead to the customer. And we've got a program around accelerating replacement of those. And Chris Franklin had mentioned the Goodwin and Tombaugh issue, which was a very prominent issue in the acquisition case. We have a 7-year commitment to replace all the pipelines serving customers out there.

So I think the challenge is there. It's a great challenge to have, right? We've got to get ready and ramp-up and execute around that. So we're already in the planning stages, designing and engineering our pipeline projects, more than we traditionally have, which is a good thing. We have to onboard our own workforce to do tie-ins, the inspectors and increase our contractor network, the folks that are actually laying the pipe for us. And then what comes with that is training. We have to qualify and train all of those new hires as well as requalify all the ones that we currently have, which are 750-plus. And we do that in our own in-house training center. So it's a challenge, but like I said, it's a good challenge. So it's going to be prominent on our list of things to do.

And the other thing, and I think we saw some of this already today was around natural gas role in ESG initiatives. It's going to be a prominent thing that we move forward. On the commercial side, you saw a little bit about combined heat and power, natural gas vehicles. We've got a sales team that are trying to work really hard with our potential customers out there, have turnkey solutions for them. It not only saves customers money, but it really -- natural gas is environmentally friendly and very efficient fuel. So it has a nice ESG story around it. Landfill gas, we keep trying to acquire as much as we can. It has huge environmental impacts.

And then the other thing that goes with that, and you saw some statistics today around the quantification on greenhouse gas emissions with some of our natural gas ESG initiatives. And particularly, on the gathering side, what -- some of the statistics are based on EPA standard kind of national metrics. We're going to take a real hard look at quantifying it on our system, especially on the gathering systems, where you have higher emission rates. So we're going to work real hard to make sure that we've got a good handle and can accurately quantify the ESG impacts. We think it's more than what you even saw today. Thank you.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [11]

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Very good. Back to Colleen. And so in a couple of weeks, you're going to become the President of the Water business. What are your priorities?

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Colleen M. Arnold, Essential Utilities, Inc. - Deputy COO [12]

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You've heard us talk about it. Operational excellence is our core competency. And I certainly want to not only maintain it as we saw in Chris' slides, but increase it, and then we just heard Joe talk about operator training. One of the few things that I have been able to observe so far in our interaction with Joe, that their operator training and qualification program on gas is really rigorous. And on the water operations side, I don't know if you all know this, but certification requirement for what makes a water operator differs greatly from all our 50 -- in all our 50 states. And it doesn't necessarily really qualify our operators for all the complex, increasing treatment needs that I talked about earlier. So I'm looking at focusing on operator training. We have Asian workforce like we all know. Today, historically, what we've done is we've taken our senior operator and have them train the junior ones and with technology today, Chris talked about Fontus Blue; and software, we get smarter; and data analytics, I think we can have smarter operators who are more focused and proactive in what they do, and we know we will be more efficient with that too.

And then, of course, you guys talk about it, but growth and especially for me, as I spoke about my knowledge of the municipal market, the growth in the municipal market will be a key priority. I am really excited to be able to extend our value proposition as a regulated utility to the municipal side. I've been working in water for over 25 years. I'm passionate about the water industry, and I know we have, as Aqua, some great solutions to offer, and I know we'll make the right investments.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [13]

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Perfect. Joe, we're going to switch back to gas for a second. As you think about the pipeline replacement projects that are coming up. How do you factor in? And how do you think about how that impacts safety?

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Joseph Gregorini;Peoples Gas Company;SVP and Chief Operating Officer, [14]

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Well, let me start by saying that I'm very proud of the employee safety culture we have at Peoples as well as a very strong and rigorous gas pipeline safety and compliance program. We literally have hundreds of standard operating procedures, job procedures, a lot of those are patterned around federal gas pipeline safety regulations, but also state commission regulations. It's really the core of what we do. But we try to be -- go beyond that. And Rick touched on some of these self-initiated programs that we started in gas pipeline replacement, and accelerated program is one of that.

When we look at our pipelines, we've got 2,700 miles of bare steel and some cast iron pipelines, safe to say a fair amount. We've had an accelerated program in place for the last 7 years, but now with the ability to increase that and accelerate it more, those are our highest risk pipelines, and we're going to be able to take them out of the ground sooner than what we could before. So I mean, that overall is one of the most important initiatives to improving gas pipeline safety in our system.

And Rick mentioned a couple of other self-initiated programs, so the Pipeline Safety Management Program. Again, this isn't mandated or required. It's a practice that's used in other industries: aviation, chemical, nuclear. We're going to bring it over and use it on the gas. We think it's a best practice, and it's going to enhance our safety across the company. And it's going to allow our subject matter experts to -- on a -- based on a set framework and on a regular basis, get together, assess all of the risks. It's a -- this is a very dynamic process. Identify mitigation steps and then test them and verify them. And we're going to actually have -- we're going to have dedicated folks that we're going to bring on board to help manage this. This isn't just a fad. This is going to be a permanent part of our -- an important part of our gas safety program going forward.

And Rick also mentioned the Massachusetts incidents and the overpressure situation. That's another self-initiated program that we undertook. It caught the industry's attention, but it did catch our attention, what happened there. We have low-pressure systems similar to what's up there. So we immediately engaged our team in identifying all of our procedures around these low-pressure systems; studied real hard what came out of the investigations with NTSB, the State Commissions, AGA, American Gas Association; and implemented steps. We put some immediate steps in place, some short-term and longer-term steps, even some capital programs to address that. So I know that's beyond the pipe replacement, but I think it's another example of some of the important initiatives around gas safety.

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [15]

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And I'll just add. Peoples, a large portion being in Pennsylvania, so the Pennsylvania DISC law, Peoples has a 5% cap rate on their DISC right now. So there is that opportunity under the legislation to increase that just like we have in -- on the water side with Aqua Pennsylvania.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [16]

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Kim, thanks for bringing that up. It highlights the parallels that we've already seen between the water business and the gas business. So thanks for doing that. Chris Crockett, it's your turn now. And I'm going to ask you a technical question. Colleen mentioned the increased complexity of water quality issues. How do you see the PFAS, lead, pharmaceuticals in the water and water quality in general playing out in the next few years?

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Christopher S. Crockett, Essential Utilities, Inc. - Chief Environmental Officer & VP [17]

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That's a good question. And I could spend probably 3 hours talking about this. One of my favorite things to talk about is emerging water quality issues. But I'm going to try to keep it under 3 minutes, see if I can cram it all in. So let's start with the opportunity that these chemicals represent. They represent incredible opportunity for Aqua to be a leader and the champion of protecting public health and also an opportunity for growth, which I'll talk about in a minute. The issue that we're seeing here is the way the Safe Drinking Water Act was set up and the way Drinking Water Regulations were set up. Since the '70s, science identifies a contaminant. Then the scientists and regulators determine the safe level that it can be in the water. And then the water suppliers remove that chemical to that safe level. The issue that we're seeing now is our ability in science is outstripping or outpacing our ability to understand the public health significance and the regulatory process. For example, we used to detect chemicals at the part per million or milligram per liter level, then part per billion. Now we are detecting water quality at the part per trillion level, which is 1 grain of sand in an Olympic size swimming pool. So our ability to detect these things is occurring at a much faster rate than our ability to understand what it means for public health. And then we have a regulatory process that takes years to adapt a new chemical to its list. In fact, there's only 90 regulated contaminants in drinking water and EPA has not adopted a new maximum contaminant level in over 20 years.

So how is Aqua approaching these emerging tenets? Well, regardless of what the EPA is doing, we go and understand the state of science and how to remove these chemicals and participate in research with universities and organizations. Second, we engage our customers to try to understand what their questions are and concerns about these chemicals so that we can explain to them what we're doing and what the issues are. Third, we -- as we mentioned earlier -- Chris mentioned earlier, we test our systems. We go out and develop the ability to test our systems for these emerging contaminants. For example, PFAS, when it first was on the scene in 2016, laboratories, there were only a handful in the country that could do it. It took you 2 months to get a result. We went and built -- put in our own capabilities to analyze for it, put in a $400,000 liquid chromatograph, and we are getting results in under a week and went out and tested thousands of our locations.

Next, after we have acquired all this information and, at the same time, we're working with our environmental regulators as well as our economic regulators to make sure that they understand that we are supportive of regulations to remove these contaminants as well as to gain acceptance for the technologies and the recovery to remove these contaminants. So that's PFAS and emerging contaminants in a nutshell.

Where we think it's a substantial opportunity for growth is as we mentioned, there's 50,000 community water systems out there. Many of them today struggle to meet the environmental regulations of the past century, let alone what's coming ahead in the next 20 years or next 2 years even. And so many of those systems that are struggling are already feeling the pressure of these emerging contaminants. Communities that have already had contamination from PFAS or lead have really not had the wherewithal to manage the issue and they're turning to either massive investments that they can't afford at the community level, and then they're turning to the state and federal taxpayers to bail them out through grants. We don't think that's a sustainable option. We think that private utilities like ours, we have the wherewithal and the complexity to be able to go in and address these issues and manage them properly and do it cost efficiently for the customer.

So we think, again, that these emerging contaminants are a real opportunity for us to be a leader, a public health champion and to grow as a company.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [18]

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Awesome. I don't think you met your 3-minute target. But it was a very thoughtful answer and very important information. So Joe, we're coming back to you now, talk about Peoples. Peoples, like Aqua, has grown through acquisitions. Can you talk about your thoughts on how you had to go through some integration efforts at Peoples?

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Joseph Gregorini;Peoples Gas Company;SVP and Chief Operating Officer, [19]

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Yes. Sure, Rick. In a relatively short period of time, a handful of years, Peoples through acquisitions, essentially, doubled the size of our business in Western Pennsylvania. And uniquely, there's 3 systems that were brought together. We're all in the same geographic area and, literally, we have situations where we have pipes from different legacy systems on the same street. It's unique to the Western Pennsylvania area. So one of our biggest challenges was when we acquired those systems, we had 3 legacy unions, work -- unionized workforce of about 750 employees. Three separate sets of contracts, 3 sets of operating rules, 3 different sets of shop locations. And so really a breakthrough in that integration was in 2016. We were able to negotiate a single labor agreement that covered all of those employees. And for the first time, we're able to bring all those together under common work rules.

Prior to that, we literally -- this is no exaggeration, we had our guys driving by each other. So huge efficiencies that we were able to gain out of that. So it was a big part, and we actually were able to consolidate some of our shop locations to be more efficient. So that was the big piece of it. And then when we were sold from -- by Dominion Resources in 2010 and StillRiver acquired us, we had to start a new with all of our IT infrastructure. We had a short period of time to rely on the Dominion systems, but within a -- but less than a year -- or a little over a year, had to build our own IT infrastructure.

So having those new state-of-the-art systems, especially on the operations side for managing our compliance work, scheduling our work, our mapping systems, I can go on and name quite a few of those. Having those in place really made it much easier and more effective to integrate the 3 businesses. It put us on the same common practices. It actually eliminated a lot of manual processes that existed with a couple of the other legacy companies.

And then lastly, as I mentioned, because of the overlapping service territory, as we go through and replace pipe on all 3 of those legacy systems, we're able to do it in a much more efficient way. We don't have to replace pipe for pipe. We may have opportunities where we may only have to replace 1 pipe and tie-in 2 different legacy sets of customers or eliminate pipe altogether and just tie it into an existing system that's not going to be replaced. And over the last number of years, we've been able to eliminate the replacement of 30 miles of pipeline related to our bare steel pipeline replacement project, which has played a big part now, as you know, maintaining an efficient operation. So...

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [20]

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Thanks, again. Kim, it's your turn. And let's change gears and talk about a whole new topic: fair market valuation. Matt discussed earlier that it spurred conversations with municipalities talking about selling their utilities. Can you talk about our company's biggest learnings as regards to fair market valuation?

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [21]

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Sure. So Chris likes to talk about emerging contaminants. And I really like to talk about fair market value and that legislation. So when you talk about fair market valuation legislation, I think it's important to recognize it's a real shift in the way of thinking about acquisitions and the rate-making process. And so in my regulatory world, there's a lot of key stakeholders that came along with us on this journey, in this shift, and really created a whole new work stream, right, in some of our states with the success of fair market valuation legislation. For us, like Matt mentioned, it started in Illinois in 2013. And since then, we have some type of version of this legislation in 7 out of our 8 states. That's a really short amount of time. And I think it goes -- and as a testament, I think, legislators were looking for tools and ways to incentivize consolidation in the municipal market. So it's a short amount of time and a lot of progress has been made. Just to take a step back, when you think about fair market value and the different types of legislation, to me, it's a version of acquisition policies.

And most of the states that we were in had types of acquisition policies, which were -- again, they were -- their intent was to consolidate, right, gain efficiencies of scale because there are so many water and wastewater providers, and there's so much fragmentation. Those acquisition policies worked really well I think for smaller IOUs, small -- smaller systems, mom-and-pops, smaller communities. But they weren't really making a lot of progress in consolidation in the municipal area. And so what the legislation really tried to do, and Matt alluded to this in his presentation, is again in the regulatory world, there's depreciated original cost, and that's going to be different than fair market value. And so how can we develop guardrails in a process where we come to a fair price, avoid litigation about what that price is and then still have customer protection when we file the acquisition for approval at the commission.

But some of our biggest learnings when we file the transactions at the commission, all the deals have different nuances and are different. The reason for why a mayor or a town is deciding to sell their assets are all different. Some might have a large amount of debt, pension obligations. A lot of times there's sort of looming environmental compliance issues that they want to transfer that risk to a company like Aqua, that's an expert in fixing and addressing issues and regulatory compliance. And sometimes, they just want to exit the business, and all of those are valid reasons.

One thing that I've learned in talking to the public officials that are making these decisions is that they're all really trying to do the right thing for their customers and their constituents, right? They are amazingly inquisitive about the rate-making process and the regulated process. They want to know how their customers are going to be treated under the Public Utility Commission. They want to know about the protection, and they really want to know about the rate impact that this sale could have on their customers. And so you almost kind of go through a mini rate-making education with the public officials as you take them on this journey. And again, a lot of focus on rates and trying to be as transparent as possible because we do know we have to be open and transparent about the price and the value of those assets will have an impact on the rate of their customers and our customers.

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [22]

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Thank you so much. I think we're out of time. And so in closing, I'd like to thank the panelists. I hope you found this session to be really informative.

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Presentation

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Richard Scott Fox, Essential Utilities, Inc. - Executive VP & COO [1]

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And now I'd like to invite Dan Schuller to the podium to talk about our financial update.

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [2]

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Thank you, Rick. Thanks, analysts. Good morning, everyone.

Many of you are likely focused on 2020 and beyond, let me start by recapping 2019. First, we ended the year with almost $890 million in revenue, up 6.2% as we benefited from the impact of the Pennsylvania rate case and continued customer growth. O&M was up 8% from $308.5 million to $333.1 million. However, those results were skewed by the Peoples transaction-related costs as well as growth, which we'll discuss further when we show the O&M waterfall.

Net income was up 17% year-over-year from $192 million to $224.5 million, but that was impacted by transaction-related expenses as well. GAAP EPS was down 3.7% given that the 2019 share count was higher than 2018 due to the April 2019 common stock and tangible equity unit offering.

To provide a clear picture of year-over-year income, let's look at the adjusted income and adjusted income per share lines. Adjusted income was up 5.1% and adjusted income per share was up 4.3% from $1.41 to $1.47. The $1.47 excludes the impact of Peoples-related expenses and the additional shares issued to fund the Peoples transaction. Now we will use that $1.47 to baseline our future earnings growth.

Next, let's walk through the details in the following waterfall slides starting with revenue. For 2019, we reported strong revenue growth of 6.2%, which was primarily driven by rate increases in customer growth. I would note that this included the first rate case impact at Aqua Pennsylvania since 2012. During that time, we invested over $2 billion in infrastructure improvements in Pennsylvania.

Good customer growth. About 70% of that revenue gain came from newly acquired assets with the remainder from organic growth. I do want to note the volume category shown here reflects both water consumption and wastewater volumes. We made this change in our categories in our third quarter earnings presentation due to the increasing importance of wastewater in our business.

Next let's take a quick look at the -- at rate case activity before moving on to O&M expenses. In 2019, we completed rate cases or surcharges in New Jersey, North Carolina, Ohio and of course Pennsylvania, totaling annualized revenue of $58.2 million. Thus far, in 2020, we've completed rate cases and surcharges in Illinois, Ohio and North Carolina for annualized revenue increase of $4.8 million, and we expect another $8.3 million from our pending activity in Indiana, New Jersey, North Carolina and Virginia. While not on this slide, I should mention that Peoples had a successful rate case in 2019 for the Peoples' natural gas business unit, resulting in approximately $59 million in additional annualized revenue.

Now back to O&M. At the waterfall, you will see that there are some onetime events in both 2018 and '19 that led to an uncharacteristic increase in O&M with Peoples-related costs in both years and some other nonrecurring beneficial items in 2018. Thus, the overall increase is not reflective of the true results of the business on a same-system basis, which were more in line with our historical expectations.

Next let's spend some time in the earnings per share waterfall. Admittedly, this is a complex slide and we filled the whole screen with it, as you can see. But let's walk through it carefully because it bridges between GAAP and adjusted figures for both 2018 and 2019. So GAAP EPS in 2018 was $1.08. But adjusting out the mark-to-market impact of the interest rate swaps and Peoples-related expenses to this for $1.41 on an adjusted basis for 2018. For 2019, rates and surcharges were the biggest contributors of growth, contributing an additional $0.16. Growth from acquisitions and organic customer additions added another $0.03, and that was offset by other -- by higher expenses, other and volume, bringing us to $1.47 for the adjusted income per share for 2019, up 4.3% from 2018.

Continuing to the right then, the $1.47 is then impacted negatively by $0.22 of Peoples-related costs, about $0.11 from the dilutive effect of the equity offering and approximately $0.10 for the settlement of the interest rate swaps, resulting in GAAP EPS of $1.04 for 2019. Now I'd really focus on the middle of the slide between the 2 medium blue bars to understand the baseline year-over-year results for the business.

Next let's take a look at the multiyear trend in income per share. On the growth in income per share slide, you'll see the steady increase in our income per share since 2014. Those of you that have followed us for some time will recognize that this growth rate in the recent years was less than our rate base growth given the Aqua Pennsylvania repair implementation, which led to more rapid earnings growth in the early years and slower growth thereafter. The green boxes adjust the GAAP results for various items like the 2015 impairment of our JV pipeline in the Marcellus and the 2018 and 2019 impacts of the Peoples transaction-related expenses and financing.

Next let's discuss the dividend trend over the same period. In 2019, we increased the dividend 7%. We've increased the dividend 29 times in 28 years. And as of March 1, we'll have a 75-year history of paying quarterly cash dividends. This slide and those shown previously in the finance section have been focused on the financial results of the water and wastewater business. At this point, though, we're going to shift our sights to the future to provide you with more information on the combined water and natural gas utility business, talking about credit ratings, what you can expect to see in terms of segment reporting, key drivers of the business and combined earnings guidance.

So first, let's spend a few minutes on credit ratings, which now include the impact of the Peoples transaction. As we said, when we first announced the Peoples transaction, we are committed to maintaining a strong balance sheet, and our credit metrics reflect this. Historically, we had an S&P rating at Aqua Pennsylvania, and Peoples had ratings from both S&P and Moody's. Given the need to issue public debt at the Essential level, we went through the ratings processes at both agencies prior to our public debt issuance last year. Following our Pennsylvania regulatory approval in January, S&P released their ratings, giving Essential an issuer rating of A, meaning that unsecured holdco debt would be rated A-. You might recall, last April, S&P had the holding company at A+, but they indicated that they would downgrade the holding company by up to 2 notches with the transaction. But given updated financial projections this year, S&P only downgraded Essential -- or a notch -- Essential down by 1 notch from A+ to A. So we're quite pleased with that outcome. Moody's came out with a BAA2 rating when we issued last April, and we understand that, that rating will remain constant at closing.

Due to different ratings methodologies, it's not uncommon for utilities to have lower ratings from Moody's than from S&P. And as you can see on the bottom of the slide, these ratings are in line with those of our peers, which include water and gas players, of about $2.5 billion to $25 billion in market cap. And we'll work to support strong investment-grade ratings by maintaining our primary credit metrics in the ranges that are shown on the right-hand side of the slide, those on -- in blue over there.

In terms of debt issuances, you should generally expect to see going forward a mix of first mortgage bonds at the opco level in those states where we have active indentures in place, so it's Pennsylvania, Ohio and Illinois, and public debt at the Essential level for our other water states and for funding Peoples' capital needs in Pennsylvania, Kentucky and West Virginia.

Given the expansion from water and wastewater to natural gas, we thought it was important to give you a better sense of what investors will see in the future with respect to financial reporting. So per accounting standards, segments and the level of detail by segment are really defined by the chief operating decision-maker in the level of information which he or she regularly considers. Given this, we're envisioning 2 reportable segments: water, including wastewater and gas, which, together with nonregulated impairment some to the consolidated. The level of detail we expect to provide is outlined on this slide. But basically, it's a complete income statement down to net income for the 2 reportable segments as well as information on capital expenditures, total assets and rate base. We plan to provide most of this every quarter, but rate base, for example, we may just provide annually as we do in our 10-K today. Balance sheet and cash flow statement will only be at the consolidated company level. Now in putting this together, we believe that this will provide you with the level of information that you would expect from a true commodity utility.

Next let's shift gears and talk about the drivers of the combined Essential business with both water and gas. Let's take these blocks one by one. Regulatory environment. As you know, not all states are equal in terms of the constructiveness of the regulatory environment. Some are forward-looking. Others are historical. Some brand -- are higher ROEs or have better infrastructure recovery mechanisms. Certain infrastructure surcharges are focused on pipe while others are really sourced to meter, and some states have revenue adjustment mechanisms. Once we're in a state, we work to optimize our returns in light of that regulatory environment, but we also seek to improve below-average regulatory environment by working closely with regulators and supporting legislation, which would facilitate more progressive regulation. And as you'll recall, we have exited certain states that we deemed to have consistently subpar regulatory environments.

Capital investment and recovery. This is really the core of our economic model. We invest capital, which builds rate base, and then we seek to earn a return of and on the equity that supports that rate base.

Regulatory discipline. This is about understanding the specific regulatory rules in a state and doing everything we can to ensure optimal regulatory outcomes and limited regulatory lag. For example, we carefully plan our capital expenditure and rate case timing to minimize that regulatory lag.

Operating efficiency. This is -- and panelists talked about this. Others have spoken about it. But this is really about maintaining a key focus or a keen focus, I should say, on our O&M expenses so that when we file or rate it for a rate increase, the vast majority of that increase is predicated on the capital that we have invested to improve service to our customers. We won't spend much time on the O&M ratio today because it can be misleading. For example, for 7 years, we didn't have a rate increase at Aqua Pennsylvania, so naturally, the O&M ratio would increase. We would expect a similar impact if our repair election of Peoples allows us to stay out of rates for an extended period of time. That said, we continue our focus on the expense lines via our variance reporting, monthly review processes, state visits and internal Board meetings. And we're seeking efficiencies as we bring Aqua and Peoples together, especially through technology.

Seasonality and weather. For utilities, seasonality is the regular pattern of higher or lower usage depending on the season, the normal pattern of ebbs and flows through the year, you might say. Weather, however, could be described as that inherent volatility within each season. And these effects find their way into utilities financial performance. And we'll show in a few minutes, the effects are much more pronounced for gas than they are for water. And those of us in the room are going to have to get comfortable with the fact that colder-than-normal or warmer-than-normal weather will factor into our earnings predictability.

And finally, tax efficiency. As regulated utilities, it's incumbent on us to make optimal tax elections to benefit customers and investors. Think tax repair. For Aqua Pennsylvania, this allowed us to [stay out of] rates for 7 years while we invested that $2 billion of capital. And other than the DSIC, customer rates were flat through that period. And now customers continue to benefit due to the low effective tax rate, which is incorporated into the revenue requirement. So while the weather is out of our control, the message of this slide is that we're never satisfied with the status quo. We're determined to effect these other drivers as much as we can to drive business performance and improve returns.

Next let's spend a couple of minutes on capital recovery. As you know, starting with the Pennsylvania DSIC back in 1996, we spent a great deal of time supporting enabling legislation for infrastructure trackers or surcharges. These mechanisms directly benefit customers by facilitating accelerated replacement of aging infrastructure while providing more timely recovery for the utility. This slide captures the current state of water and gas surcharges across our combined footprint and highlights the percentage of capital expenditures that's eligible for recovery by a particular surcharge.

As Rick showed earlier, over 60% of our capital investment across the 2 operating units is eligible for infrastructure surcharges. While some states have better trackers than others, these mechanisms are always critical to us and that they allow us to earn actual returns on equity, which are closer to the authorized, and that's helped us to stay out of rates longer. That benefits customers as well because rate case expenses ultimately are pass through to customers.

So we currently have infrastructure surcharges in 6 of our 8 water states and 2 of our gas states plus we have enabling legislation in Texas and expect the DSIC to be implemented there later in 2020. And we also have a pilot mechanism in Virginia. We should note that some surcharge-eligible capital won't be recovered via the surcharge. For example, capital invested after the cap has been reached but before a rate case or if the shareholders are benefiting from repair and the level of earnings precludes implementing the infrastructure surcharge, some eligible capital would have to wait until the next rate case.

Next let's talk about the weather's impact on the business. So this is remedial for those in the room that cover other gas companies, but it's worth a few minutes for those who aren't historically focused on water or a little newer to the gas story. So 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. So a day with a mean temperature of 30 degrees Fahrenheit represents 35 heating degree days. So using data from the Energy Administration -- Energy Information Administration from 1990 to recent times, we plotted monthly gas consumption in the Pittsburgh area versus monthly heating degree days for the same region. In the left pane, you see that strong correlation. The colder it is, the more gas that's used. Quite intuitive, right? On the right pane, we plotted the heating degree days by month, by year from 2014 to 2019. As we had expect, we see a certain seasonality with more heating degree days in January, February and March, falling off to effectively 0 in the summer, start again by rising heating degree days as we transition into the fall and into the winter. More surprisingly, perhaps, is the variability in weather that can exist in the same month between 2 different years. For example, in February of 2015, there were about 1,300 heating degree days, but in February of 2017, there were less than 700. And we would expect that gas usage followed these weather patterns. So not only is seasonality of gas usage something for us to bear in mind, but the variability in weather is, too.

Let's look at Peoples gas throughput by quarter. In the left pane, we plotted the quarterly percentage of Peoples' annual gas throughput for 2019. And as expected, the colder months, Q1 and Q4, were the strongest for gas sales. Now shifting to the financial impacts on the right. In the right pane here, we've used our 2019 monthly water revenue as the base in navy blue and then added Peoples' monthly gas revenues on top in the lighter blue. If you just focus on the navy, you'll notice some uplift in revenue in the warmer summer months when people are doing more outdoor watering, but enough of the revenue is in our base facility charges to limit that revenue seasonality. Looking at the light blue, however, the seasonality of natural gas is more dramatically reflected in the monthly revenues.

Let's think of what this means for net income seasonality. You will recall that for the water business, Q3 was historically our strongest quarter in terms of net income, followed by Q2. That changes with the addition of Peoples. The net income variable of that quarter is much more pronounced in gas utilities than it is in water utilities. On a combined basis, we're forecasting the strongest 2 quarters going forward to be Q1 and Q4. The strong summer quarters in water are offset by a falloff in gas consumption and the resulting lack of profitability, especially in Q3. So we wanted to give you a sense of the percentage of net income by quarter represented by the ranges on this slide, but I should caveat this by saying, we don't yet own the business and so we haven't been through a year of reporting earnings every quarter, quarter-after-quarter for the combined company. As time moves forward, we'll obviously be developing that data set and you will be better able to quarterize our annual earnings based on that track record.

Now that we've covered the seasonality of earnings, let's touch on repair tax and what we can expect at Peoples. As you know, Aqua Pennsylvania implemented repair back in 2012. Repair was not unique to Aqua nor was the implementation using flow-through accounting. Repair can be divided into 2 parts. First, the current portion; and then second, the catch-up deduction, which looks back at past capital investments as if repair had been elected then. The current portion can immediately be recorded in the income statement, but the catch-up is typically discussed and addressed in a rate case or other PUC proceeding. The guidance we're providing today only includes assumptions we're making about repair at Peoples for the current portion. To be more specific in terms of the election, we're only electing repair for Peoples' natural gas, which includes the legacy dominion and equitable systems that Joe spoke about rather than for all of Peoples or even with all Peoples in Pennsylvania.

We've defined the inner property as a pressure zone between regulator stations and have tentatively set the threshold at 10%. Meaning that if a given project is replacing less than 10% of a pressure zone with no betterment, it would qualify for a repair. While we will be asking the Pennsylvania PUC for guidance on how to treat the catch-up deduction, we've not included the catch-up in our forecast. Our assumptions were made based on our analysis of Peoples' capital and how much of the capital may be eligible for repair. But since we don't yet own the company, these assumptions will likely evolve as we learn more, and we'll share those new findings on future earnings calls.

Let's spend a few minutes on the earnings per share guidance. On a GAAP basis, we're providing a guidance range for earnings per share of $1.05 to $1.10 for 2020. For 2020, on an adjusted pro forma basis, so including 12 months of estimated natural gas earnings, we're providing a guidance range of $1.53 to $1.58. So this is based off $1.47 adjusted income per share for 2019. Then we expect to continue earnings per share growth at a 5% to 7% CAGR through 2022.

As you think about earnings growth at 5% to 7% versus our rate base growth of 6% to 7% for water and 8% to 10% for gas, there are a few things to consider. First, as we have success with the municipal acquisitions, that will be contributing lag. These acquisitions rarely, if ever, earn a full return immediately post-closing. For example, we have approximately $200 million of Pennsylvania acquisitions not currently included in rate, and that's excluding or before we consider DELCORA. As a 134-year-old company, we believe that acquisitions at 1x rate base are beneficial for long-term shareholder value even if they're not accretive to earnings growth on day 1.

Second, if we go from a period of higher earnings to a period of earning a more normal return, that would result in slower earnings growth versus rate base growth. And then third, we will of course have discontinuities when we issue equity, especially for Peoples. However, absent these things over the long run, there's nothing structurally that should keep our long-term rate base growth and our long-term earnings growth from being more closely aligned.

In terms of accretion from Peoples, you've heard us say that Peoples will be accretive in the first full year, excluding tax repair for natural gas. Let's talk through that in light of the guidance. As you know, 2020 will be the first full year with the benefits of tax repair at Aqua Pennsylvania incorporated into rates, and that's effectively fully inuring to the customer. Even in 2019, we had a portion of the year where those tax repair benefits inured to the shareholders, and that's the 2019 earnings reflect those incremental earnings. Without any significant measures then, 2020 would have been down a bit in terms of earnings per share, but we had some levers that would have offset this. A full year of Peoples in 2020 would have been accretive to that level of earnings by a few pennies, and then the repair benefit would be on top of that. Given the timing of the Aqua Pennsylvania rate case and the transaction closing, both offset from the calendar year, we won't see that in the annual reported numbers, but that's what's going on behind the scenes.

We often get the question, "How much EPS benefit will come from repair?" As I've said, we don't get on the company to control the capital program. Therefore, even after significant analysis, we're still making some simplifying assumptions in terms of how much capital will be repair-eligible. Also, we don't want to overpromise. If there's more value to repair once we're integrated, we'll let you know. But for now, I'd use $0.08 to $0.12 a share for 2020 for simple math.

All that said, I believe we've outlined an achievable path to 5% to 7% earnings growth over the next 3 years with relatively consistent growth year-over-year as is generally favored by utility investors. This does include the incorporation of the current portion of repair at Peoples, but no earnings tied to the catch-up deduction. Furthermore, it includes fairly conservative assumptions with respect to acquisitions, incorporating only known transactions plus $60 million annually in additional fair value acquisitions.

Finally, on several earnings calls, we've been asked about our share count. And I've insisted that we would be very transparent about the share count used in the denominator of any income per share calculations. Prior to anything related to Peoples, we had 178.8 million shares. So when we showed the 2019 adjusted income per share of $1.47 at the beginning of my section, it's that share count that was used. For the transaction, we issued 37.4 million shares of common stock. On an as-converted basis, the 13.8 million TEUs would result in an additional 16.3 million shares of common stock. We're using the minimum conversion ratio of approximately 1.179 shares per unit as our stock is trading well above that conversion price of $42.41 per share. So then we add to this the 21.7 million shares will be issued to CPPIB when we closed the pipe. And finally, there's another roughly 300,000 shares. They come from our dividend reinvestment program, our employee stock purchasing plan and stock-based compensation. So that brings us to 254.4 million shares of WTRG, and that's the number we expect to have post closing of the Peoples transaction.

So that should provide clarity with respect to our share count. I should also mention that we will issue some stock this year to fund the DELCORA acquisition and other transactions. But the amount issued will be relatively small with respect to our market cap, think 2% to 3%, and we'll seek to do this in a way that limits earnings dilution.

Thank you. And with that, I'll turn the podium back to Chris Franklin for his conclusion of our prepared remarks.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [3]

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All right. Thank you, Dan.

And I hope this update was helpful. A lot of detail. Hopefully, you recognize there's a lot of transparency and, by the way, on a business that we don't yet own for the next -- at least the next couple of weeks. And I also hope that you find this was consistent with what we've been talking about over the last several months, almost a year or nearly 1.5 years now.

In summary, our priorities for 2020 remain focused on operational excellence, integration of Peoples, the continued pursuit and finishing of the transaction process with DELCORA. We remain committed to the acquisition program with -- in the municipal sector, as Matt mentioned, and we'll implement our accelerated Peoples CapEx plan full year for 2020.

And I thought I'd take a minute to summarize all the guidance we provided today. We provided a lot more transparency and longer-term guidance, which I think is what many of you have been asking for a few years now. And hopefully you believe, as I do, that we delivered that.

On the EPS front, we'll grow at a 5% to 7% CAGR. Dan demonstrated that in a lot of detail. But I think it demonstrates a strong platform we've built, that's a strong growth pattern. And as Dan said, this does not include municipal M&A, which, in short term, as you all know, we've articulated a few times here today, can hurt earnings in the short run before it actually goes through the rate process. We expect to continue to provide earnings growth -- I'm sorry, an earnings range and hopefully in a longer period of time, but we're always going to be respectful of our regulators and ongoing rate activity.

Now on the CapEx side, the operations team led by Rick will have a full job ahead of them as they try to spend nearly $1 billion annually of CapEx across the Essential platform. This is primarily pipe replacement in both water and gas. And I think you saw from the charts today that we've got plenty of opportunity to spend CapEx on pipe replacement. This core organic growth provides a strong baseline for future performance.

Now our rate base growth of 6% to 7% for water and 8% to 10% for gas moves us with a total rate base growth in the range of 8%. This does not include future municipal acquisitions. We continue to say that. So keep in mind, that's a little differentiation from how some others do it. And over the long run, we would expect to see rate base and earnings growth to be more closely aligned.

As Dan reminded everyone, from year-to-year, there are sometimes a bit of a disconnect between that rate base growth and earnings growth due to acquisition timing, equity issuances, periods of over- or under-earning and sometimes onetime items. But long term, there is nothing structural to keep things from looking like they did in the period before we're dealing with repair, both at -- in water and now in gas.

Lastly, we expect annual customer growth to be between 2% and 3% on average for water. And you'll notice, we did not mention O&M targets. We did this purposely because we'll use 2020 to baseline the combined company, and we thought it was premature to really discuss O&M targets. As we've said many times, though, over the last 1.5 years, we did not acquire Peoples as a synergy play. And so that remains true today.

In closing, I'll remind you that we remain committed to satisfying the needs of all of our stakeholders. The new larger Essential is strongly positioned to have a meaningful impact on the communities that we serve today and the communities that we hope to serve in the future. We offer a unique opportunity, we believe, for investors because we're a company positioned with strong organic rate base growth, a lot of miles of both gas and water main to replace, with the majority of our operations in really strong regulatory environments and the ability to participate strongly in the municipal consolidation process. And I think we've proven our success already over the last several years.

Now while we're excited about opportunities that lie ahead. I'll reiterate that we're going to be disciplined in how we approach opportunities and that we put the interest of all of our stakeholders into effect when we think about our growth.

So with that, I'm going to invite Rick Fox, Daniel Schuller and Matt Rhodes up to the chairs with me, so that we can answer some of your questions. And we'll take questions for a little bit, and then we're going to separate into -- we do have a box lunch after that, and then we'll move around the room and sit and have lunch with those who can stay for a little bit. We'll answer any of your questions but more on an individual basis after that.

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Questions and Answers

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [1]

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All right. There is a microphone here. So if you have a question, maybe you raise your hand. I see Ryan's first. Shoot.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment [2]

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Yes. This is Ryan Connors with Boenning and Scattergood. I wanted to drill down a little bit on the fair market value situation. It's obviously creating great opportunities, but it's not without detractors. And that's not just the entrenched interest in terms of the obvious municipal interest there. But some of your own peers, for example, in Delaware, have kind of come out with a unified front and said, "we don't want it in Delaware." They talk about affordability and other things. So then you get a situation like Jacksonville where certainly that lends credence to the notion that money is the root of some evil sometimes. So what are the things you hear as you -- in terms of pushback on fair market value? How do you address those arguments? And I guess as a follow-on, because I'll pass it right on, but they talk about someone like Sanders coming in openly talking about we're going to go out not only against privatization, but we're going to try to take stuff back to the municipal side. So just if you can just kind of address all of that. I know it's a lot, but just your views there.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [3]

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Yes. That's a lot to unpack there. So let's start with the calibration that occurred starting in Pennsylvania, and Kim alluded to this in her comments earlier, but there was a calibration that began to take place. Remember, in the early days of fair market value in Pennsylvania, municipals saw the sky as the limit. And so there is this big disconnect between what they wanted to take as proceeds, what we wanted to pay, what regulators wanted to see and then, in some cases, what customers wanted to see. I think that in large part has come nicely together. As you can see, the -- what the commission and even the OCA has come out with in Pennsylvania are very close to what to now we're having, what we have as purchase price. So there's not as big a gap there, Ryan. And I think that calibration is happening. And I think these, what they call the UVEs, the appraisers, are coming in at more reasonable levels. So it took some time for that process to work. But I think it's working out well now and I think the most recent cases, acquisition cases are going to bear that out.

With regard to some positions in the industry, others that others are taking, other peer companies are taking, I'll say this. Listen, there's a lot of good companies out there and really has their own perspective. But fair market value does give larger companies a little bit of the advantage. Let's just -- let's call it the way it is. We've got a larger base. We've got more resources. And it is -- that does give us a little bit of an advantage, us, American water, maybe some others. And I know there are some smaller companies that struggle with that as a competitive factor. So I'd like to think that everybody's view is altruistic. And I won't say it's not, but I do think there are other factors that come to bear there, too.

Now I will say too when we think about in the broader view of the country and presidential politics, I will put an investor-owned water utility, a regulated water utility up against nearly any municipal utility in the country. Some are well capitalized, well-run and doing all the right things. I will always can see that. However, in that middle market and in the smaller end of the market, there is a vast number of municipals that cannot and will not keep up with the standard that we expect in the United States. And the 2 Presidential candidates, they have positions on this. I would say that they just haven't studied the issue. I think they're susceptible to lobby that has provided them with misinformation. And frankly, and I think you would agree with this, Ryan, very, very difficult for a President to take office and then get legislation through to take back companies. And so I don't think that's a realistic outcome. Having said that, if the country decides that they're going to move to a more socialism-type approach, I think a lot of things, water utilities are only one of them, are going to be in for vast change.

I don't know, Matt, if you have anything else to add to that, the fair market value discussion today?

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Matthew R. Rhodes, Essential Utilities, Inc. - EVP of Strategy & Corporate Development [4]

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No. I think you said it. I think the -- we worked through some things over the last few years. And I think we've gotten it to the right spot now in Pennsylvania where, as Chris said, what we're paying is basically aligned with what we're getting into rate base. And in other states, we've seen it work very well, too. We've done several deals in Illinois. We just did a deal in Ohio where we're basically getting the full purchase price into rate base as well. So I think it is working now. There was a learning period, in -- particularly in Pennsylvania. But as Chris said, I think we've -- it's going to be an effective program, and we're going to do it the right way in the future.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [5]

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Question upfront?

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [6]

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Chris, appreciate all the detail today and commend you on kind of maintaining the level of transparency and perhaps even increasing it. So thank you for that. I have 2 or 3 questions maybe on repairs. Dan, just the $0.08 to $0.12 2020 impact for repairs?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [7]

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Correct.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [8]

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Should we expect that to trend higher or lower? As you're looking out in '21, '22, where does that sit?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [9]

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It's a bit early to say just kind of given where we are in the process, but I think I wouldn't want to guide you to increase it. But if you kept it relatively steady in that band, you're fine.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [10]

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And that's how you've guided. When you put together your guidance, that's how...

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [11]

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Correct.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [12]

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That's how you did it.

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [13]

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Correct. Yes.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [14]

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Okay. And then just on the catch-up piece, obviously, right, that was a big-time tailwind when -- so we did this in the -- on the water side. So could you just help us with what are the next steps that you have to take? Is it with the commission? And then what's the time line on that? And how should we just think about modeling that part of it?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [15]

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Sure. Yes. I mean for now, I would keep it out of your models if you're trying to tie to obviously what we've shown today. The situation for the water business was a bit different because we had repair as part of our order for our rate case that we filed in 2011 that came out in 2012, and then included this 10-year amortization of the catch-up deduction. And the understanding was that, that amortization would inure to the shareholders until the next rate case, right? In this case, we're not doing this as part of a rate case. We will have to file something with the commission and have a conversation there with respect to how to treat that catch-up deduction. And there are various things that could happen to it, but we'll have to work through that with the commission. And obviously, if there's a benefit to the investors that comes from that, which we'll obviously advocate for, we'll be sharing more information with you on that as it becomes available.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [16]

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And then just one last one. On DFUS, did I hear the $26 million CapEx? Was that CapEx? Or have you quantified the...

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [17]

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About $25 million.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [18]

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$25 million. Is that CapEx, OpEx?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [19]

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That's the CapEx number.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [20]

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Okay. That's the Capex number. And what's the plan for recovery of that? Is that -- I mean you basically go through the state?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [21]

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We would go through processes in each of the states. So that's not in one particular state. That's across our platform. And I think those investments are in about 4 [other] states.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [22]

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And that gets you to your target of 18 parts per trillion...

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [23]

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Yes. 13. 13. Correct.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [24]

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Thanks. It's really -- Durgesh, when you think about that in the 4 states, one is New Jersey, right, which is standard or there already.

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [25]

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Right.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [26]

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And there's not a huge amount of work to do in Pennsylvania. So Pennsylvania should be straightforward, and only one system in Texas, and then the rest are in North Carolina. So that's really a conversation we'll have with regulators and environmental agencies in North Carolina.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [27]

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Ryan Greenwald, Bank of America. So just piggybacking on the repair tax question there. Under a constructive outcome, where do you kind of see that 5% to 7% shaking out if you're able to kind of utilize the catch-up component?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [28]

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It's too early to comment on that, I think.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [29]

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Got it. And then in terms of equity needs post-2020, how should we think about a run rate given your base plan and just modest acquisitions?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [30]

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So if you think modest -- I guess the way I'd think about this is, going forward, we will fund more of our municipal acquisitions with a combination of both debt and equity. So when you see us do a more significant municipal acquisition, so not necessarily the one-off $7.5 million or $10 million acquisition, but when you're seeing us do a $50 million or $75 million acquisition, I assume that at some point, we'll be funding that 50% with equity.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [31]

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So the short story is, it's just for acquisition. Our CapEx program is funded with an existing...

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [32]

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Correct, Chris.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [33]

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Travis Miller with Morningstar here. A couple of I guess housekeeping questions. But higher level, that 2% to 3% customer growth, obviously, we've seen in the gas and electric business, 2% to 3% has gone to 0 over the last 10 years, at least. Can you talk a little bit about how you get to that 2% to 3% number? And if it goes to 0% to 1%, what's the earnings impact? And then I got a couple other.

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Matthew R. Rhodes, Essential Utilities, Inc. - EVP of Strategy & Corporate Development [34]

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Yes, I'll start. So we've seen our organic customer growth in the water business be a little less than 1%, call it, 0.6% 0.7% over time. And then the rest of that 2% to 3% comes from municipal acquisitions. So we're assuming that we -- based on what we've done in the last few years, and we've added, call it, roughly $100 million of rate base, let us exclude DELCORA for a second, for municipal acquisitions, we feel like with our organic customer growth and a run rate level of municipal acquisitions, that gets us to that 2% to 3%.

Now when we do a larger acquisition like DELCORA, yes. When that closes, that will lead to customer growth that's even higher than that. But if you think about a run rate, run rate municipal acquisition level every year plus organic growth, that gets you to the 2% to 3%.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [35]

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Okay. And what's the...

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [36]

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I might just say that organic growth is where you'd expect it to be. So North Carolina, Texas, Southeast Pennsylvania, that's where we see more of that organic growth.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [37]

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What's a general rule of thumb for, say, 100 basis point change in that organic up 1%-type number in terms of earnings impact?

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [38]

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Yes. It's a difficult question because, as we mentioned, these things don't typically come in at full earnings. In other words, municipals tend to have lower rates because they've deferred maintenance for long periods of time. And so we picked them up, we're picking them up at a lower rate. We'll come and make the capital investment and then move rates up accordingly and more toward the rates that we charge for our customers as we make the capital investments. So that takes some time. So I will say the first jump typically comes when we bring them into rates for the first time. And if you assume the company's [in for] rates every 2 to 3 years, there's a typical under-earning period for those.

So I might point you to -- when you think about that 2% to 3% customer growth rate, think about rate base growth because that's really what generates the earnings. So even if you're growing at 2% or 3% in customer growth, it's really the rate base that comes along with that and when that rate base then is in rates and earning its full potential. In most cases, we're buying these at 1x rate base. So as we've said, these are nice transactions over the long run. But day 1, they don't always earn their full capacity there.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [39]

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Any thoughts on payout ratio target in the combined entity?

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Daniel J. Schuller, Essential Utilities, Inc. - Executive VP & CFO [40]

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Yes. And we did show it on the slide. We have adjusted our payout ratio. Historically, we had it at 60% to 70%. We've adjusted that and shown on the slide a new target of 60% to 65%. So a little bit more conservative and a little bit more in line with the rating agency guidelines.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [41]

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And then, just one final and I'll let the others go. But given where the stock is trading, what's the thought in terms of accelerating the M&A? I mean, obviously, you put out a big CapEx number. You said a lot of M&A is coming on the muni side. But if you're buying at 1 rate base and trading it 2-plus, what's the thought there in terms of...

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [42]

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Yes. Listen, I think we all agree, nice strong currency at this point. But we're also disciplined buyers. We've got -- as we mentioned, we've got 2 big entities to put together. We've got some integration work to do now. And then we've got DELCORA, which is right behind Peoples, we'll take some integration work as well. And so we'll be, number one, very cautious of digestion; and number two, we will be a disciplined buyer as well. The good position currency gives us opportunity. But I think we want to be very thoughtful about our approach in what we buy. And so I don't want to move too quickly.

And, Matt, I don't know if you have a follow-up to that.

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Matthew R. Rhodes, Essential Utilities, Inc. - EVP of Strategy & Corporate Development [43]

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Yes. As you know, M&A and acquisitions can be somewhat episodic, right? We can't always control the timing when someone wants to sell either municipality or an investor-owned utility. So we do monitor the landscape constantly. We're looking at different opportunities. But like Chris said, we're going to be disciplined, and we have to -- we'll take the opportunities as they come.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [44]

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Might as well, one more. Just super big picture, but just you talked about the strong currency. I think one of the reasons why the sector has done so well is that the returns on equity awarded have really held up pretty remarkably well over the last 10 years when you think about tapped interest rates. I know initially, the talk was, "well, commissions are at the lower rates based on a short-term blip down." I think it's safe to say we're pretty clearly passed a short-term blip down. What's the view? What are you hearing in terms of commissions? I mean, is there a view that at some point we just get a ratchet down in terms of awarded ROE? Or what's the -- what are you hearing out there on that?

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [45]

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I think if -- you have to, at some degree, use history as your guide. And I think most commissions have stayed in a relatively defined band. But I would hesitate to front-run what any commission would do or how they think about it. But I would say, with the appropriate recognition of risks associated with running a utility, I would think that the ROEs in the band that they are today and have been over a long, long period of time now are probably the right place for them to be. And again, as you think about this as a multistate utility, utility commissions also have to remember that, to some extent, if they're going to be a far outlier, utilities are going to migrate to their capital investment, to states that -- where they're rewarded for that investment. And so I think commissions that are really on top of these things are also looking at what's the going ROE? And if I deviate too much from that, might I starve my state of its capital?

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [46]

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And on the regulatory side, what are the next states and jurisdictions where perhaps you're either under-earning or you see opportunities for rate increases? What's the next step over the next year or 2?

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [47]

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We're in North Carolina today. And I would say, North Carolina, great state for growth, a lot of good things happening in North Carolina. North Carolina's commission is under new leadership. Chairman Michelle -- Mitchell is our – Charlotte, yes, that’s right, is to be Chair. Ed Finley, who was Chair for many, many years navigated through the Duke mergers. It was -- and it had his fingerprints, did a nice job. It will be interesting to see what happens in North Carolina. I think there's opportunity there for some new regulatory tools. I'll point to specifically the future test year, opportunities to move away from the historical test year that really is very difficult for utilities that spend a lot of capital, which we're doing in North Carolina. So I would say that's a state, I would say, you keep an eye on. Most of all other states are I think are in pretty good places with regulatory and they continue to make advances. Texas is a little bit new in the sense that water has only been under the Public Utility Commission in Texas for the last I guess 3 or 4 years. And so the regulatory outlook there is still evolving. There's 3 new commissioners there as well. So that might be another one just to keep an eye on.

Kim, I don't know if you have -- if there's others you would point out?

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Kimberly Joyce, Essential Utilities, Inc. - VP of Regulatory, Legislative & External Affairs [48]

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No. I think you covered it all.

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Christopher H. Franklin, Essential Utilities, Inc. - Chairman, President & CEO [49]

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Okay. Any other questions? All right. Well, we're going to make ourselves available. The entire management team will make ourselves available. There's box lunches out front here. And we'll move around the tables and feel free, we'll answer all the follow-up questions you might have. We really appreciate you joining us. I know this is a chunk of time out of the day and really appreciate you joining us today. I know the market is a little crazy, so people probably have to keep an eye on around the things, but thanks for being with us.

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Matthew R. Rhodes, Essential Utilities, Inc. - EVP of Strategy & Corporate Development [50]

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Thank you.