This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Hello and welcome to the Essential Utilities Q1 2024 Earnings Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded and for the duration of the call, you guys have been in listen-only mode. However, you will have the opportunity to ask questions towards the end of the presentation, and this can be done by pressing star 1 on your top right keypad to register your question. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I'd like to hand it over to your host today, Mr. Brian Dinger-Deason, to begin today's conference. Please go ahead, sir.
Brian Dinger - Deason
Thanks, George. Good morning, everyone, and thank you for joining us for our first quarter 2024 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, and the slides that we will be referencing and webcasts of this event can also be found there.
George
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 10Q, 10K, and other SEC filings for a description of such risk and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted on the website. We'll begin the call with Chris, our chairman and CEO, who will provide an update on the company. Mike Hewer, the president of our gas business, will then provide an update on the gas business.
Brian Dinger - Deason
And then Dan Shuler, our CFO, will provide an overview of the financial results before Chris closes the call and opens the call up for questions.
George
With that, I will turn it over to Chris Franklin. Hey, thanks, Brian, and good morning, everyone. Thanks for joining us. Let's begin with some highlights from the quarter so far. First, Dan's going to discuss in a lot more detail our financials, but we posted gap earnings of $0.90 to $0.97 per share, which includes the significant gain on sale from the energy projects, which closed in January. Now, the start of the year has been unusually warm, underscoring our real need for weather normalization at our gas utility. Operationally, this was another very strong quarter for both gas, and water, and we continue to achieve industry-leading operational metrics in both gas and water. You'll hear more about the gas division from Mike Huart in just a few moments. Now, related to our acquisition program, we have seen real progress on the C-Motion, which was introduced by Chairman DeFrank. We understand that more than 30 people have contributed to the process of the C-Motion comment period. and we expect the PUC to vote on the motion relatively soon. We will continue to monitor the progress here, and we hope the process is completed soon here in Pennsylvania. Now, as you probably saw, the EPA published the first ever limits on PFAS last month. These were largely in line with what we were expecting, and I'll get into some detail in a moment, including our CapEx spending and PFAS, on PFAS. Now, speaking of CapEx, our significant infrastructure investment program continues to upgrade our pipes and plants, which enhance our ability to deliver on our mission of providing reliable water and natural gas service customers. Through March 31st, we have invested approximately $253 million, and as a reminder, we expect to invest us, by the way. You've heard me say that many times, and I can't tell you how proud I am of the company's leadership and what they have accomplished in terms of our work to improve customer reliability. Now, as part of our continued focus on operational excellence in 2024, I thought you might enjoy hearing from Mike Heward, our president of our natural gas division. And later in the year, you'll hear from Colleen Arnold, who runs our water business. We have some leading efforts going on in our natural gas business, and I think you'll find it interesting. Finally, on this slide, it's been a busy week for the company. On Wednesday, we held our annual meeting of shareholders, which when all agenda items received over 90% of shareholder support. Notably, I'm pleased to report that Tammy Lindy and Chris Bruner have been elected to the board. to the essential board. Over the last 10 years, we've really focused on corporate governance, and as a result, I think we have one of the most, what most would consider best-in-class corporate governance guidelines, and I believe we're really a leader in that part of our business. For example, our corporate governance includes tenure, limitations, and retirement ages. In fact, Ellen Ruff, our and she was a former Duke executive, and Elise Stewart, our longtime Audit Committee Chair, reached retirement age over the past year and formally retired from the board this week. Now through a formal board succession search process, we identified Tammy and Chris, who I believe will fit seamlessly into what is already a very strong board. Tammy is someone you may already be familiar with as a longtime industry executive, general counsel at PSEG in New Jersey. She brings a great utility, legal, and regulatory mind to our board. Chris is a retiring audit partner at EY, and he previously served as the head of the Philadelphia office of EY, and he brings of the New York Stock Exchange and the SEC and, of course, declared independent by our board. We welcome Tammy and Chris to the board and look forward to their service. And I'll just mention one other thing. We disclosed through 8K this morning that the board has offered me and I've accepted a new three-year contract that will commence on July 1st of this year and go through mid-2027. That will be my fourth three-year contract since I've been CEO. Now moving to slide seven, I want to spend a little bit more time on PFAS, given the final EPA rule that was published last month. As we've been discussing for more than five years, essential has been an industry leader in setting company-wide standards for PFAS, in publicly disclosing all of our sample results where we find PFAS, and certainly in creating innovative solutions to address the FOSS issue. As a result, we are well positioned to comply with the EPA limits that were just set. Unlike many other utilities in the country, we have tested all of our water sources, identified the sources that need treatment, and we've been implementing mitigation solutions now for years. In fact, ACWA has installed nine treatment systems to date and mitigated another 10 sites by optimizing the use of supplies and removing wells from service. For 2024, we estimate that more than 10 systems will go online by year-end. And by using our modular design tailored to small systems, we anticipate ramping up our capability to mitigate as many as 100 systems in a single year. The final rule that came out was largely in line with our expectations, so no surprises there. Without getting into too much detail, one of the most significant changes we saw was that the period of compliance was changed to five years. You may remember that previously we were all thinking that the compliance period was going to be a three-year period, and we think this was a very prudent approach and may be able to us utilities rush in to implement our mitigation solutions. Recently, we named one of our internal experts to a newly created role solely focused on the rollout of the treatment technology. And one of his primary different charges is to standardize our approach and minimize design and construction costs. Joe is leading this work from headquarters to ensure that our standard no matter what state, and all impacted operations. And we're seeing the benefits of this structure already. Our work to mitigate PFAS, the PFAS-related costs to our customers, also continues as we pursue lawsuits against the manufacturers and apply for state and federal loans and grants. We're going to stay focused on keeping costs down for our customers. Now, while our costs may change as we move through the process, We currently estimate that we'll spend at least $450 million to complete this PFAS mitigation. I'll leave you with one final thought on this topic. We were a pioneer on our PFAS commitment five years ago. We have a plan. We expect to remain a leader in this area. We also see opportunities to help other utilities with their PFAS mitigation plans which obviously could help some of our corporate development work. So next, it's really my pleasure to introduce the president of our natural gas division, Mike Cuellar. Mike has over 38 years of industry experience and joined us from NYSource back in 2020 when we completed the transaction with Peoples. He's been a tremendous addition to the team and I've asked Mike to join us today and provide some details on our natural gas utility that he leads. And by the way, to give you a sense of size, we provide service to 750,000 customers in Pennsylvania and Kentucky. Mike, you want to take it away?
Mike Cuellar
Sure. Thanks, Chris, and I'm happy to be here today and appreciate the opportunity to highlight the significant and important work that the team at Peoples and Delta's Gas is doing. So moving to slide nine, as noted on the slide, Peoples is the largest LDC and PA with over 703,000 customers and $3.5 billion of rate base as of the end of 2023. Additionally, our gas segment includes Delta Gas, now serving over 40,000 customers in Kentucky. When you think of these two jurisdictions, it's important to be mindful that both Pennsylvania and Kentucky are supportive regulatory environments, and in Pennsylvania, People's Service Territory sits directly on top of the Marcellus and Utica Shell production zones that continue to give customers a lower-cost commodity to the national average, and that's helping keep bills affordable. Since the acquisition by Essential, the clear focus of our gas segment has been the increased safety and reliability of our 15,000-mile distribution systems. The best example of that focus has been the reduction of year-end outstanding leakage on our annual DOT report, having reduced outstanding leaks by 83% over the past five years. It should also be noted, TEPOS has maintained its really strong focus on customer service, continuing to lead its peer group on the annual PAPUC Customer Satisfaction Survey. Moving to slide 10, you will recall that we filed a Pennsylvania gas rate case just before the new year. It's the first case under essential ownership after staying out since 2019. And it includes a doubling of rate base from the last fully projected future test year as compared to this case. From 2.1 billion to 4.2 billion primarily for replacement of aged bare steel and cast iron mains. Work that both increases safety and reliability and reduces greenhouse gas emissions. In this case, Peoples has included a weather normalization mechanism like many of our peers currently have available to them. The case is proceeding as planned. Evidentiary hearings are scheduled for May 9th. And as you would know, this is the typical time during the rate case process when conversations are happening between stakeholders. Finally, we expect rates to go into effect before the winter heating season. On slide 11, beyond the operational focus and customer satisfaction performance, the peoples and essential teams continue to execute on aggressive pipeline modernization programs. Under the Currently Active Long-Term Infrastructure Improvement Plan, EPA, EPELS has replaced over 510 miles of pipeline, or 60% of the current LTIP target. While again enhancing the safety and reliability of our distribution system, this effort is leading our way to the target of reducing CO2 emissions by 60% by 2035. At the conclusion of our current LTIP, Peoples will assess our progress and continue this critical infrastructure improvement work in a series of five-year plans. It should be noted the runway of needed safety and reliability enhancements continues to grow as the industry focused on rebuilding infrastructure and reducing greenhouse gas emissions. Beyond the pipeline replacement and modernization, Peoples has been active in implementing technology improvements. that have short-term and long-term benefits to system operation. Our ability to reduce the potential of overpressure events, and the GPS functionality of our tracking and traceability program, highlight this opportunity. Lastly, people will pilot a game-changing meter technology in 2024 that allows utilities to interact with customers and have greater control over the distribution system. peoples, and essential. We are excited about the progress we have made and look forward to our future and continue to focus on safety, reliability, affordability, and our customers. Chris, thank you and back to you.
George
Mike, thanks for your leadership. Thanks for being with us today. View of the financial results.
Brian Dinger - Deason
Thanks, Chris, and good morning, everyone. In this slide, let's talk high level, and then we'll get into the details of the waterfalls. The quarterly performance was strong, especially when factoring in the gain on the energy project sale that was completed in January. Operating revenues were down due to the decline in natural gas commodity prices year over year, which positively impacted customer bills. Weather was warmer than normal, but was largely comparable to last year. continued our focus on managing O&M expenses with a slight decline there year over year. I'll cover this more in detail when we talk through the waterfalls. These items, combined with the after-tax gain of $66 million from the sale of the three district energy projects, resulted in net income growth 38.8% and earnings per share growth of 34.7% compared to last year. Next, let's walk through the first quarter waterfalls. On slide 14, we have the revenue waterfall for the first quarter. Moving left to right, we have regulatory recoveries or rate increases in surcharges of nearly $14 million. Acquisitions and organic growth in the water business contributed $3 million, and then small increases due to increased volumes of both water and gas. This was then offset by a decline in other and a significant reduction in purchase gas costs. The decline in other reflects a positive one-time impact of contracted deposit fees in Q1 2023 and lower P&G universal service rider revenue this year due to lower customer bills. The lower purchase gas reflects the significantly lower gas commodity price that our customers enjoyed relative to 2023. I'll note that one thing you don't see here is a large change in the volume of gas due to weather. This is because the same period in 2023 also had materially warmer than normal weather. For the first quarter of 2024, it was about 15% warmer than normal, which resulted in weather-related natural gas sales net of purchase gas costs being about $20 million below projections for an earnings impact of 5 cents per share. Next, let's take a look at the O&M on slide 15. Here we have the O&M waterfall. We saw increases in production costs of $2.4 million and employer-related costs of $2 million. The employee-related costs are largely in line with inflation. However, we saw some larger increases in production expenses due to purchased water, purchased wastewater, and power prices. Next, we had an increase due to customer growth in the water segment. These increases are offset by the lower costs from the gas segment universal services rider, which decreased due to the lower gas commodity prices this year, as well as lower other expenses. Other includes a number of items, increases in bad debt and materials and supplies, decreases in year-over-year gas segment expenses, and the impact of the sales of both West Virginia utility assets and the energy project. This resulted in O&M that was down slightly from last year. So overall, a positive story here. For the year, we expect O&M to be largely in line with our historic norms. Next, let's look at the EPS waterfall on slide 16. Starting on the left side of the EPS waterfall with 72 cents from last year, the next thing we see is a 20-cent pickup in the other category. This increase in EPS includes the $66 million after-tax gain on sale from the energy projects, which closed in January. This was offset by increases in depreciation, interest, and taxes other than income. Next, we have the impact of the rates and surcharges, which contributed almost 4 cents. Then we have slight increases due to water growth and additional volumes of both water and gas, And finally, an insignificant impact of increased expenses. That lands then at 97 cents of UPS for the quarter. If we take that 97 cents of GAAP earnings per share for the quarter, and we subtract off the gain on sale of 24 cents, and then we add back the 5 cents for weather that I mentioned earlier, we get to a number that exceeds our Q1 consensus. Next, let's move to slide 16 to provide an update on regulatory activity. This slide depicts our regulatory activity so far this year. We continue to manage our regulatory activity to maintain safe and reliable service, earn a return on the capital we invest, and minimize regulatory lag while always considering affordability for our customers. Thus far, we received authorization to increase water segment revenues by $13.7 million annually in Illinois, North Carolina, Ohio, and Pennsylvania. And the Kentucky and Pennsylvania gas businesses have surcharges that will increase revenues by $1 million annually. We have water segment rain cases or surcharges pending in Illinois, New Jersey, Texas, and Virginia that total $43.2 million. A detailed breakdown of these can be found in the appendix. And, of course, Mike just covered the people's rate case, which is underway currently. Finally, we expect to file a Pennsylvania water rate case during the third full week of May, which is nearly three years since we last filed. We'll provide more details on that case on our Q2 call in August. And with that, I'll hand the mic back to Chris. Chris?
George
All right, Dan. Thanks. Next, let's touch briefly on the municipal acquisition program. As of this call, we have six signed asset purchase agreements in two states where we already have existing water and wastewater operations. These acquisitions will add over 215,000 customer equivalents and about $385 million in purchase price. We continue to see strong and healthy pipeline of opportunities for additional growth and we're currently engaged in active discussions with many municipalities. In fact, the customer count of those is over 400,000, and that will be on the water and wastewater side. As we mentioned, if Chairman D. Frank's proposal and any of the associated bills in the legislature are successful, there should be a much clearer path to closing municipal acquisitions in Pennsylvania in the future, and I think that will free some of the that are currently thinking about it, but maybe standing still for the moment. We continue to believe increasing compliance requirements, such as PFAS, should lead to continued consolidation in what, as you all know, remains a very fragmented industry with over 50,000 water systems and 14,000 wastewater systems throughout the country. All right, so in closing, let's update the guidance we provided in February. that you have a clear line of sight to the opportunities in front of us. In February, we provided guidance for 2024 of net income per diluted common share of $1.96 to $2. And at the time, we clearly indicated that that guidance was based on normal weather, as most utilities do. And Dan has mentioned the weather in Q1 has been much warmer than normal. So for clarity's sake, If we assume normal weather from this point forward, we would finish the year on a gap basis above our guidance range due to the gain on sale. Dan took you through some of the calculation there just a moment ago. Now, through 2028, we plan to invest about $7.2 billion in regulated infrastructure in our existing utilities, a really strong capital program. billion to 1.4 billion, and we're on track to do this. And as we've said many times, this is the primary generator of more reliability and service for our customers, as well as the primary generator of earnings per share for our shareholders. Based on this investment, we expect rate base will grow at a compounded annual growth rate of approximately 8% for water and about 10% for natural gas. through 2028, and the combined utility rate base will grow to compound an annual growth rate of over 8%. We continue to expect that together, organic customer growth and growth from acquisitions for water and wastewater will climb at a rate of 2% to 3% per year on average. We remind investors always that growth from acquisitions is lumpy and should be viewed over a three-year average. We expect continued stability in our natural gas customer base. As we said before, we expect to raise about $250 million in equity this year using an ATM equity program. We remain committed to a 60% reduction in our Scope 1 and Scope 2 greenhouse gas emissions by 2035 from our 2019 baseline. As you know, we've made significant progress already on this, and we estimate it to be as of year-end last year. I'll note that the team feels that we are well prepared for the SEC climate rule, which is currently stayed due to various legal challenges. I'm going to conclude my formal remarks for today, and we'd like to open it up for questions. I'll send it back to the operator.
Operator
Thank you very much, sir. Ladies and gentlemen, as a reminder, if you wish to ask any audio questions, please press star 1. on your top one keypad and also just make sure your mute function is not activated live signal reach your equipment. Our first question today is coming from Duragesh Chopra, guy from Evercore ISI. Please go ahead. Your line is open, sir.
Mike Cuellar
Good morning, Duragesh.
Dan
Hey, Chris. Good morning. Thanks for giving me time. Hey, just I wanted to kind of kick start with a gas rate case in Pennsylvania. Obviously, you guys have probably seen all the media reports.
George
Around the water case that is ongoing just any read throughs from there or any color that you can share on how that case is progressing Yeah, I guess I would just say apples oranges in many ways and so we will we feel very good about the strong case that we presented and Dan mentioned I'm sorry as Mike mentioned in his comments um, you know, about, about a settlement and, uh, you know, we'll see how those discussions go, but, uh, we, we're, we're prepared to see this case through, but so far very, very creative and, and, uh, good relationships with the advocates and, uh, and the commission.
Dan
Excellent. Thanks for that update, Chris. And then maybe just switching gears, you know, um, other states, and I'm sure you've seen this also, there have been some lawsuits filed, by residents against the utility, the water utility, you know, related to PFAS, PFAS. Can you comment if whether you've seen anything like that in your service territories and implications, if any, for your business?
George
So fortunately, we have not. And I like to think that that's You'll recall five years ago, we started down this path before most people even knew what the PFAS discussion was. And we started mitigation well before many others. So I'd like to think it's because of our work we've been doing. And then our disclosures have been really strong. Anywhere we've deepened PFAS, we have reported it publicly. And of course, we created that internal standard at 13 parts per trillion. several years ago, well before the EPA came out with any standard. And so I'd like to think that all of that proactive work is part of the reason why we haven't been in that focus for lawsuits. But no, at this point, we've not seen anything.
Dan
Yeah, Chris, I can certainly attest to your leadership there. You were kind of the first voice in the industry talking those issues. Okay, thank you very much. That's all I had. Thanks for the time.
Operator
Thank you. Take care. Our next question will be coming from Davis Sunderland calling in from Baird. Please go ahead. Your line is open.
Travis Miller
Hey, guys.
Davis
Happy Friday. Thanks for taking my question. Yeah, happy Friday to you. Thank you. Wanted to ask about the pending municipal transactions and the PFAS guidance for the $450 million in capital Does this include the pending transactions? And maybe, I guess, just to add on to that, how has PFAS discussions or discussions surrounding costs associated with upgrading systems made its way into potential discussions for new systems so far?
George
Yeah, it's a good question. And, you know, what we're largely focused And generally, I'm not talking about Los Angeles and Philadelphia, New York, but generally the municipal systems that we're focused on are smaller. And so I would say more of a prevailing theme would be that they haven't tested yet. And so not all of them even know whether or not they have. And so I think what we're going to find as this MCL, the maximum contaminant level, is put in place, I think we're going to find a lot of testing. We're going to find a lot of them that find problems. So I would expect that that kind of discussion really ramps up in this coming year and over the next five years as everybody's forced to comply with the four parts per trillion. But I wouldn't say that it was a major theme at this point in our current discussions with the municipal transactions we have today. I think your second question, Davis, was around does the $450 million include capital for acquisitions? And we don't typically, until we close those, they wouldn't be in our calculation.
Brian Dinger - Deason
Yeah, that's correct. And, Davis, if you look at the acquisitions that we have pending to close, they are more biased toward wastewater acquisitions rather than water. And I don't believe at this point that there's PFAS in the water acquisition or two that are in that list. But in any event, we think that it's, you know, we think of the $450 million, or as we've said, at least $450 million. It wouldn't be a material change on that if we have a few more sites.
Davis
Got it. That makes sense. That's helpful. Okay. And maybe one other question. This might be a bit hypothetical. So I guess just asking as to weather normalization and what you've applied for in the pending gas case, do you have any estimates or any commentary or any thoughts maybe as to what a normal season would have been for this past quarter or what the impact would have been had you been given this weather normalization clause that you guys have applied for?
Brian Dinger - Deason
I guess the way I'd characterize that is if you think of the $20 million net revenue shortfall that I mentioned, that would be inside, call it a $5 million impact if we had weather normalization, depending where that weather normalization comes out exactly. But as you can see, it would materially reduce the volatility that we see in a year like we had last year or this year in terms of a downside, but also in a very cold year, it would have the impact of keeping customer bills at a more normalized level as well.
Davis
Got it. That's helpful. Appreciate your time, guys.
Operator
Thank you very much.
Travis Miller
Thank you.
Operator
Thank you, Mr. Sunderland. Our next question will be coming from Travis Miller calling from Morningstar. Please go ahead. Your line is open. Hey, Travis.
Travis Miller
Hello, everyone. Hi. A couple of follow-ups to some things you mentioned in the prepared remarks. One is the supply chain.
Chester
I thought that was an interesting comment there and thought process there in terms of are there raw materials or equipment or something that you see constrained right now or you would anticipate? could be constrained to your point about the short time period here, relative short time period.
George
Yeah, we think about tanks, right? Each of them, you know, and by the way, most of our systems where we're doing mitigation are small systems. We do have some large ones, but a lot of them, the vast majority of them are small systems. When you think about two different which are hundreds. And then the carbon material is also something. Now, that would be ongoing, essentially, because that would have to be replaced or regenerated. But if we think about those materials, there could be some constraints on the ability to deliver. That's why I say over five-year periods spreading it out, it's going to be a lot more palatable to people. It's really tough. We're out there. We're already doing mass purchases to get ready. So that's not going to be a challenge for us necessarily, but it could be for others. Let's remember that EPA significantly underestimated the impact of this rule. And so the rush on some of these materials is going to be much more significant than I think was initially anticipated by EPA. Okay.
Travis Miller
Okay, makes sense. And then just real quick follow-up, the tanks that you mentioned, you obviously are doing a lot of the PFAS stuff already. Can you use the tanks you're using already or are those unique tanks that you would have to replace or don't have? Does that make sense?
George
Yeah, it makes sense. These would be brand new, added to the site of each of these sources, right? The 210 could be in a building or outside of a building, but they would be brand new to the process at each site.
Travis Miller
Okay, that makes sense. And then one other, it's the hottest topic in the sector right now, data centers.
Chester
Any impact there, or even large manufacturers for the gas business, large factories, anything there that would be upside?
George
Yeah, Mike's here, and there's none that I'm aware of that would be materially impacting gas, but Mike, anything you're seeing?
Mike Cuellar
I think it's a great question, and I will say that locally within our service territory, there are project developers that are looking for opportunities that include sites with connection to the grid, customers that may even want to take power offline, And the value of being located with vast pipelines as well as ample and low-cost natural gas is driving that opportunity.
Travis Miller
And anything on the water side? We hear that the data centers are water-intensive. Anything that would be relevant there?
George
Yeah, no, it's a good question. And I'll tell you what, Ohio has been really successful at attracting some of these facilities, not only but also chip manufacturing and also general manufacturing. They've really done a beautiful job there. And we would like to participate in that. And so we are engaging in Ohio. And, of course, there's a lot happening in Texas as well. plant itself, but then the housing that comes along with a new manufacturing plant because of the employee base that's added. And so we're seeing that kind of growth, particularly in Texas. And so that would be more the nature of our participation on the water side, not necessarily the plant itself, but the follow-on housing.
Travis Miller
Yep. Okay. Makes sense. Thanks so much for the time.
Brian Dinger - Deason
You bet. Take care, Travis.
Operator
Thank you, sir. would I be moving to Jonathan Reeder calling from Wells Fargo? Please go ahead.
Travis Miller
Hey, Jonathan. Hey, good morning. Good morning, Jonathan.
George
I was hoping to just get a little more clarity on the guidance. Exactly. So excluding the 24 cent gain on sale, do you expect to be able to deliver, you know, the full year 24 EPS within that $1.96 to $2 range? You know, in other words, can you offset the 5 cent weather headwind in Q1?
Brian Dinger - Deason
John, I think we'd say that that's a difficult challenge at this point, given that the five-cent weather impact in the first quarter.
George
I think the math Dan took you through is pretty clear. What we can't predict, as we had in 2022, Jonathan, is a blockbuster November, December in natural gas, which could make up, but we try to predict and guide based on normal weather. And that's why when we add in the weather normalization, it makes it a much easier prediction. We would not have anticipated, especially two years in a row, to have the weather impact that we just saw in 2023 Q1 and 2024 Q1. So again, I think Dan's math took you through how we think about that on an impact given what we saw in the first quarter. Yeah, for some reason, I was thinking the impact on Q123 was even larger, like closer to $0.08. So when I heard you guys say $0.05, it sounded like, okay, maybe that was something that could be a little more manageable. Or like you said, maybe you get some favorable weather, whether it's at the water business over the summer or the gas business in Q4. that helps kind of balance things out.
Brian Dinger - Deason
Yeah, Jonathan, I might add that, you know, last year there was significant impact in the first quarter, but by this point we also had a few positives that we had already experienced in the year or were seeing ahead of us. So we already had that New Jersey contractor contract fee increase reversal that we talked about in the first quarter last year. We had a Texas water pass-through that you've heard us talk about. We had some things that were clean up from our SAP implementation. We had some capitalization of 2022 expenses in the first quarter of 2023, which were beneficial. And then at this point when we had the call, we knew we had a relatively chilly April. We're in a little bit different situation and then ultimately we saw the natural gas safe harbor come through, which was beneficial as well last year in terms of getting back on track and inside that guidance range. I think this year we're a little bit more susceptible to the weather impact. As you know, we'll do everything we can to claw back pennies and focus on our operating model in order to do that. In transparency of that here today, it's just a little bit harder than it was last year.
George
Gotcha. I appreciate that additional clarity there. Maybe try and ask Durgesh's one question a little differently. Can you talk about the prospects of reaching a settlement in the people's gas case as well as just more broadly the challenges or inability on the water side for you? And that appears... Pennsylvania American to reach settlement in the cases, because historically, you know, settlements seem to be the norm in Pennsylvania. Listen, you know, I can't give you any details because, for obvious reasons, but, you know, I think it's often about, you know, the healthy exchange between the parties, and, you know, we're not going to agree on everything. That's why I call it a settlement. You know, I would, I'll just leave it at this, Jonathan. right now, and I can't predict whether we're going to have a settlement or we'll litigate it. It's a constructive discussion.
Travis Miller
Gotcha. Okay.
George
So, I mean, you don't think it's like there's anything more broadly in the Pennsylvania regulatory construct or regulatory environment that's, I guess, leaning parties not to settle anymore? I do not. Okay. Okay. And then I know you said you expect the commission will vote shortly on the final revisions to the fair market value framework. Do you have any insight regarding the potential significance of any changes from Chair DeFrank's original proposal? And then are you still of the opinion that the only changes to the framework will be from the commission and not legislatively? So yeah, let me answer it two separately. There was over 30 commenters, right, a lot of comments about, you know, Chairman's C motion. And I know that they are carefully considering all of those comments, and we'll think about how they might impact. But, you know, and those are all public, right, so we'll be able to see those. I wouldn't say there's anything new in those comments from what we've seen and heard prior to the C motion. So all those opinions, I think, are... you know, there's no surprises there, let's say that. And so I would be hopeful that the chairman would, you know, be pretty close to his view initially. But there's five votes and five opinions up there, so we'll have to see what that looks like as they kind of push through. Now, the second part of the question about legislation, I think there is a series of pieces of legislation that move through the House of Representatives on the committee level, and those are on the floor. And there is an ongoing discussion with the leadership in the House of Representatives about what might we accomplish, because the bills that were released from committee are not things that we would want to see passed, and we understand that they would probably not be successful in the Senate. However, if there was some compromise language that could be reached that would be similar to Chair DeFrank's motion at the commission, I think there's real possibilities there. And that discussion in the House of Representatives ongoing, and I think there's a lot of stakeholders that are involved, so we're, you know, and we're participating, but I would hope that it would come out similar to the motion in the commission, and this would really give us all a clear path as to how this is going to work moving forward. Okay, now that's really helpful to know that, yeah, like if something, you think if something comes out of the legislature, it's not, I guess, in the current, like, kind of penal form or, like, removing Act 12 and, you know, the draconian kind of stuff. It's, you know, how do we tweak fair market value to still promote the consolidation of the fragmented industry and everything like that. That's right. I'm told that in the Senate there's not an appetite for repeal, that they believe that municipal leadership, as elected officials, have the right to transact if that's what their decision is. language, we could all work together. If not, I don't think much will happen at all at the legislative side. Great. That's excellent, Keller. So thank you so much. Good luck with the fair market value. Good luck with the rate case. And then you said on the water side you're going to be filing, I think, next week for the new water rate case in PA.
Travis Miller
Is that right?
Brian Dinger - Deason
Later in the month of May, the third full week in May.
Travis Miller
Oh, third full week.
Brian Dinger - Deason
Gotcha.
Travis Miller
I missed that little one. All right. Thanks a lot, guys. See you at AGA. All right. Yeah, take care.
Operator
Thank you, Mr. Reeder. We'll now move to Ryan Connors calling from North Coast Research. Please go ahead.
Reeder
Good morning. Morning. Thanks for taking my question. So, yeah, I actually had a couple of big picture questions. One came to mind as you were discussing the PFAS kind of potential bottlenecks in equipment purchasing and that sort of thing, and you're talking about making mass purchases. Been on some of the earnings calls for these vendors of this equipment lately, and it's a real gravy train. They're talking about not giving back any of the pricing that they took the last few years and continuing to raise prices above and beyond inflation. And so it kind of comes to mind that that's all happening at the same time your industry is seeing greater concern about affordability and if not yourselves, at least some seeing some real pushback on rates cases and that sort of thing. I mean, are the water utilities going to just kind of get squeezed in between the manufacturers and the rate payers here? Or is there some, at what point does the pushback on the pricing of the equipment or, you know, what construct is in the regulatory framework to account for sort of price gouging or Just curious what your thoughts are on that. You seem like you're caught in the middle there.
George
Yeah, to some extent you're right. Although I'll give Dan, Dan's purchasing and procurement is under Dan's purview at the company, giving a lot of credit. They've already been out there in the market negotiating some of these things. So maybe, Dan, you want to talk a little bit about some of our success there?
Brian Dinger - Deason
Yeah, so, you know, we think about this – There are a couple of different scales here. We've got small systems in states like North Carolina and areas like western Pennsylvania where we've got relatively small systems we're going to put in. Think three-foot diameter canisters. We would look to buy those in mass across the need there, which is, as Chris said, we've got hundreds of these to do. You've got two tanks per installation of two vessels. You know, it is a lot of vessels, Ryan, as we think about it. So, you know, we'll go out with bids that are for packages of those, if you will, not all at once, obviously, but with enough volume to drive volume-based discounts, buying a lot of the same size vessels with multiple suppliers. Now, two is something that's been discussed in the space is For those things that are funded by the federal government somewhere, we're getting a grant or a loan, you know, we have to use American-made product. So we're going to have to use that everywhere. And I think the municipal and the restaurant utilities will all realize that, you know, they've got to go a little more broadly in terms of finding supply here. And to hold price down, we need to go to offshore manufacturers of these types of vessels that will do that. So I think we've got those small vessels, we've got larger vessels, so think kind of 12-foot diameter. Again, these are things that are fairly standard. There are multiple manufacturers of those. We'll look for multiple bids and go with the best price. I mean, that's really our objective here is to always put in the appropriate equipment at the appropriate price. for the protection of our customers.
George
Yeah, it capitalizes on our economies of scale, and we're obviously going to be a big player in the purchases. And I do think, Ryan, where we're so much susceptible would be on the resin or on the carbon because it's going to be ongoing purchases. But, you know, we're hopeful that we can negotiate fair pricing.
Reeder
Yeah, okay. I appreciate all the detail there. My other one was, Chris, you mentioned, so as this reform process plays out for Act 12, you mentioned that potential sellers have been kind of standing still. And I'm a little surprised and curious why it wouldn't be the opposite. Why, if I'm a city and I feel like there's going to be a cap put on valuations, why I wouldn't be rushing to sort of get my APA signed before that happens because there's Presumably there'll be some grandfathering in of deals that have been signed. So can you discuss, like, why is that not the case? Why is there not sort of a rush to get things done and sit on your hands and wait for a cap to be put in from a seller standpoint? It doesn't seem to make sense.
George
I think the reality is even if there's a grandfathering, that's, as you know, part of the language that's out there. Just the base reality is here. These things are ending up in court. And so, you know, even if it's grandfathered and the commission was okay with it and the consumer advocate then challenges it, as they have in some cases for us and, you know, some of our peers, we end up tied up in court. And we want, you know, I think we're tired of it. Investors are tired of it. We want to get deals that we can transact and actually close. And so that's the important work with this C motion. And, you know, You know, it's the clarity of how do we get to close, what is affirmative public benefit, and what's not challengeable in court. And I just think that as municipals look at it, and we do too at this point, if we think that even if they're grandfathers, they're going to end up tied up in court and then appealed in court and everything else, you know, we're taking a little bit of a wait-and-see attitude.
Reeder
Yep, yep. No, that's a great point. It makes total sense when you put it that way. Yeah, and then lastly, just on the PFAS thing, you know, I remember you talked about treatment or testing rather and the fact that that's, you know, not all these systems have been tested. I remember visiting the Bryn Mawr, the brand new Bryn Mawr, you know, kind of labs when it was constructed, I guess, a few years ago. And one of the things that Tor talked about was how that that facility can do testing for not only for your own stuff, but for municipalities and so forth. I mean, is that going to be a commercial opportunity that would be meaningful if a lot of these systems just have to get samples tested, or is that just kind of immaterial?
George
Yeah, I mean, you raise a good point. We are still the only state-certified utility lab that can test PFAS in the state of Pennsylvania now, so there is opportunity there. Now, Having said that, we want to get ourselves situated where we are in a position that we're in full compliance within the five-year period. So there's substantial testing running through their lab. Before we add another shift, we would want to expand that opportunity a little bit. But I'm not saying that we're not, Ryan. I'm just saying that at this point, we're really focused on full compliance at essential utilities. And then we'll look for opportunities beyond. right way.
Reeder
Yep. Okay. Thanks for your time.
Travis Miller
All right. Take care.
Operator
Thank you very much, Mr. Connors. Ladies and gentlemen, once again, if you have any questions, please do press star 1 at this time. We'll now move to Greg Oro calling from UBS. Please go ahead, sir.
Greg Oro
Hey, Greg.
Chester
Yeah, hi. Thank you. Hey, do you have anything to report on the Del Cora purchase agreement?
George
Oh, Greg, we couldn't go one call without a Del Cora question. Yeah, you know, I guess one bit of good news, and I guess you could position it as good news, so we were due to be in court on May 8th, and this was in the Commonwealth State Court, and they were going to hear the argument from the county, which essentially is appealing the decision of the lower and enforceable. And so that oral argument was canceled, and the judges said that they were going to make the decision based on filed briefs. Now, typically, that's good news. We won't know until the decision is out, but I think the aspect of timing actually is probably helpful here, too, because we're told often the judge's decision comes a little bit more quickly when they're not digesting oral arguments and they're just focused on the briefs that have already been filed because obviously they've read them already. And so we take that as a little bit of a vote there and optimism. That would be a nice addition. And, you know, in Delaware County, where this Delcor exists, they raised taxes last year and there's talk about raising taxes again this year. we've taken that as an opportunity to re-engage with elected officials in the county to remind them that there are significant proceeds associated with closing this transaction and might they consider re-engaging on a settlement discussion and then letting the need for a tax increase go. So I would say that that discussion is ongoing. So always something happening on Del Cora, but remember that the key gating factor here is we have a stay on the process by a federal bankruptcy court judge that is not associated with the transaction itself, but the bankruptcy of the city of Chester where some of the assets of Del Cora lie. So we're still waiting for action on that, but we continue activity in the background.
Chester
Okay, I appreciate the update.
Operator
Thank you, Mr. Oro. Ladies and gentlemen, we don't appear to have any further questions. I turn the call back over to Mr. Chris Franklin for any additional or closing remarks. Thank you.
George
All right. Thanks, folks, for joining us. And as always, Brian, Dan, and the team stand ready to answer your follow-up questions should you have any. Thanks for joining us today. Have a great weekend.
Operator
Thank you very much. Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may now disconnect. Have a good day and goodbye.
Disclaimer