Good day everyone and welcome to the Essential Utilities' Q1 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Melinda, and good morning, everyone. Thank you for joining us for Essential Utilities' formerly Aqua America's first quarter 2020 earnings call. I am Brian Dingerdissen, Vice President, Chief of Staff, and Head of Investor Relations and Communications. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides we will be referencing and a webcast of this event can also be found on the site. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risks and uncertainties. During the course of their call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the company's website. After the presentation, we will open the call up for questions. Our call will start with Chris Franklin, our Chairman and CEO, who will discuss the highlights from the year-to-date, and provide an update on the company's COVID-19 actions. Dan Schuller, our CFO, will then discuss our financial results and our recent financing activity. Dan will be followed by Rick Fox, our Chief Operating Officer, who will provide an update on our operations, including at Peoples. Finally, Chris Franklin will conclude the call with a review our 2020 guidance and open the call up for questions. With that, I would like to turn the call over to Chris Franklin.

Hey thanks Brian and good morning everyone. I'll just start right in. We had a strong and eventful first quarter that had an end that I don't think any of us would have predicted. But let's start back in January with the final regulatory approval in Pennsylvania of the Peoples transaction, a very strong start to the year. Then we close the transaction and introduced a new parent company name, Essential. Nobody new how appropriate that name would be when we chose it. And then, we changed our ticker symbol to WTRG. And after that, we quickly followed up with a filing with the IRS to begin using the tax repair at Peoples in Pennsylvania. We also filed our application with the Pennsylvania Public Utility Commission for approval of the DELCORA transaction, the largest municipal transaction we've ever done. Then before the quarter ended, we had to react to the COVID-19 pandemic by activating our business continuity plan. Our primary objective was, of course, to preserve and ensure the health and the safety of our Essential employees, our customers, and the communities we serve. You'll have to excuse me, but I have to brag for a minute about our Essential employees. Their dedication to our mission has never shone brighter than it has over the past eight weeks. Our people have continued to provide high-quality water, wastewater and natural gas service that our customers depend on. Many of our people have the same challenges as their neighbors, children out of school, caring for family members and concerns about their own personal health. But despite these challenges, our people have continued to get the job done, and I'm very proud of our Essential team. Let's take a look at the first quarter highlights. Since the beginning of the year, we invested…

Thank you, Chris. Good morning, everyone. First, reviewing the financials for the quarter. We ended the first quarter with revenues of $255.6 million, up 27.1%. The recently acquired natural gas utility contributed $38.5 million of this revenue growth, while the remainder was largely due to rate increases in the regulated water segment. As a result of Peoples closing on March 16, we are reporting Peoples operating results since the acquisition date in our GAAP numbers. O&M increased to $106.6 million in the first quarter, up 34.4% from $79.3 million last year. This was primarily a result of an increase in Peoples transaction-related expenses, and the addition of the regulated natural gas segment, O&M expenses. Net income was up 206% year-over-year from $16.9 million to $51.8 million. And GAAP EPS up -- sorry, GAAP EPS was up 122.2%. As we discussed at our Investor Day in February, we're providing an adjusted income, non-GAAP measure for 2020 guidance, really to demonstrate the earnings power of the company going forward. This metric includes pro forma results for Peoples, as if we'd owned the Peoples for a full normalized first quarter. We'll continue providing this throughout the year and believe it best compares the combined company with the legacy Aqua company, in terms of both earnings power and financial results. Looking at the adjusted income and adjusted income per share lines, which exclude Peoples-related transaction expenses and include the pro forma adjustment for Peoples operating results for the period of January 1 to March 15. This shows that adjusted income was up 209.1%, and adjusted income per share was up from $0.28 to $0.60. This pro forma income per share result aligns with the guidance we provided in February of $1.53 to $1.58 for the full year. We did not see an impact of…

Well, thanks, Dan, and good morning, everyone. Today, I'd like to provide two important updates: first, on our operations response to the COVID-19; and second, an update on our safety review of our gas business that was recently completed by a third party. But before I get into those topics, let me start with this. It is really important to note that our water and wastewater treatment processes removed and inactivate COVID-19, as this virus is much less resistant to treatment than the other pathogens that Aqua routinely treats. Now on to COVID. Let me summarize our overall efforts on COVID-19, but I will share some additional details. First, as a utility, the work that we do is essential. And our employees recognized that, and they have performed exceptionally well. As you might expect, we have taken preventative measures to ensure employee and customer safety across the company. On this slide, you can see some examples of what we have done. We limited worker interaction by minimizing gatherings; starting work from home, rather than the office; and utilized one employee per vehicle. We adjusted work practices to ensure that it can be done safely using social distancing. And, of course, we provided the new and necessary personal protective equipment such as masks, gloves and face shields. As Chris indicated, only four out of our 3,100 employees have tested positive with COVID-19. None of these employees work together. And so -- and at-company transmission is unlikely. We care deeply about these employees and our families, and we believe our proactive measures help and continue to help prevent more employees from becoming infected. Turning to the next slide. You can see that we reviewed what types of work could not be deferred until after the COVID-19 crisis subsides. On the water side,…

Thank you, Rick, and thanks for the update on that new report to us, which is really good news on Peoples' safety. Now in closing, I just wanted to cover a couple of learnings from the first quarter. First, I think it's fair to say that there's no substitute for true dedication of the mission. We recognize that our company provides essential services to our customers that allows them the simple comforts like cooking and bathing and the warmth in their homes. At challenging times like this, I wish every company could experience the knowledge, expertise and commitment to the mission that I've witnessed from the employees at Essential during this crisis. Second, you can successfully close a major transaction in the middle of a pandemic. While I don't recommend it, the events resulting from the pandemic have actually accelerated the integration of our two companies. It forced the team to immediately begin working together to create standard operating policies like IT policies, cleaning policies, operating policies, and I could go on and on. So far, the results have been impressive though and, I believe, signal the overall success that lies ahead for the combined company. And third and finally, communication is critical. From the first day we began to work from home, the top 35 managers across the gas and water utilities met every single evening at 5 PM. to coordinate the response, and ensure we were communicating on critical issues. While the calls no longer exist daily, strong and regular communications continue as we address any salient issues that arise. Steady communication with our regulators continues to be a staple of our work. And our weekly townhall meetings via video technology with our employee base, has provided us with an important feedback loop, as we adjust to this…

[Operator Instructions] And we'll go first to Ryan Connors of Boenning & Scattergood.

Great. Thanks for taking my questions. So I wanted to actually drill down on the rate pipeline a little bit, rate activity pipeline. I mean looking through the slide information there, it looks like you've either been in recently or are already in -- with a pending rate action in every state, maybe with the exception of Texas. So I mean obviously the optics aren't great right now to be having to file a rate case. So can you just talk about -- is there anywhere -- what's the situation in Texas? Is there any other place where you're getting -- the cycle is getting long in the tooth that you'd have to go in?

Let's start with North Carolina, right? We're in Carolina. And we -- the discussions continue despite a lot of people are working from home, Ryan. And -- but we still have not heard or anticipate any lengthy delays in that process. And so that's one of the ones in-flight currently. Dan, you want to talk about the others?

Yes. I think, Ryan, you kind of pinpointed the one where we've been obviously sort of out for the longest period of time. And I would say that we continue to drive capital and rate base growth in Texas. And we do see a time that in the not-too-distant future where we will be filing a rate case in Texas. As of this moment, don't need one, but we foresee one in the coming couple of years.

Okay. So it's not necessarily imminent in weeks or months. Okay.

That's fair.

Okay. Now in terms of DSIC. DSIC, is not part of the base rate obviously. So maybe easier for someone to argue, "Hey, let's pull that off for a while, while things are -- rate payers are facing stress." Has there been any talk about that in any of the states to sort of temporarily repeal DSIC surcharges?

None that I'm aware of, Ryan. I think everybody is scrambling to see what bad debt expense might look like. Ultimately, what are the consumption issues, and then what are the -- what constraints do people have due to the unemployment rates and -- but I've not heard any pullbacks in using the distribution system improvement charge at this point.

Okay. Then one more just on -- I definitely agree with your comment that local governments are going to be seeing the budget pressures and you could see some more acquisition opportunities there. With that said, what do you think is the timing of that? Obviously, you've always got presumably a pretty good number of deals that are being worked on. Have some of those already started to accelerate towards the goal line? Or is that more of a -- is that in the future?

No. I'll tell you, our Board met yesterday after the shareholder meeting and we went through the acquisition pipeline and what's been active. I would say in the last eight weeks since we've been working from home, at least the majority of the office people here, I would say one-third of the time for a lot of us has still been focused on growth given the activity. So although there can't be public meetings and group meetings, a lot of discussions continue. And I would say, we've advanced a number of things that hopefully, we can talk about in the near term here. I would say too, Ryan, that the activity that we're seeing and we're working on are continue to be larger opportunities than they had been in the past. So I think the -- what you'll see is some longer-term issues that will bubble up as a result of financial constraints that come from COVID, but others probably that will be immediate because of the crunch people are -- some of these municipals are under.

Got it. Okay. And then just one last, more of a housekeeping item. I mean obviously it's a much smaller line item than it used to be, but relative to the size of the company. But the pipeline JV, obviously energy price situation, we had news Shell pulling out of Pennsylvania this week they announced. I mean what's the outlook for that asset in this energy price environment?

Yes. That's one, Ryan, you saw that we talked about it a little bit at the Investor Day. That it's something that we're considering strategic options with respect to that. Yes, we continue to have that pipeline operating when there's demand for water and we're looking for someone though since it is that small line item for us. We are looking to make a change there and sell that asset. That's probably the best place to us.

Yes. And the good news is Ryan, it's not eaten our bread today. It's on our books for a fairly low number. We wrote it down a number of years ago. It's about $5 million on our book, something like that, $6 million on our books. So it's really not eaten any bread. So as we look for potential new owner, it's not really hurting – hurt our numbers.

And the last couple of years, Ryan, have been really strong for it, in terms of just volume sold relative to what we had been seeing in; call it 2015, 2016, 2017.

Got it. Well, hey, thanks for your time.

Absolutely.

And next, we'll hear from Travis Miller of Morningstar.

Good morning. Thank you.

Good morning, Travis.

I had a quick follow-up at the municipal acquisition question earlier. Are there any in the pipeline that would require some kind of public input, some kind of scenario where you have to have public meetings of some kind that might get delayed or canceled?

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

And at this point, we don't have any pending transactions that require a referendum. So we wouldn't have that type of public input as a concern.

Okay. Okay. And then, sorry if I missed this earlier but what were your water usage levels as we think about post-coronavirus shutdowns, shelter-at-home type of events, late March and April on the residential and then just non-residential? I know you've got a lot of different customer classes that are nonresidential. Just generally, I think you said...

Yeah. Let me give you a little bit guidance there. Like other utilities, what we've experienced and it's easier to talk about the water side because gas is more driven by weather obviously. On the water side though, we saw a pickup in residential consumption with people staying at home. And then as expected, we saw a fall-off in commercial, industrial and public. And public, think of that as schools and government buildings, which really emptied out, right? So that's probably – that's where you see the biggest decline. But I think our view was going into this that we would expect that residential pickup to be helpful in offsetting the declines. And in fact, we just got our flash numbers for the water business for April, and they really show that is occurring as our April numbers, our April actuals came in right at budget. So we are seeing that offsetting occur as projected.

Okay. And then just real quick, how much do you have decoupling on any of it, if any?

We really only have – we don't have decoupling to any great degree. We have it in the state of Illinois, and that's really about it.

Great. Thank you very much. Appreciate it.

Yeah. Thanks, Travis.

And moving on to Richard Verdi of Coker & Palmer.

Hi, good morning. Thanks for taking my call. Great job on navigating the company here through the start of this COVID crisis. I just want to follow up on the – one of the last callers' inquiries on the volumes. Looking at slide 12, it was a lean line this quarter. But if you think about it, you have the COVID crisis but – and it's causing your commercial industrial to go down. But then if you look back at January 2, I know Liberty Electric had one of their plants down. I think it was 17 or 20-some days. And so I'm wondering how much of that from the quarter could have been from that down plant at Liberty versus COVID? And maybe kind of the feel for how COVID's really impacting your company, if you just talk to that a little bit more, please?

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

Okay, okay. Thank you for that. And then, excuse me, the last question here, focusing kind of on the acquisition front here, if you look at the unemployment statistics since COVID took effect here. And you look at that data point on a state-by-state basis, some of your smaller states or where you're kind of growing are in the top 15, 20, let's call it. And that creates an issue of okay, well, unemployment. You could lose connections. You could have rate case setback in some extent. On the other hand, it creates a situation where these municipalities face financial difficulty and are going to be more, quick to sell. And so, if -- there's a two-step approach there, right? You could look at it and say, "Okay, well, we want to grow more in Pennsylvania and we'll beat the negative impact from maybe rate case setback and connection will set back." Or you could pursue acquisitions in those states. And offset negative revenue impact potential let's say, from rate case setback and connection loss effect in the near-term by picking up acquisitions. And then, as they grow further in the future, you have a positive impact. So I'm just kind of wondering if you could maybe talk to strategy a little bit, going through the next year or so with the COVID crisis. And with the acquisition front, how you kind of think of those issues going through the strategy?

Yeah. I mean, it's a lot to digest there. Let's start with the fact that, we are -- we still do business in states where the regulatory climate is strong. So, I think, while we've been very sensitive. And we're not shutting people off for example we've turned people back on who have asked to be turned back on. We try to be very sensitive. We ramped up our programs to help customers that are struggling to pay their bills. We've done all those things. So I think we and the regulators have cooperated nicely so far. I wouldn't expect to see it. And I'll maybe use a stronger word, a punishment in rate cases. I think there's a desire in constructive regulatory states to say, there is a balance here. We've got to keep the company strong. And we've got to keep the customers in a situation where it's affordable, for their bills. So I do think long-term, let's talk about the next couple of years that we will see a balance there. I don't expect there anything to be draconian, in terms of regulatory reaction, on rate cases and the sort. The good news is -- and I think you know this Rich, the vast amount of the company's rate base is in the state of Pennsylvania. And we just came out of rates in Pennsylvania, both in gas and in water. So we're not -- there's no immediate-term need to go in for rates to keep the company strong. So that's good news. Now, as it relates to growth, we're going to continue to look -- and we think about ourselves really in the -- as a solution, rather than just strictly, we're doing M&A. We really look for towns and cities and municipalities where we can help be a solution. And so, I believe -- and if our current list of opportunities is as an example, I believe we'll have more opportunities to grow than we have hands to handle the opportunities. And so, I really believe that, you'll see both, a steady hand of the regulator. And I think you'll see nice, steady growth, because of generally, the need and our opportunity to be a solution. So I hope that answers your question.

Yeah. Thanks its great color. I truly appreciate that. Thank you for your time guys. I really appreciate it. Be well.

Thank you, Richard.

[Operator Instructions] Next, we'll hear from Jonathan Reeder of Wells Fargo.

How are you, Jonathan?

Great, great, how are you? Hey guys. Good call, good update, appreciate the color there. I just wanted to verify, that you said the adjusted Q1 results, $0.60 reflect, call it normal weather for the gas operations, and even though Peoples doesn't have the normalization causes in PA and West Virginia and weather was below normal. Is that right?

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

Yeah. No. I mean it does make sense and helpful for you to show it to us that way, so that we -- a good sense going forward like what to expect on a normal basis. But yeah, I just wanted to clarify that. And then staying on the gas side, do you think the Black & Veatch report. Is that going to result in potentially, like meaningful acceleration in my CapEx needs to address some of those implementations? Or is it just further validation of the plan that you kind of previously articulated in terms of, I think it's what, 8% to 10% rate base growth there?

Yes. Yes. I'm going to give Rick a crack at this. So let me just start by saying there -- as we think about the capital, there is clearly opportunity to spend more capital to improve the system as a result of the Black & Veatch report. That -- the one of the key takeaways is that we're doing really well. Peoples is doing a really nice job, especially when you compare them to others in the industry. So it's not like the list of recommendations that Rick provided would say, oh, my gosh, there's some real urgency. We need to get to a massive capital spend as a result of the report. That's not the case, but there is opportunity for more capital to be spent. And Rick, why don't I kick it to you from that?

Yeah, Chris. I think you answered it well. Some of these items that I mentioned are just a refinement in the approach or in the focus, but if these things that would have been done anyways, the things that I speak to around prioritization. There are also some opportunities in here and needs to spend some additional capital, and that would be addressed in future plans. Some of that is in here are modest costs. And I'll point to the GPS project. It's a really important project, but it's not terribly expensive. And so I think that's the way we'll answer it for now, but there is an opportunity going forward to make things stronger by investing capital.

So Jonathan, I wouldn't think about a step change.

Yes. Okay. So yeah, I mean just you'll work it through the plan and based on rate affordability. If you can still keep, I guess, the rate impact manageable, then you could see some acceleration, I guess, in the near term. But you'll just keep that in mind.

Yes.

Okay. And then, when do you expect to get clarity from the Pennsylvania regulators regarding the catch-up component when you make that mid-summer kind of filing covers?

Well, are we through the COVID process by then, Jonathan?

I was going to say the same.

It's a little bit hard to know. Dan, go ahead.

Yes. No, I think that that's exactly right, Chris, that as we said, we'll file it in the summer, but where the PUC is in terms of the number of cases before them, yet to be seen. And thus, how long it takes for that to play out, just hard to tell right now. Hopefully at the next call, a little more detail around that for you.

Okay. But I mean, it might progress more along the time line of like a rate case. So I mean we could be thinking like nine months or a year type?

Oh, I hope not.

I hope it's not that long for sure. Will there be a bit of back and forth? Absolutely.

Okay. Okay. So, maybe year-end. Okay. Great. Thanks so much for taking my questions and stay safe.

Yeah. You too, Jonathan.

Thanks, indeed Jonathan.

And there appear to be no further questions at this time. Mr. Franklin, we'll turn the conference back over to you for any additional or closing remarks.

We appreciate your joining us today. And obviously we're always available for follow-up questions after the meeting. And you have Brian's numbers, Renee's, Dan's and mine. We look forward to catching up with you. Please stay safe and healthy. Thanks for joining us.

That does conclude today's conference. We do thank you for your participation. You may now disconnect.