Essential Utilities, Inc. (WTRG) Earnings Call Transcript & Summary

Good day and welcome to the Essential Utilities Guidance Day Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. You may begin.

Good morning, everyone, and thank you for joining us today to discuss our 2021 guidance. We hope that you and your families had a happy new year and wish everyone the best as we move into 2021. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our website. Here's our forward-looking statements. 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 this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the company's website. After the presentation, we will open the call up for questions. Here is our agenda for the call today. We will start with Chris Franklin, our Chairman and CEO, who will provide an update on our success from 2020, discuss our 2021 priorities and make a significant announcement on the reduction of the company's carbon footprint. Next Dan Schuller, our CFO, will then discuss our financial guidance. Chris will conclude the presentation with a review of our acquisition program and summary of our guidance. At the conclusion of the call, we will open up for questions. With that, I will turn the call over to Chris Franklin.

Thanks, Brian. Good morning, everyone, and thanks for joining us. I thought we'd start off this morning with a quick reminder of the 3 primary themes we set for ourselves in 2020 and then presented them to you at our Investor Day back in February of last year. Those themes were integration, growth and operational excellence. And I'm happy to say that even despite all the challenges of 2020, we were able to deliver on all 3 of these objectives. There's a lot happening in integration, as you might imagine, as we've been reporting in less than a year of ownership of Peoples, our leadership teams and employees from both legacy utilities have come together to support the water and natural gas businesses and leverage best practices from both utilities, and we're off to a really strong start. I'm so pleased with the first year together. DELCORA is also a key piece of our integration work as we continue preparing to onboard DELCORA's large customer base and their group of employees. And finally, as you're aware, in 2020, we published our ESG report and launched an ESG microsite. If you haven't seen it, I'd encourage you to take a look. It's -- I think it's industry-leading. It's really special. We'll talk a little bit more about DELCORA and ESG later in the presentation. Now growth continues to be a core component of our company's strategy. And in 2020, we closed 5 deals, adding nearly $63 million of rate base, and we have approximately $420 million in pending acquisitions with over 224,000 equivalent dwelling units, and our municipal pipeline remains robust. Finally, maintaining our standards of operational excellence is part of our everyday operations. In 2020, we invested $1 billion, nearly $1 billion, in infrastructure improvements and enhanced our systems and increased safety, very pleased with our operational excellence as well last year. Now as we invest in our infrastructure, it has an obvious impact on customer bills. We take pride in leveraging our 135 years of experience to invest needed capital in a responsible manner that even sometimes results in a reduction in operating expenses. Projects like these allow the company to solve operational challenges without creating upward pressure on customer bills. So there on the left side of your screen, the slide highlights a project where we developed our own water supply to reduce our need to purchase costly water from another provider. And on the right, you see another project. This project actually won an industry award, where we leveraged capital investment and innovative design to reduce both operating expenses and our dependency on nutrient credit purchases at a wastewater plant in Virginia. Now the larger company, Essential Utilities can do even more to support communities we serve. In 2020, The Essential Foundation gave over $4 million in community support. This included support for organizations impacted by the COVID-19 pandemic as well. In addition to financial support, our 3,000 employees also form a strong volunteer network and have made a real difference. Over the years, the company has made long-term commitments to efforts such as TreeVitalize, which helps ensure the water sources and air quality are protected. The company has also been a long supporter of renewable sources of energy. I think you're aware that we have multiple solar fields that provide energy to our plants. We have a long commitment to purchase clean power where possible across our water platform. All right. With that quick review of 2020 accomplishments, I'm really excited to tell you about our '21 priorities. With the acquisitions announced in the last year and, frankly, the opportunities in the pipeline, integration, growth and operational excellence will continue to be much of our focus this year. In 2021, we'll obviously continue with the Peoples integration. While we've made great progress, we'll continue to further align the organization and leverage our size for expertise -- and expertise to reduce cost. We're also deep into the planning of the integration of DELCORA. This is our largest municipal system we've ever purchased and plan to close this year probably in the second quarter. We expect a seamless transition after closing DELCORA. The acquisition pipeline remains robust, and we expect to sign over $100 million of new deals in 2021. Now while growth is key, we continue to focus on operational excellence to ensure quality service for our customers. This is always our top priority and will remain so. Importantly, I want to point out the last bullet on the right here. We expect to file an Aqua Pennsylvania rate case this year, and Dan is going to take you through a little bit more details on that in a few minutes. But now let's get to one of the priorities that I'm really excited to talk to you about. It fits nicely with our ESG work and the topic is our emissions reductions commitment. Although, we haven't owned Peoples for a full year yet, we have put substantial work in consideration into our emissions reduction. And today, we're ready to announce our commitment to substantially reduce Scope 1 and 2 greenhouse gas emissions. In fact, by 2035, we pledge to achieve a 60% reduction over our 2019 baseline. All of our utilities, gas, water and wastewater, across our 10-state footprint will be contributing to this enterprise-wide target. Transparency is always at the center of our ESG program and a core value at our company. So we're going to report progress toward this goal twice a year until we meet the target. We see this as a strong first step toward an ultimate goal of net zero. And while we're optimistic and excited about the pace of technological advancement, I'd prefer not to combine our first step with uncertainty or speculative elements simply to announce a net-zero target. I want to assure you that our 60% emissions reduction comes from projects and initiatives we've already had planned or put into place. They utilize existing and proven technology and methods. They're real and they're tangible. And importantly, the baseline is just a year ago, 2019. We're not going back 10 years. To put this ambitious commitment into perspective, our target is consistent with the rate of reduction necessary over the next 15 years to keep on track with the Paris Agreement. We all know that, that aims to limit global temperature rise to well below 2 degrees Celsius. This gives us confidence we're on a strong path in the intermediate term and will continue to push forward on bold and innovative ideas to build on this foundation. In the meantime, the quest for net zero -- in the quest for net zero, there are some promising technologies on the horizon that we are excited about and actively researching, renewably produced green hydrogen as one of those examples. Each day, it seems like a new piece of information or new article is written about its promise to transform our national energy picture, and we're following various industry and academic studies of how much can be blended with natural gas safely and reliably, and we're open to all possibilities in our work to reduce emissions. Fortunately, our water and wastewater business will be a tailwind in this endeavor. We continue to seek opportunities to procure additional renewable energy. You probably know that our heavy use of electricity is our primary source of emissions on the water side. Pushing water up and down hills is very energy intensive. We announced earlier last year that Aqua contracted with a retail power supplier for 100% wind power through green e-renewable energy certificates beginning in 2022 for our water and wastewater operations in Illinois, New Jersey, Ohio and Pennsylvania. I'm sure you're aware that these are the states that feature deregulated energy markets, which allow for this arrangement. This plus other initiatives will increase Aqua's energy derived from renewables from 5% today to 60% in 2022. And we remain optimistic that given the pace of external change, we can further dramatically reduce or even materially eliminate our Scope 1 and 2 emissions for our water and wastewater utilities in the coming years. Now it was important to us that we achieved this environmental improvement while ensuring affordability for our customers. So I want to note here that the renewable energy commitment we made at Aqua will not drive higher customer rates. All right. Let me walk through some of the key elements of our plan. You might suspect, about 78% of our Scope 1 and 2 emissions are driven by the gas distribution business. Almost all of these gas-related emissions are related to the methane leaks from the distribution pipeline system. So it makes sense that almost all of our emissions reduction will be driven by the company's aggressive long-term infrastructure improvement plan, we call LTIIP, which has a stated goal to replace about 3,000 miles of bare steel and cast iron pipe. In addition to the LTIIP, there are other initiatives currently underway to reduce emissions. Essential is implementing a gathering system repair program, which allows for accelerated detection and leak repair. Construction techniques that minimize methane emissions during replacement and repair of activity are also expected to be employed. The company is using new equipment that captures gas used during construction and reinjects it back into the system. Further, we continue to replace some of our gasoline and diesel-powered vehicles with compressed natural gas-powered vehicles to reduce our fleet emissions. So by 2035, Essential will reduce annual emissions by 350,000 metric tons of CO2 equivalent emissions compared to its 2019 baseline. And sure, a 60% reduction sounds good. But what does it mean in everyday life and in practical terms? If you're like me, a ton of CO2 equivalent emissions can be somewhat esoteric to wrap your mind around. So let's try to think about it in one of these ways. By 2035, this figure is roughly equivalent to any one of the following activities taking place in 1 year. Emissions from 76,000 cars on the road, emissions from 59,000 homes electricity usage or the CO2 sequestered by 450,000 acres of U.S. forests, think about that as the massive size of Sequoia National Park. Now as I shared in our third quarter earnings call, natural gas has a critical role to play in our national energy future and underpins the growth of renewables because of its complementary attributes. Think about it. 179 million Americans benefit from the affordability, local abundant supply and reliability of natural gas in their homes, and they continue to do so as many projections show, at least through the middle of the century. Our goal is to operate gas, water and wastewater utilities with as few greenhouse gas emissions as technology and economics allow while maintaining affordability and reliability that are central to our customers' needs. Let me talk about -- one last slide here before I turn it over to Dan. I want to take a few moments to just quickly touch on some of our other ESG commitments we're making. These are important. We're making significant commitments relating to employee and supplier diversity, which will be factored into the short-term incentive compensation plans of management here in 2021. We believe that supplier diversity is critical for our communities as well as our business. We want to source from and partner with businesses owned by those who represent the diverse communities and neighborhoods where we live, work and operate our company. This also enriches and strengthens local economies, increases sourcing options and fosters collaboration and innovation. We have a multiyear plan of increasing the proportion of controllable spend with diverse suppliers from 8.6% today across the company to 15%. Now for many of us -- well, many of us know that the utility industry has lagged other sectors in attracting and retaining employees of color. We see a great opportunity to strengthen our diversity, equity and inclusion at the company and the target that we're setting is based on local customer demographic data to ensure that our employee diversity reflects the communities that we serve. We have a range of diverse recruitment tactics, and we believe tying compensation to this work is the right decision to spur change. We also want to ensure employees of color experience equity, inclusion and a terrific work environment at Essential, which is why in recent years, we've introduced things like unconscious bias training workshops, employee resource groups as 2 examples, and we look forward to adopting further supporting practices to achieve our multiyear plan of 17% employees of color across Essential. And besides financial metrics and this new 10% weighting on diversity, our short-term incentive plan also includes metrics on water and wastewater compliance, gas leaks and infrastructure improvement, customer satisfaction and, of course, employee safety. We believe this incentive program builds on an already strong foundation of management and Board oversight on ESG issues. And now with that, let's turn it over to Dan to get a financial guidance update. Dan?

Thanks, Chris. Good morning, everyone. Let's talk for a minute about the infrastructure investments we plan to make in 2021. As a combined company, we expect to invest approximately $1 billion this year in infrastructure between water and natural gas. For the 3-year period between '21 and '23, we plan to invest approximately $3 billion. I will note that this does not include capital to pay for acquisitions or for capital improvements of those acquisitions, which are not already signed or weren't already signed when we finalized the budget and the plan last fall. The primary drivers of capital investment are distribution pipe replacement and source and treatment projects in the water business and pipeline replacement in the natural gas business. Importantly, over 50% of our capital across the 2 business segments is eligible for recovery under surcharge mechanisms which are critical in allowing us to earn actual returns on equity closer to our authorized returns and therefore, help us to stay out of rates longer. In 2021, we plan to replace 315 miles of pipe across our water and natural gas businesses. For the 3-year period, through 2023, we're targeting 1,000 miles of pipe replacement with about 54% of that on the gas side. We believe these mileage targets make us a leader amongst our utility peers and support our objective of providing safe and reliable service to all of our customers. Across our footprint, we're witnessing the impacts of climate change and recognize our responsibility to quickly and significantly reduce emissions. This is not a check-the-box action, and it is not just talk. Every one of us from Chris and our engaged Board of Directors to my colleagues and I and the leadership team to our frontline team members in the field aspire to live out our mission each day in a sustainable manner. We provide essential resources for life, and we do so as residents of the very communities and environmental habitats that we serve. Many people only see the end results of the work performed by our 3,000-plus employees. They fill up a glass of water for their child or turn on the stove to cook a dinner for their family. Many of you judge us, as you should, on our ability to service these customers with the utmost care for their health and safety. However, with an acquisition-based business model, I think one thing that can sometimes be overlooked is our undeniable expertise and track record in significantly improving or even transforming the environmental profile of water and wastewater systems that we take under our care. It's a hallmark of our strategy and municipalities trust us time and again because of the skill set that we've developed over the last 135 years. In Peoples Gas, we saw a situation not too dissimilar to what I've just described. Here, we found a gas LDC with a strong profile in many respects. However, under previous ownership, it had not quite kept pace with leading players in the industry in terms of investments, innovation and commitments related to climate change and emissions reduction. Essential's expertise and resources are now being deployed to match our shared aspiration to be among the industry leaders in this area. Today, as Chris said, less than 1 year after the acquisition, we're announcing an ambitious target for emissions reduction. This is a journey and change will not happen overnight, but we're putting the right pieces in place to evolve our company for a low-carbon future that excites us rather than intimidates us. The capital investments highlighted on the previous 2 slides translate into significant rate base growth over the next few years. In the water business, our rate base is growing at roughly 6% to 7% from infrastructure improvements. Again, I will note that acquisitions are not included in that range. Those signed acquisitions, included on this page in dark blue, boost that rate by a couple hundred basis points. For gas, the rate base growth rate is anticipated to be in the 8% to 10% range due to our accelerated pipeline replacement program at Peoples. We continue to reiterate our commitment to maintaining a strong balance sheet and our credit metrics reflect that. Historically, we had an S&P rating in 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 as part of the Peoples transaction. S&P assigned Essential an issuer rating of A meaning that unsecured holdco debt is rated A minus, and Moody's rating for us is Baa2 and has remained constant since we closed the transaction. As you can see from the bottom of this slide, these ratings are in line with our utility industry peers. By sustaining our primary credit metrics in the range, as shown on the right side of the slide, we anticipate maintaining strong investment-grade ratings and commensurate access to capital. I will note that we expect to regularly be issuing debt to finance our capital program, and we'll need to issue equity from time to time to maintain our credit metrics and achieve our investment and acquisition goals. But as we've said before, we believe that issuing equity to fund fair market value municipal transactions is really great for building shareholder value for the long term. On a GAAP basis, we're providing a guidance range for earnings per share of $1.64 to $1.69 for 2021. If you're thinking about a starting point, recall that we're guiding to the high end of our 2020 guidance range of $1.53 to $1.58, but that strong water usage contributed a couple extra cents of earnings in 2020, thus a normalized $1.56 or so. We then expect to continue earnings per share growth at a 5% to 7% CAGR through 2023. This growth rate includes contributions from known municipal acquisitions plus $60 million annually in additional fair value acquisitions after those known acquisitions close. As you think about our earnings per share growth at 5% to 7% -- sorry, as you think about our earnings per share growth of 5% to 7% versus our rate base growth, there are a couple of things that you should consider. First, the best comparisons of rate base growth and earnings per share growth are from rate case year to rate case year for one particular utility. Second, if the endpoints include over-earning or under-earning, that would have an effect on the earnings growth versus the rate base growth. Third, municipal acquisitions generally create short-term earnings lag as these acquisitions rarely, if ever, earn a full return until they're included in a rate case. And finally, when we need to issue equity to finance acquisitions and our robust capital program, this causes discontinuities in that EPS growth profile. However, absent these things, over the long run, there's nothing structural that should keep our long-term rate base growth and long-term earnings per share growth from being more closely aligned. We believe the 5% to 7% per share growth over the next 3 years may prove to be conservative, given the levers we have and our optimism with respect to acquisitions. Importantly, from a regulatory standpoint, the multiyear plan we laid out here includes the impact of an Aqua Pennsylvania rate case, which we plan to file this year on the 3-year rate cadence that we've discussed previously. We presented a version of this slide at last year's Analyst Day. We brought it back to remind you about the net income variability by quarter for our combined water and gas business. This slide should provide you with some assistance in constructing quarterly earnings projections that reflect the seasonality in water and gas usage. So with that, I'll hand the presentation back to Chris Franklin for the latest on our acquisition program and to conclude our prepared remarks. Chris?

Great. Thanks, Dan. Let's talk a little bit about growth strategy here. Most of you have seen a version of this slide in the past. This is an updated version, but you're probably familiar with our core competencies and our acquisition growth strategy. And I think this is what differentiates Essential in the marketplace. We continue to see a significant water and wastewater municipal transaction opportunities of varying sizes, which is why our municipal initiative remains our primary focus and our top priority for growth. Our municipal acquisition program provides consistent, year-over-year customer growth and rate base growth that continuously generates new capital needs. As we stated before, we're pleased with the existing rate base mix of our utility platforms at about 70% water and 30% gas, and we will continue to be very strategic and selective as we consider any future acquisitions. As we see continued success in our local municipal, our municipal acquisition program, that mix of gas and water could further tilt toward water and wastewater. Now this next slide represents closed acquisitions and our regulated water segment for our water segment. In 2020, we closed the Campbell Water System in Ohio, the East Norriton Wastewater System in Pennsylvania, the Rockwell Utilities water and wastewater system in Illinois and the New Garden wastewater system in Pennsylvania, altogether adding 12,000 customers and about $63 million in new rate base, pretty strong year. Now here, you can see that we have 5 municipal acquisitions that have been signed and are pending closing. We continue to advance the acquisition of Commons Water in Texas, DELCORA and Lower Makefield in Pennsylvania, and we recently signed agreements with Bourbonnais in Illinois to acquire their wastewater assets for $32 million, serving about 6,400, 6,500 customers. Just this past week, we also signed an agreement for East Whiteland, a wastewater system in Pennsylvania, and we're going to pay about $55 million for that system. So in total, these transactions will add about 224,000 customers or customer equivalents when closed. Based on the approximate rate base of $420 million, these signed agreements are expected to generate about $21 million of incremental annual income when they're fully earning, i.e., after rate cases are filed, et cetera. And remember, that's before any incremental capital that these acquisitions will require in the future. I know DELCORA is a hot topic for many of you from the questions we've been getting. The good news is that DELCORA transaction continues to advance. Just before the end of the year, the County Judge in the court case brought by Delaware County ruled in our favor and basically ruled on the validity of the asset purchase agreement and the legality of the trust. We are very pleased with the outcome of that decision. We expect to move forward with the transaction and are awaiting the administrative law judge's recommended decision and then the PUC decision. Based on the PUC schedule, we would hope to close the transaction in early second quarter. As the momentum of acquisition or municipal sales continues to grow, many more municipalities are expressing interest in selling their systems. We see a lot of factors that contribute to this, including the need for proceeds to invest in community needs or economic development, the need for capital investment to improve infrastructure and to address the challenges, which -- with increasing and more stringent environmental regulations at plants, et cetera. When we evaluate a municipal acquisition, there are a variety of considerations. It's not just purchase price and the future capital requirements, but it's also the impact of customer rates and the opportunity to earn an allowed return among other factors. Although, each deal is unique, we feel confident that we can provide a solution for many of the municipalities that are looking to partner with us. Now as we've said many times, fair market value continues to be important legislation. And fortunately, all 8 states where we have water utilities also have their market value statutes. This has given municipalities an opportunity to realize the appropriate value for their water and wastewater systems and is one of the main reasons that we continue to have a healthy pipeline of potential municipal opportunities. While the level of activity in states varies, we believe activity will increase in the states where fair market value has more recently been enacted. This table includes acquisition opportunities where we're having active discussions with municipalities. As illustrated on this slide, we are actively pursuing acquisition opportunities totaling about 340,000 customers, nice strong pipeline. All right. Let's just summarize guidance. I'll do this briefly in respective time. Earnings for 2021 per share, earnings per share, we expect to be $1.64 to $1.69. For EPS for the 2020 to 2023, we expect 5% to 7% compounded annual growth rate. For the CapEx for '21 to '23, we expect to spend about $3 billion on nearly $1 billion a year. For rate base growth, we expect to see 6% to 7% for water growth and 8% to 10% growth in gas. For customer growth, we expect 2% to 3% growth in water and stable in gas. And for emissions reduction, we expect a 60% reduction in greenhouse gas emissions by 2035. The guidance we've provided today is strong and achievable. We've worked hard during the pandemic to keep the company strong and to ensure that Aqua and Peoples combination has gone well. I continue to be excited about the opportunities to grow the company while improving the environment and serving our customers and shareholders. So in closing, I think Essential is strongly positioned as a fully regulated utility with a unique mix of organic growth from infrastructure investment, a long-term growth opportunities through the continued deployment of our proven acquisition strategy, our regulatory expertise in earning a fair return for shareholders, operational excellence to facilitate quality service for our customers and a strong and continuously developing ESG program aligned with the interest of all of our stakeholders. And with that, I'll conclude my formal remarks and open it up for questions. Operator?

[Operator Instructions] Our first question will come from Ryan Greenwald, Bank of America.

So maybe if you guys could provide a bit more color around your approach to taking a 3-year view versus a longer 5-year view offered by a lot of the sector, and any commentary you can kind of provide around like the longer-term visibility for the organic growth of the business?

Sure. Let's start with this. When I became CEO in 2015, we didn't give guidance at all. Then we went to 1 year, now we've gone to 3 years. So I guess all of these things are matter of perspective. I know folks would like even longer view than that. But we feel like we've made a lot of progress in giving even longer-term guidance from nothing now to 3 years. So listen, we have a long-time business here, 135-year-old company with a nice, stable growth trajectory. But there's enough things moving through the market with municipal growth, et cetera, that we feel comfortable that a 3-year view is comfortable at this point. And while we don't see major hurdles in the future, we still think that 3 years is what we're comfortable with at this point. Dan?

No, Chris, I think that's right on. I mean, I think, Ryan, you and I've talked about it a little bit in the past and Chris reiterated that, that very comfortable with 3 years and the visibility to that 3 years. And things continue to develop, and we expect to continue to roll that 3-year guidance forward as we go.

Fair enough. So when we think about the muni acquisition pipeline, you guys have these 5 APAs for over $400 million. You kind of alluded to the $100 million a year in the past. But how should we think about potential run rate and how elevated it can actually get kind of given the market dynamics right now?

Yes. It's a tough question because as you can see from the acquisitions, the municipal acquisitions we're doing, there's some really large ones, DELCORA being one example. And then there are some smaller ones. So it's difficult to say to look at -- to think about it as a smooth run rate. It will be lumpy. Let's face it, it will be lumpy, and these things take time and effort. And -- but what we do see, and I think this is promising, we see larger and larger opportunities, more opportunities that have -- and larger than we've seen in the past. So that's the good news. I think maybe we'll be able to give a much clearer picture of that in the coming years. But given the lumpy nature of it, it's very difficult to predict a smooth runway, if you will.

Our next question will come from Insoo Kim, Goldman Sachs.

So my first question is on your comment on the rate base growth and EPS growth. I appreciate the color you gave on how different factors could impact that difference. But when we talk about how your guidance for EPS growth could prove a little bit conservative, could you give us a little bit more color on what different items could make that range a little bit higher than what you're assuming in your base guidance?

Yes. Yes, absolutely. Insoo, this is Dan. So I think when we say that, it's really about a few things. Number one is the municipal acquisition program and how successful we are with that program. It's about our capital investment but also our capital investment timing relative to rate cases and that regulatory process there. And then it's also about expense control or expense management that could be helpful there. So I think that claim was a fair one. We would certainly hope that this could be proven to be conservative, this 5% to 7%. But we think 5% to 7% is a very solid growth rate to be providing as part of this guidance at this point in time.

Understood. And then on the DELCORA acquisition, do we know at this point whether the Delaware County has appealed to these county court judge's ruling? And if so, how does that impact the potential timing of the deal close?

Yes. So we won't know that for certain, probably to later in the month. And I think the way we look at it, Insoo, is that this is a very strong decision by the county court judge. I mean he didn't leave any ambiguity to his view. And so I think even with an appeal, the county will have a difficult time in the Commonwealth Court, if they decide to go that way. And as we said before, we're -- settlement is always an option if the parties could come to the table. And finally, we see the administrative law judge's decision coming someplace later this month. And I think the judge has the option to move forward and place some conditions. And that's probably the easiest path and that's the hope that we move that way and then we just move to closing then in the second quarter.

Understood. And then just one quick one, if I may. On the ESG side, I appreciate a lot of the color you gave on your goals. But is there an opportunity on the wastewater side of things as it relates to potential for, I think, that renewable natural gas development from wastewater treatment plant processing? Given now you have both a water, wastewater as well as the gas business, I just wonder if there's a way to combine these assets on that front?

Yes, it's a great question and one we think a lot about. The challenge we have, and we have a lot of wastewater in our company, but the vast majority of those plants are small. And so plants need to be of a fairly large size in order to be helpful in the renewable effort. And so as technology continues to improve, maybe there's more opportunity for some smaller plants in the future. But right now, it's more our largest plants that we could find some of that synergy. And of course, we're looking strongly at that. DELCORA is one of those examples. That's a very large plant we would acquire there with DELCORA. But your point is a good one and one we look at consistently.

Our next question will come from Durgesh Chopra, Evercore.

Good content here this morning, I appreciate it very much. Maybe just -- I have 2 questions. One, can you clarify, Dan, maybe this is to you, on the '21 guidance, is there a benefit included in there from the tax repair election on the balance sheet portion at Peoples Gas, which -- for which I believe we are awaiting a final decision?

Yes. That's right. So you're speaking of the catch-up portion. No, there's nothing in the '21 guidance related to that for 2021. You'll recall that our proposal there was really to bring that back kind of in the out years, a tiny bit in '23, more in '24 and the bulk in 2025 to keep us out of rates longer. So really nothing to worry about in terms of what we've shown you today relative to that catch-up portion. So that process is underway. Hearings are scheduled for the end of this month and then the ALJ would work on a proposed decision. So we'd expect to see resolution on that kind of in the second quarter.

Got it. But I guess I didn't fully appreciate the fact that, that really -- any upside there would be in years '23 and '25 or any implications from that order would be '23 to '25. Is that right?

Yes, that's right. Because as you recall, we might recall, the way we filed it was really to keep us out of rates longer by bringing back some of that benefit rather than thinking about that benefit as increasing earnings in the near term.

Yes. The trade-off that the regulator has to think about is do they -- do we stay out of rates 1 year longer or do we come in 1 year early? That's really what that catch-up would do for us is bring us in a year earlier if we didn't -- if we weren't successful there or keep us out a year later or so if we were to be successful.

Yes. That's correct, Chris.

Understood. That's great color. And then your commentary on equity through this planning period. I guess I just want to make sure I have that correctly. Is the equity going to be for any future potential acquisitions? Or do you need equity just to kind of keep your credit metrics under the base capital plan that you showed here? Can you sort of clarify that for me?

Yes. So the way we think about that is, to your point, really, you're focused on the credit metrics and maintaining the credit metrics to maintain credit ratings. So from time to time, with an investment program and an acquisition program like we have here, you will have to issue equity to balance with that debt that we are issuing. So I would say, it supports the overall cash needs of the business, both for acquisitions as well as for investment in capital expenditures.

Our next question will come from Ryan Connors, Boenning and Scattergood.

Thanks for all the detailed information this morning. I think you covered the guidance stuff pretty comprehensively. So a couple of questions on the acquisition side. And the first is, if you look at some of the stocks of your sort of vendor companies, your meters and your pumps and your treatment, they're absolutely been red hot. And I guess the rationale is that the federal government is about to shower massive funding infusion on these local governments and municipal utilities and that that's going to drive this huge uptick in order flow for that infrastructure manufacturing business. And I guess if you could comment on -- do you believe those expectations of a huge federal stimulus into local governments and municipal utilities -- do you think that's correct? Do you think that will materialize? And if so, how do you think that affects the pipeline of municipal acquisitions? In other words, is that like a lifeline to some of these systems that otherwise would have sold? How do you view that issue?

Yes. It's a great question, Ryan. And trying to predict the federal government at this point is like a crystal ball. But let's say this. We have -- and I personally have testified before the House Commerce and Energy Committee that if they're going to spend money on infrastructure, it's better on roads, bridges, airports, that sort of work, storm water and let private capital come to play in water, wastewater and that sort of thing. So we've been somewhat successful in that messaging as an industry. We'll see if it stands up as an infrastructure bill comes through. But here's the thing. In most of the utilities that we're buying and we're looking at, capital deployment has been so deferred that even an infusion is a short-term fix. I can't see that there's enough federal money coming to bail a lot of these troubled systems out for long periods of time. And so you're right. Could a band-aid forgo a decision to sell short term? Potentially. But I think what we're finding is the needs are much deeper than short-term band-aids or short-term fixes. So listen, Ryan, crystal ball. I'm hopeful that the federal dollars are focused on roads, bridges, airports and that sort of thing and not on this. And so we can continue to do this good work. But we'll see what the Congress comes up with.

Got it. Okay. That's a very helpful perspective on that. My other one had to do with sort of the game theory on fair market value and the competitive situation on those deals. I thought it was interesting that -- fairly local press and central PA indicating that one of the largest energy utilities in the world, really more of a renewables energy utility investor -- was bidding on a pretty sizable wastewater plant out in the Central PA. That would be an entirely new entrant into that Pennsylvania market. And I don't know whether that has to do with the question that came up earlier about how wastewater ties into renewables and so forth. But do you think those -- that's a one-off on a certain asset? Or do you think that's sort of a canary in the coal mine that now we're going to get more and more new players coming into successful fair market value markets like Pennsylvania?

Yes. It's a great question, too, Ryan. Especially when you think about the size of NextEra and the size of some of these other players, even a York wastewater doesn't really move the needle from an earnings per share. Maybe if you're looking at it from an ESG standpoint, it's a -- I hate to put it this way, but a trophy for them to have. But it's difficult to see utilities of that size getting into these scrappy fights for utilities that -- from their comparison size, are small. They're nice size for us and, obviously, grow earnings nicely for companies our size. But it will be interesting to see. And is it because it was wastewater and potentially a renewable type play or is it that they're looking at water wastewater, it will be interesting to see what the questions for NextEra are. I don't think it's the canary in the coal mine to be honest. I think that the players are largely Aqua Essential now and American. But it remains to be seen. Might there be private equity to come to play as these deals get larger, That's probably infrastructure funds and private equity potentially.

[Operator Instructions] Our next question will come from Jonathan Reeder, Wells Fargo.

The M&A side, and that most recent discussion. Is it your understanding [indiscernible] is it done? Is it essentially a done deal for AWK? Or is there still the potential for the city to go with...

Yes. The new news, Jonathan, there is that there's -- the city is going to hold 2 public meetings, and they're going to let the public have a say on whether or not to sell the utility. As you know, it's a split City Council. So there is some opposition. So it will be interesting to see what the public input sessions look like. And then whether the City Council decides to interview multiple candidates for this role or whether they vote or where they keep it themselves. But these things are never done till they're done.

Okay. That's helpful to know. Any guidance around the size of the 2 additional deals where you said you've been selected as the winning bidder and working to finalize the [ KNO ]? On the Q3 call, you kind of [indiscernible] I think the 2 big ones that just got put into the pool on this?

The total between them is about $30 million, Jonathan, I think, to give you a sense of size.

Okay. That's helpful. And then if I could have a couple of CapEx-related questions. The $450 million of net CapEx for 2021, I think that represents like $50 million use of 2020 guidance. Should we think of $450 million per year is the new normal going forward? Is it just a little higher due to some project timings?

Well, that program and I'm backing up to that slide here, I think that's probably a pretty good spot, especially when you think about what we said, $1 billion investment this year, $3 billion over the coming years, maybe a slight tick up there, but it's pretty consistent.

Okay. And then the $550 million on the water side, is there -- does that affect any sort of meaningful spend related to DELCORA as well as the other recently closed or pending transactions? I know you said the number includes as you report that -- reflects that...

Yes. The significant expenditures for DELCORA for plant-related work don't come until, think about that as like 2026, 2027, 2028. In the meantime, there's some capital expenditures there, but it's $25 million to $50 million a year. It's not a great big chunk until down the road.

Our next question will come from Verity Mitchell, HSBC.

Very good update, really, really helpful. I was just very interested about your comments about fair market value acceleration in the new states. And I just wondered whether you could talk about Texas, in particular. Do you think there'll be a much faster growth in these new states? I mean not all of them have all of the regulatory mechanisms yet. So I'm just looking at kind of future growth and geographical strategy.

Good question. And we're very hopeful in Texas. Texas is different. The makeup of the municipal sector there is a little bit different than it is in other states. And so it can be a little bit more challenging. But we have good growth prospects in Texas. And I think once you get the first one through the PUC in Texas on fair market value and the rules start to become clearer, municipals can get more and more certainty. So I would -- I think we have a strong hope that we can grow in Texas at a faster pace. And we'll see how this first one goes through the commission. So far, it looks promising. But I would also point you to Ohio, where we have just done the Campbell acquisition, and we see other opportunities. We're really the only large investor-owned water utility in Ohio. So we have -- our President in Ohio, who was very successful in passing legislation and readying the company for growth, we have a new president joining us as that President retired in Ohio. And our new President is actually coming from the municipal sector. He's run a large city water system in Ohio. And so he's got a lot of friends in the municipal sector. So we're very hopeful that we're going to see some additional growth in Ohio among others, Verity, but those are 2 thoughts.

Speakers, at this time, we have no further questions in the queue. So I would like to turn this conference back over to Chris Franklin.

Thank you all for joining us today. Really appreciate it. And as always, we're all available for follow-up questions as you think of them. Thanks for joining us again today. Take care.

Thank you very much. Ladies and gentlemen, this now concludes today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you.