Good day, welcome to the Aqua America's Quarter Two 2019 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Dingerdissen. Please go ahead, Brian.
Thank you, Eduardo. Good morning, everyone, and thank you for joining us for Aqua America's second quarter 2019 earnings call. If you did not receive a copy of the press release, you can find it by visiting the investor relations section of our website at aquaamerica.com. The slides that we will be referencing in a webcast of this event can also be found on our 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 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. Now I would like to pass the call to Chris Franklin.
Hey, thanks, Brian, thanks everyone for joining us. The second quarter was certainly a busy one. We installed a large amount of capital, advanced several municipal acquisitions, continued our work on the Peoples Natural Gas acquisition and the Peoples Natural Gas rate case. In terms of today's agenda for the call, here's what we'd like to do. We'll start with some highlights since our last earnings report in May. Daniel Schuller will then talk about our financial results as well as our rate activity. I'll give you a brief overview of our progress on the municipal growth strategy. We have Kim Joyce, our Vice President of Regulatory, Legislative and External Affairs, joining us this morning, and she'll give you an update on fair market value and the regulatory aspects of the Peoples Natural Gas transaction.
We'll conclude the call with a review of our guidance for 2019, then take any questions that you might have. Let's jump right in. During the second quarter, our employees delivered another strong performance, demonstrating our long-term strategy of growth through acquisition, our investment in infrastructure renewal, and of course, our consistent delivery of value to customers, communities, and our shareholders. In fact, the first two quarters of the year, this year, we invested nearly $270 million in infrastructure investment. That's up 24% over last year's first half, on track for another record capital spending year of approximately $550 million this year. Investing in infrastructure is at the core of our mission to deliver safe and reliable service, as you know, it also helps fuel our growth and earnings. Our municipal acquisition strategy is on pace for another strong year.
We added a signed purchase agreement in Campbell, Ohio just recently. Also announced a letter of intent with DELCORA, which is a large municipal wastewater authority here in southeastern Pennsylvania. I'll share a little bit more on those in a few moments. Our municipal strategy has been fueled in large part by the passage of fair market value legislation that has allowed more municipalities to consider companies like ours as a solution. In June, the Texas Legislature passed a fair market value law, which should open more opportunities for companies like Aqua to serve many more communities in Texas. In July, the board approved a 7% dividend increase, which marks 28 years in a row of dividend increases.
Lastly, the Peoples transaction is on track for closing this fall after we secured financing and final regulatory approval in two states and are waiting for final regulatory approval in Pennsylvania, and Kim will take you through that in just a moment. On slide seven, you can see our dividend track record. The announced 7% dividend increase marks the 74th year in a row of consecutive quarterly payments. We continue to have a stated payout target ratio of between 60% and 70%, and we're comfortable in our ability to continue to increase the dividend for shareholders into the future. As a reminder, we are still over 30% retail-owned, which really is significant given the size of our company now, and this is post equity offering for Peoples.
We take great pride in our long and consistent track record of delivering shareholder value. Our dividend policy is a statement or a testament to our financial strength and discipline, as well as our ability to grow. With that, let me pass the call along to Dan to discuss the company's financial results.
Thanks, Chris. Good morning, everyone. Thank you for joining the call. As you can see on slide nine, we're reporting non-GAAP numbers again this quarter to adjust for the impact of the Peoples transaction and integration. You'll see this throughout the year. We reported revenues of $218.9 million in the second quarter of 2019, up 3.3% compared to $211.9 million in the second quarter of 2018. Operations and maintenance expenses were $86.4 million in the second quarter, compared to $73.5 million in last year's second quarter. Moving on to GAAP net income, which includes items related to the Peoples transaction, reported $54.9 million compared to $66.6 million in the second quarter of 2018.
GAAP earnings per share, including Peoples-related expenses and incremental shares, were $0.25 in the second quarter compared to $0.37 in 2018. When adjusted for Peoples-related charges, income was up 0.3% from $66.6 million to $66.8 million. As you can see on the bottom row of the table, adjusted income per share was in line with last year's EPS of $0.37. Now, let's move to the revenue waterfall on slide 10. Breaking down the 3.3% revenue increase, you'll see that growth was the largest contributor, which includes acquisitions in Illinois, Pennsylvania, and Virginia, as well as organic growth, adding approximately $4 million to revenue. Rates and surcharges added an additional $4 million. Other items decreased revenue by $297,000, and then consumption was lower by $677,000, given the normal trend from conservation and wet weather in some of our states.
Let's move to the O&M waterfall on slide 11. Operations and maintenance expenses were $86.4 million for the second quarter, compared to $73.5 million in the second quarter of 2018. The largest driver was costs from the Peoples transaction and integration, which increased O&M by $12.7 million. This charge includes a material portion of the bridge fees, which were written off when we raised equity and debt in April. Walking through the other drivers, growth, both from acquisitions and organic growth, added $1.1 million of expense. Employee-related costs decreased by $57,000. Production expenses were lower by $143,000, and other items decreased by $745,000. Excluding the transaction-related expenses, O&M would've been roughly in line with Q2 of 2018. Let's review the drivers of EPS on slide 12. In walking through the EPS waterfall from left to right, you can see that increased rates and surcharges and growth increased EPS.
Consumption was down slightly, and other items, including depreciation and interest, reduced EPS by $0.026. This brings the adjusted income per share for the second quarter to $0.374, up just slightly from last year's Q2 EPS. GAAP EPS included three items from the Peoples transaction. A mark-to-market adjustment on the interest rate swaps, which we mentioned on the last call, provided a positive $0.049 in Q2. Other transaction and financing fees of $0.148, as well as $0.025 to adjust for the dilutive effect of the equity offering. This brought GAAP EPS to $0.25 in the second quarter. Let's look at slide 13. Since this quarter's share count for GAAP EPS includes the impact of the common stock and tangible equity unit offerings in April, we wanted to spend a few minutes on the tangible equity units, or TEUs.
We issued 13.8 million units at $50 per unit. Each $50 unit includes a prepaid stock purchase contract valued at approximately $41.37, and a three-year amortizing note valued at approximately $8.63. This amortizing note provides the 6% coupon on the TEU, and it accrues interest on the outstanding balance at 3%. You can see the schedule of interest payments in the issuance documents. It's a fairly modest number each quarter, and it decreases over time. The number of shares issued as part of the prepaid stock purchase contract varies depending on our stock price at the conversion date, and specifically, the volume-weighted average stock price for the 20 days preceding the settlement. If Aqua stock is above the threshold appreciation price of $42.41 per share, we'll issue 1.179 shares of WTR for each unit. This results in the minimum number of shares being issued.
On the other hand, if Aqua stock is less than or equal to the reference price of $34.62 per share, we will issue 1.444 shares of WTR for each unit. This results in the maximum number of shares being issued. In between those two points, so in between $34.62 and $42.41, the number of shares issued per unit is equal to $50 divided by the share price. Between now and conversion, the minimum number of shares is used in the calculation of basic EPS, and the additional incremental share count, if any, based on the 20-day volume-weighted average price at quarter end, is included in the diluted EPS calculation. I will note that for Q2, the new common shares and TUs only count in the EPS denominator for 69 days of the second quarter. Hopefully, that helps you think about our share count going forward.
We've also included a more detailed breakdown of the share calculation in the appendix. Finally, recall that we'll be adding 21.7 million additional shares for the full quarter from the PIPE when the Peoples transaction closes. Moving on to rate activity on slide 14, in 2019 so far, we've completed rate cases or surcharges in Illinois, New Jersey, North Carolina, Ohio, and Pennsylvania, totaling annualized revenue of $57.5 million. In 2018, we filed our first rate case in Pennsylvania since 2011. During this seven-year period, we invested over $2 billion in infrastructure. We filed a settlement agreement for this case in February, and following a commission order, new rates went into effect on May 24th, totaling approximately $47 million in additional annualized revenue, and the DSIC was reset to zero. Additionally, the company currently has a surcharge proceeding pending in Ohio for $2.3 million in additional annualized revenue.
Let's talk about the Peoples Pennsylvania rate case on slide 15. Peoples filed a rate case in January 2019, and in July, filed a settlement agreement for $59.5 million in additional annualized revenue. I know that many of you have an interest in a potential repair tax election for Peoples in Pennsylvania. We want to make it clear that the repair tax election is something we plan to pursue in 2020 once we own the company. Given where we are in the process, I would caution against making assumptions in your models on the possible impact of repair tax. We'll provide more guidance on this in the coming months, likely at the Analyst Day we're planning on December 5th. Now I'd like to hand the call back over to Chris.
All right. Thanks, Dan. We've noted in the last several calls that we continue to see a strong pipeline of acquisitions in our municipal strategy, especially in the states where we have fair market value laws. On slide 17, you can see our eight signed municipal purchase agreements, which total about 22,600 customer connections. We're very excited about these customers joining us. Just recently, we signed an agreement to acquire the water system of Campbell, Ohio, which has approximately 3,200 customers. As a reminder, Ohio is our second-largest state with roughly 150,000 customers and a state where we are the only regulated water utility of size. Ohio also has 1,400 municipal water systems and about 1,000 wastewater systems, so there's a lot of opportunity for us to be a solution in Ohio.
Now that Ohio has a fair market value law, we expect to see interest from municipalities continue to increase as it has in Pennsylvania and Illinois, where the laws have been in effect for a longer period of time. I should mention on this slide that we do expect a couple of these transactions to close in early 2020, simply because of some regulatory process extensions. However, we do expect to see our total new customers added in 2019, along with organic, to still be within our targeted range of 2% to 3% growth. It's also important to note that as you think about what this adds to earnings, that for every $100 million in rate base from acquisition we add, we expect about $5 million in additional earnings to be generated from that increase, assuming normal ROEs. That would, of course, exclude any pursuit costs.
In addition to our signed acquisitions, in recent quarters, we've also highlighted some of the opportunities we're pursuing that are still in the earlier stages. On slide 18, you can see that we're actively pursuing some fairly large municipal systems and a total of over 400,000 customers in our active pipeline. In July, a large municipal wastewater system in southeastern Pennsylvania known as DELCORA signed a letter of intent committing to exclusive discussions with Aqua. To give you a sense of the size, DELCORA serves approximately 500,000 people. We talked about our company-wide serving about 3 million people. We have 1 million customer connections, it gives you a sense. This system has a number of wholesale and larger industrial customers. It's not all retail. It serves approximately 500,000 people in about 42 municipalities. This is significant to us.
If we reach an agreement on an opportunity of this size, we would likely look to put an ATM or an at-the-market program in place to raise some additional equity. As we said, aside from acquisitions, we do not see any additional need for equity in the near term. Now with that, let me pass it to Kim to provide some updates on the Peoples front. Kim?
Thank you, Chris. This morning, I'll provide an overview of the transaction timeline related to the regulatory approvals needed prior to our joining with Peoples. At the outset, I'd just like to say that it has been a pleasure working with the Peoples team on this joint effort, and I also appreciate all the hard work of those who participated in the approval process in the various dockets in all of the states. In looking at slide 20, Aqua and Peoples filed applications in the three states where Peoples currently provides natural gas service, which are Kentucky, West Virginia, and Pennsylvania. As was reported on the last earnings call, the parties were able to reach unanimous settlement agreements in both Kentucky and West Virginia, and those two commissions have both issued orders allowing the transaction to proceed to closing.
Kentucky has a four-month statutory timeline, and we received approval on March 13th, and we received approval in West Virginia on April 23rd. Next, I'll focus on the Pennsylvania regulatory approval process for the Peoples acquisition. First, highlight on the timeline slide that there were two other very important dockets being processed at the commission as well, the Aqua Pennsylvania water and wastewater rate case and the Peoples Natural Gas rate case. Both, in our view, reaching very positive outcomes. Turning to the next slide, for the Peoples acquisition, with Kentucky and West Virginia regulatory approval already received. We are now waiting for review in Pennsylvania. A non-unanimous settlement agreement was filed with nine of the 11 interveners, either supporting or not opposing the agreement, which was filed on June 25th.
The settlement agreement was supported by the Office of Consumer Advocate, the two intervening unions, low-income advocates, several gas suppliers, the Pennsylvania Independent Oil & Gas Association, among others. The two parties that did not sign on were the Bureau of Investigation and Enforcement, known as I&E, which is an arm of the Pennsylvania Public Utility Commission that oversees gas compliance, and the Office of Small Business Advocate, also known as OSBA. The major discussion point in the merger docket for the Bureau of Investigation and Enforcement and OSBA has been how to address a Peoples Natural Gas gathering system that serves approximately 1,700 families and small businesses located in a rural community south of Pittsburgh.
This particular system has deteriorated over time, and there is significant debate among the two parties about whether to replace and repair this specific gathering system or possibly convert those customers receiving natural gas service to an alternative fuel service, most likely propane. While we're disappointed that we could not reach a unanimous settlement agreement and continue to have conversations with all the parties, ultimately, the settlement agreement we reached with the majority of the parties seeks to set a path for resolution of this issue, which is the repair and replacement of the gathering system, which we believe is consistent with Pennsylvania policy and benefits customers, including approximately 100 small businesses in this area, and the overall economy of the region by providing continued access to low-cost natural gas.
For some further background, natural gas distribution companies have been collectively replacing old natural gas pipe on an accelerated basis for many years, and the facts here are similar to many areas in Pennsylvania, where the existing natural gas systems were installed decades ago and are in need of replacement. In fact, these customers that we're talking about have been paying full residential retail rates in addition to a DSIC for many years. Through consolidated rates or single tariff pricing, which the Pennsylvania Commission has long supported, we believe, along with the majority of the parties, that this is the most direct way to solve this issue. The alternative would be abandonment proceedings for these customers, which means converting approximately 1,000 family homes and small businesses to propane, which is much more expensive and could be three to five times more expensive.
Based on a prior experience, this would take many years due to the various logistical, legal, economic, due process, and societal concerns involved in abandonment proceedings at the Commission. Because two of the 11 parties were not supportive of this proposal, in Pennsylvania, the assigned administrative law judges will review the settlement agreement and the evidence and will issue a recommended decision. Just as a reminder, in the original Peoples SteelRiver acquisition, the recommended decision by the administrative law judge was to not recommend approval of the merger initially, and this was later overturned by the Commission. Here in our docket, when the recommended decision is issued, it will be sent to the full Commission for review and set to vote at a public meeting. Slide 21 gives our estimated timeline for a Commission decision.
There is no statutory timeline in Pennsylvania for approval of this type of acquisition, so our estimates are based on prior cases and similar transactions. We are anticipating a final order this fall, and we have estimated an order on the October 24th public meeting, which is the second public meeting in October, and closing shortly thereafter. Shifting gears to a legislative update, there is some very good news for Aqua Texas and Aqua North Carolina. In Texas, fair market value legislation passed, allowing these types of transactions in Aqua's seven states. Now, seven of our eight states have some form of fair market value legislation, and in the remaining state, which is Aqua Virginia, we are beginning discussions. Additionally, in Texas, Senate Bill 700 opens the door for the Texas Public Utility Commission to consider a water and wastewater DSIC in Texas.
This is our last remaining state to adopt this type of infrastructure mechanism. We're also pleased to report that North Carolina has passed legislation allowing the Commission to implement a consumption adjustment mechanism. The Aqua North Carolina team has worked on this concept for a number of years. The implementation of a CAM stabilizes revenues at levels approximating the approved revenue requirement during times of fluctuating consumption, which can be very important in a state like North Carolina, where changes in weather can significantly impact customer usage. With that, I will pass the call back to Chris.
All right. Thanks, Kim, I'll conclude the call with a quick summary and a review of our 2019 guidance. Looking at page 24, we're affirming our standalone 2019 financial guidance for Aqua, we're also reaffirming the expected closing timeframe, as Kim just said, for the Peoples transaction, the same timeline we essentially disclosed in June. We expect Aqua standalone adjusted income to be $1.45-$1.50 per share. This excludes the impact of the Peoples transaction and equity offering, as well as any future earnings from Peoples. We're on track for our best year of infrastructure investment, with about $550 million to be spent on replacing and improving pipe, plant, and other infrastructure. Through 2021, we expect to invest approximately $1.4 billion, this will help drive rate base growth of about 7%.
As I mentioned earlier, we have eight signed municipal acquisition agreements and expect to close most of those this year. Together with organic growth, our customer count will increase this year by 2%-3%. Finally, we've passed most of the important milestones in the regulatory process and in our integration planning for the Peoples acquisition and expect to close in the fall after receiving regulatory approval in Pennsylvania. Importantly, we plan, as Dan mentioned, to hold an Analyst Day in New York City in December. December 5th is our target date. At that meeting, it's our intention to provide longer-term guidance to you. As I've said on previous calls, we will provide this longer-term guidance only after we finish four things. We said we need to finish the Aqua rate case in Pennsylvania. That is complete. We need to finish the Peoples rate case in Pennsylvania.
We do have a settlement on that. We need to close the Peoples transaction. We expect this fall. Then we need to conclude and finish our analysis on the repair tax impact in Pennsylvania with Peoples as well. In summary, our performance for the second quarter is a result of a lot of hard work from the team on a number of different fronts. We continue our long history of dividend growth. The Peoples transaction supports our ability to continue this growth. Our fair market value legislation passed in Texas, and again, that's the seventh of our eight states to pass this important legislation. Our municipal acquisition program is strong and delivering good results, and we're pursuing larger opportunities, including the DELCORA opportunity.
Peoples filed a settlement for the rate case, which we've mentioned, and for the transaction, we're on track for closing in the fall, as Kim discussed. With all of that, I will conclude and open the call for questions.
Perfect. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure mute function is turned off to allow your signal to reach our equipment. Again, press star one to pose a question. We'll pause for just a moment to allow everyone an opportunity to go for questions. I'll take our first question from Julien Dumoulin-Smith from Bank of America. Please go ahead.
Morning, everyone. This is actually Ryan Greenwald on for Julien. How are you?
Hey, Ryan, how are you?
Hey, Ryan.
Doing well, thanks. Thanks for taking our questions. Can you just talk a little bit more about discussion so far in P.A.? I know you guys are saying 2020, in terms of repair tax, if anything is done there. Can you kind of just touch on your overall confidence of implementing it and how it would ideally look?
Yeah. Really there are two pieces of that, Ryan. There's the current portion which we can choose to elect. We can go ahead and elect that, and you'd see the benefit of that in the income statement immediately. There's really the catch-up, which is where you look back and say, if Repair had been in place over the past years, what would that be worth and how is that treated in terms of going forward? On that second portion on the catch-up, for that, you actually need basically a commission order indicating how that catch-up would be treated. If you think about our own Pennsylvania situation back in 2011, 2012, we had a significant catch-up that was put on the balance sheet, and the commission order indicated that we would amortize that catch-up deduction over a 10-year period of time.
That's the kind of thing we'd look for on the catch-up is some kind of a treatment of that catch-up. I won't say it's exactly what we had in Pennsylvania. I was just kind of giving that as an example. It's really the two pieces, and we'd expect that we would go ahead and implement it in 2020, and you'd see the current impact, if you will. Where we are now, we've been really determining what would that framework look like, how much of their capital qualifies for repair under that framework, quantifying then what that potential current portion is and what that would look like, and then quantifying that catch-up and discussing a strategy around that catch-up deduction. Does that help, Ryan, in terms of giving you a sense of it?
Yeah. Do you have a sense right now in terms of what would qualify?
It is a pipe business, so in terms of replacement, a portion of that pipe would clearly qualify for repair tax. I'd say we're still working through that process. As Chris commented at the end of the call, as we get through all these pieces, the two rate cases, the closing the transaction, the assessment of the repair of Peoples, then we'll give you the longer-term guidance.
Yeah, you can imagine, Ryan, we had actually hoped to have closed this transaction this summer, which then would've put us on the inside of the company and accelerated some of that look at these things. That's been a little bit delayed. I don't want to suggest that we've had anything but really fine cooperation between the two companies. Clearly, we're still not the owner of the company yet. A little bit of that work is delayed just because of the delay in closing.
There really is a fair bit of analysis, Ryan, to actually get those things quantified.
Yep, fair enough. Then just shifting away from the diversification into gas, can you touch on your appetite for diversifying more into new states with the core water business as fair market value legislation is making its way through?
Yeah, I think we're wide open to opportunities in other states. Having said that, we've put a lot of focus on passing this fair market value. As we stated in our prepared remarks, 7 of 8 states, we've seen the passage of it where we currently do business. Having said that, we've always said if we expand into other states, we would look to get a strong foothold. We wouldn't want to dabble in a state. We'd like to, if we enter with a presence, call that with a target of at least getting to 30,000 customers. I will say that where we've seen fair market value passed already in our existing 8 states, boy, we're seeing an awful lot of opportunity and activity. It's kept us pretty busy in our existing states.
Not to say we're not always taking a look around, but we're pretty busy in our eight states already.
Got it. Thanks for the time, guys.
Got it.
All right. I'll take our next question from Ryan Connors of Boenning & Scattergood. Please go ahead.
Great. Thanks for taking my questions.
Ryan.
How are you?
Very well, thanks.
Good. I wanted to spend a little bit of time on the regulatory approval process for Peoples. Obviously, you mentioned, Chris, it is taking a little longer than expected. Kim mentioned the disappointment of not reaching a global settlement. Can you just talk about what it is, what aspects of the process have surprised you relative to your initial expectations, just in terms of what exactly has played out differently than you envisioned it initially?
Yeah. It's a good question, Ryan, I could summarize it largely in two words: Goodwin-Tombaugh. That's the system Kim described. It's the gas gathering system in Southwestern Pennsylvania. We knew there was a system that was struggling, it was a topic of conversation between the agencies prior to this transaction. What had become apparent during the transaction is the various opinions on how to fix the problem. Where we find ourselves, even to some extent, the Peoples organization, we find ourselves between agencies that have two different philosophies on how to fix the problem. It's been very difficult to bring them to one central approach. I will say, Ryan, that over the last several months, we've had a lot of discussions with all of the agencies about common ground.
We believe that the settlement signed by nine of the parties is really fair common ground. In fact, we have offered in the documents you've seen some rate credits as part of that to help subsidize that work. Having said all that, at the end of the day, we need to see this discussion play out in front of the administrative law judge. She will issue an opinion, then we'll see the results of that in front of the five Pennsylvania Public Utility Commissioners.
Got it.
I know there's some strong language in some of these documents. I think if you read any of those from any transaction, there's an element of that, and then there's the real substance, which I'm talking about here, which is really around Goodwin-Tombaugh. Kim, I don't know if you have anything.
Sure.
Okay.
Yeah. My follow-on to that is, and let me just stress, this is purely a hypothetical question, so this is obviously not a base case. Let's just say we had a scenario where you do not get approval from the PUC, whether they reject a positive initial decision or the converse. Are we safe to assume that that's not game over? What would happen is you would recalibrate based on Goodwin-Tombaugh and then just refile with whatever the adjusting the transaction according to what is needed. Is that a fair assumption?
Yeah. I'm going to give it to Kim, but let me just say this right out of the chute. There is nothing that would lead us to believe that the Pennsylvania Public Utility Commission would go down that route.
Yep.
Think about it this way. The various scenarios don't include and have never included the payment for this system on anybody's nickel but the users of the system and the customers in general. I think the Pennsylvania Public Utility Commission will follow past precedent and the law, and we don't see anything like that happening. Having said that, I'll let Kim give an answer to the speculation.
Sure, Ryan. Just agreeing with Chris, we have full confidence in receiving regulatory approval in Pennsylvania. If for some reason the commission looked at the settlement agreement and made some tweaks or made some changes to some of the provisions that the parties agreed to, at that point, we would just reconvene with those parties and revisit those particular issues and try to resolve them, and then resubmit the settlement agreement for approval.
Got it. Right, which is the underlying point I'm getting at. It's not a yay, nay, it's a process.
That's more likely the process, right?
Yep. Okay. My other one was just on the Peoples rate case. That's great news on the settlement there. There was one outstanding item on the main line extensions, which is a little bit cryptic, especially for those of us who aren't as versed on the gas side. Can you just give us a CliffsNotes version of what that is, how you see that playing out, and any residual financial materiality that might come out of that in the various scenarios with that outstanding item?
Let me lay the context, then I'm going to flip it to Kim, too. This provision that you're talking about is one that other gas utilities, including Columbia in Pennsylvania, already have. They already have the ability to use this. It's the ability to essentially say, and I'm going to use an example, to go to a neighborhood of customers and say, "Hey, listen, if you all sign up for service, we can run a line and recover at least a portion of that line that runs to your homes, the new gas line, and have it financed generally in rates." That's the layman's version of what it does. I think the position of the Office of Small Business is essentially that they don't want small businesses to play any portion in that subsidization of those new customers.
I think that's their point of view, and the commissioners will ultimately decide whether or not those small businesses are included. I will say, and I'll conclude with this, that in a gas-rich, low-cost environment in Western Pennsylvania, this is a strong alternative to propane and electric. Therefore, generally, the commission regulators encourage this kind of expansion of gas service for customers who desire it. Kim, you know.
Yeah, Chris, I think you summarized it very well. It's just a philosophical opinion for the Office of Small Business Advocate. As the main line extensions are built out, certainly those costs are spread across the entire Peoples customer base. The Office of Small Business Advocate doesn't believe that their client should have to pay for that. It's a subsidization issue, Ryan, that I think that the commissioner will take a look at. Ultimately, a lot of gas companies have similar main line extension programs that have been approved by the commission in other instances.
Okay, great. Well, thanks for your time.
Thank you, Ryan.
Thanks, Ryan.
I'll now take the next question from Durgesh Chopra from Evercore. Please go ahead.
Hey, good morning. This is Jeffrey on for Durgesh.
Hey, Jeffrey.
Hey, Jeffrey.
I just wanted to go a little bit further with the Peoples Gas rate case. How should we think about the earned ROEs, assuming you get the rate case settlement approved? How does that compare to the earned ROEs in your water businesses?
Yeah, I think it's important to note, it is a black box settlement, but we have a pretty good sense of where ROEs come out there. We think those ROEs come out where you'd expect them to be for a Pennsylvania utility business. In terms of the settlement and the increase in revenue that comes from the settlement, that's very nicely in line with what we had in our acquisition model. We're quite comfortable with the outcome here on that rate case.
Got you. Then just moving on, this is going to be broad strokes on DELCORA since I know you're in the due diligence process. How should we think about the potential rate base add there?
I would say, at this point, since we don't have a purchase price announced and there's still work being done around that's going to be a hard thing for us to give you. I think the stated, and I'm going to try and get the words right because it's municipal, the depreciated asset base, something like that, is around $260 or-
240.
That's what's stated in their books, and so I wouldn't throw that in a model or anything. If you go on the internet, that's probably what you'd find. I would say, wait and see what we come up with in terms of purchase price and rate base.
Got you. Very helpful.
Yep.
Thanks for taking my questions.
Yep. Thanks, Jeffrey.
Thanks, Jeffrey.
I'll now take the next question from Richard Verdi from Coker & Palmer. Please go ahead.
Hey, good morning, guys. Thanks for taking my call. Brian's done a good job of keeping me up to speed with things, so I'm quite clear. I just have one quick question. It's because I jumped on the call very late, and I apologize for that. If this was addressed, again, I apologize. Chris, did the company see any kind of unfavorable weather conditions during the quarter that impact earnings?
There was a minor impact, but I wouldn't say it was a significant contributor to the earnings. You addressed that in your prepared comments.
Yeah. Consumption down a little bit, and obviously, we see continued conservation. We did see some wet weather in some states. It was kind of mixed, a bit of a checkerboard if you look across the portfolio. Good weather, I'll say that, for water sales in certain locations and wet weather in others.
Okay. Got it. That's it for me. Thanks, guys.
Thanks, Rich.
Thanks, Rich.
I'll take the next question from Julien Dumoulin-Smith from Macquarie. Please go ahead.
Hi. Thanks for taking my question. Could you just give me an estimate of what would be a good estimate of the 2020 share count starting from where we are now, and assume we're in the middle of the range for tangible equity unit?
Yeah. You're looking for 2020 share count. Give me one minute. I'll pull something up here. As I said on earlier calls, we'll continue to be as clear as we can on these. If we take, so for 2020, what you'll see there, we'll have kind of call it our original base, we'll have the new common offering, we'll have the PIPE, and then we'll have measure around the TEUs. You'll in total be somewhere around, call it between 250 million and 255 million shares. We can probably tighten that up even a little bit more.
Okay.
Think of that as your range.
Okay, now we're at 220, right?
Yeah, that's right. What you see just about 220 for the second quarter. In the third quarter, what you're likely to see there, what you'll see there is the TEU shares and the common shares. You'll see them for a full quarter, whereas you only saw those shares for 69 days of the quarter for Q2.
Right. Okay, that's very helpful. Thank you.
Yep, certainly.
Once again, if you'd like to ask a question, please press star one. We'll pause for just a moment. I'll take our next question from Jonathan Reeder from Wells Fargo. Please go ahead.
Hey, good morning, gentlemen. In terms of the Peoples' Rate Case settlement, does that assume a full income tax allowance or kind of like a normal tax rate for that business?
Yes, it does.
Okay. Then you're saying when you elect, I guess, the tax treatment in 2020, the current portion will just flow to the bottom line. There's no approval necessary. It's just the catch-up portion that is subject to whatever treatment.
You're correct, that there's not a required approval for that election and to see that current portion.
It's the catch-up.
the catch-up that requires a commission decision.
Okay. Can you give a little more color, Chris, on what a potential deal with DELCORA might look like? Is it definitely an outright acquisition, or could there be some sort of JV partnership structure? I wasn't entirely clear on that.
Yep. No, the anticipated outcome is a full acquisition. I think the attractive part for DELCORA is that they would essentially become the company's Pennsylvania wastewater division. We would aggregate all of our wastewater customers under that new entity. They would be a fully owned component of Aqua America, Aqua Pennsylvania.
Okay. They would, in a sense, assume all your other wastewater systems and run it for you to some degree and everything.
Yeah, that's what we anticipate. We're really impressed with the talent there. The people, the management we're impressed by and we think would be a great match with the folks we already have doing wastewater at the company. To give you a sense, Jonathan, company overall, we have about 100,000 wastewater customers now. We're talking about DELCORA's role would really be in Pennsylvania or Southeastern Pennsylvania role. If you think about that, even announced already, we have 10,000 customers joining us from Cheltenham, which is not yet closed, but it fit in our list as well. It would be significant for everybody.
Okay. Then, Mike, is it your typical municipal deal that it would fall under the fair market value legislation, that would apply, or is there a cap to the size of the deal that can fall under fair market value?
Well, here's the way I would put it, because we're still in negotiations and due diligence, so I don't want to front-run the agreement. Suffice it to say, we don't anticipate taking goodwill on this transaction.
Okay. How do they use the proceeds? Is it a municipal agency where they can redeploy those proceeds into, I guess, other kind of civic uses as the driver behind them coming to the table? How should we think of that?
One of the impressive parts about the Peoples that they are approaching this transaction with, they've said this publicly, so I'm not giving you anything that's not in the public realm, they anticipate taking 100% of the proceeds and putting them against future rates. It's a nice outcome for customers. They get a prolonged period of rate stability, a combination with a professional utility. They've got to build another expansion of their plant. They've got a lot of capital to spend in the coming years, we can be helpful on that aspect of it. At the same time, their team gets some expanded opportunities to grow, their customers get long-term rate stability.
All right. No, that's good detail. I appreciate that.
Yeah.
I guess just kind of a little house cleaning, Dan, and it kind of goes back to maybe Richard's question, but on a non-GAAP basis, help me understand why I guess net income was flat despite having at least a full month of the PA rate release in place, particularly during a higher consumption month.
I guess a couple of things to comment on there. Coming off repair, you don't expect to see a big bump in earnings from the case. Remember that case really shifted those benefits of repair to the customers, because now it's incorporated into the revenue requirement. We did, of course, see five weeks or so of the new rates in Pennsylvania, they're incorporated there. You do see a revenue pickup, when you look kind of at the income, you see it's more flattish. With that revenue, you see the revenue pickup, you've got increased expenses there, depreciation's up year-over-year because of the capital expenditures. Remember, we've invested kind of $500 million of capital over the last year. Interest is also up similarly based on that capital expenditure over that time period.
A few additional costs in there related to pensions and so forth. That's why you see the kind of $0.37 last year, $0.37 on an adjusted basis this year.
Right. With that depreciation interest, I mean, now you have forward-looking kind of test year in PA. Shouldn't that have kind of contemplated those items, where there could've been some accretion or?
I think that's fair, too.
Fair point.
I think Dan's first point, though, Jonathan, if you think about it, coming out of the Pennsylvania rate case, first one in 7 years, and coming out of the repair tax, which is the key element, there's just not a huge uplift out of that case. I think that's the right way to think of it. You come out of it and you've had to spend an enormous amount of capital to overcome income generated from savings on the tax line, right? There's just not a huge uplift that comes from the first case as there will when the company's back on its normal rate case cadence going forward from here.
Okay.
While the case does contemplate those, remember, you're only seeing about five weeks of that new revenue, versus a full quarter of the new revenue.
Yeah, that's true. That's a good point.
That you'd expect to see going forward.
Right. No, good point there, Dan. All right. Thank you so much for taking the time. Appreciate it.
All right.
Yep. Thanks, John.
Thanks, Jonathan.
I'll take the next question once again from Ryan Connors from Boenning & Scattergood. Please go ahead.
Yeah, just a quick follow-up. You were talking about the DELCORA opportunity there, which is great. Then there's been some news flow here locally around Chester, that the city wants to put out an RFP to sell that water system and apparently doing some legal maneuvering around the board and stuff like that. Do you have any comment on those news items and whether we should look at that as being back alive again, or is that just overreading that?
Let's just level set for everybody. Chester Water Authority located in Chester is one of the most depressed third-class cities in the U.S. It serves also Delaware County and Chester County or portions thereof. It has about 42,000 water customers. It's a sizable system. In 2012, there was a piece of legislation that passed that took control, this is a hundred-year-old utility owned by the city of Chester. The legislation, though, in 2012, changed the governance and gave Chester County three votes on their board, Delaware County three votes on their board, and the city of Chester three votes on their board. Prior to that, it was all city of Chester-appointed votes. The debate now is, did that change the ownership or did that just change the governance?
Chester would argue, the city of Chester argues they were never reimbursed for any transition of ownership. It's really owned by them, and therefore, they're in a, I'll call it pre-bankruptcy. It's Act 47 here in Pennsylvania. They need the proceeds from the sale. The city is arguing that they're the owner, the rightful owner, and that they get to sell it. The authority is saying, "No, no, we're independent. We're the owner, and you can't sell us." This ultimately will be decided in court. It's being litigated today. In fact, not literally today, but currently. I think once that happens, the city will, should they be the rightful owner, they'll put it out for bid and sell the authority. I think it'll be tied up in court for the foreseeable future.
Okay. Not dead, though?
Not dead by far.
Got it. Okay. Thanks again.
You bet.
It appears there are no further questions at this time. I'd like to turn the conference back to Chris. Please go ahead, sir.
Thank you all for joining us today. Brian, Dan, and I always remain available for follow-up. Thank you for joining the call today, and thank you for your questions.
This now concludes today's call. Thank you for your participation. You may now disconnect.