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Aqua America Inc  (NYSE:WTR)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Aqua America's Q4 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. Please go ahead, sir.

Brian Dingerdissen -- Chief of Staff and Head of Investor Relations

Thank you, Christina. Good morning, everyone, and thank you for joining us for Aqua America's full year 2018 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 and a webcast of this event can also be found on our website.

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 risk 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 posted in the Investor Relations section of the Company's website.

Presenting today are Chris Franklin, Aqua America's Chairman and Chief Executive Officer; Dan Schuller, Chief Financial Officer; and Matt Rhodes, Executive Vice President of Strategy and Corporate Development, and I'm Brian Dingerdissen, Vice President, Chief of Staff and Investor Relations.

At this time, I'd like to turn the call over to Chris Franklin. After his presentation, we will open the call up for questions.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Thanks, Brian, and good morning, everyone. Let's take a look at the Slide 5, as we reflect on 2018, say it was a historic year for Aqua. The strategy we initially described to many of you in the winter of 2016 is really working, and it's manifested in a number of important ways. And that's really thanks to the hard work and dedication of the team. We excelled in each of the core competencies. And we described these many times to you, but it's infrastructure investment, our work on regulatory issues and operational excellence. Last year, we have built unprecedented momentum in our municipal acquisition strategy, which is largely the result of the passage of fair market value legislation in a number of our states. Most importantly, for the future of our Company, we announced our entry into the regulated natural gas industry.

I'd like to highlight a few of our significant accomplishments from 2018 for you. First, it was another year of solid financial results in line with guidance. Adjusted income per share rose 4.4%, and revenue was up 3.5%. Dan will give a lot more details of the financials in just a moment. Also, we filed our Pennsylvania water rate case, the first one filed since 2011 and just recently, we filed a settlement of that case. I'll mention more detail in a moment, but this was a significant undertaking and will really help ensure that we're able to provide reliable, high-quality service and continued investment in infrastructure for our customers.

The six municipal acquisitions we completed in 2018 helped us to reach a milestone for the Company of a million water and wastewater customers; it's a big deal for us. One of the things that helped drive this growth is the passage of fair market value legislation, and in 2018, this legislation passed in two more of our states, North Carolina and Ohio. It's important to note that with all the progress we've made on growth this year, we never took our eye off of the core operations of the Company. In fact, we had a record safety and compliance result in 2018. Also in 2018, we invested more than ever to restore aging infrastructure in our communities. Our total spending was nearly $500 million of CapEx.

Though our mission of protecting and providing earth's most essential resource has always been at the core of our business, we took additional steps in 2018 to communicate our commitment by issuing our inaugural, Corporate Sustainability Report, and we also participated in the Carbon Disclosure Project survey. And finally, the biggest news of the year was the announcement of our acquisition of Pittsburgh-based Peoples Natural Gas. The integration planning and regulatory process are moving ahead nicely. We're excited about the opportunities this will open as we would become a larger multi-platform utility company.

Now taking a look at let Slide 6, we see the growth in income per share that continued in 2018, as I mentioned, up 4.4% on an adjusted basis. Today we will rollout our stand-alone EPS guidance for 2019, which should continue this long-term positive trend. As most of you know, we filed an important rate case in Pennsylvania last August, our first since the 2011 filing. And since our previous case, we invested over $2 billion of CapEx to improve our water quality and wastewater infrastructure. On February 8th, we filed a joint settlement agreement that will provide $47 million in new revenue to the Company. We expect that the Pennsylvania Public Utility Commission will approve the settlement in the coming months and we expect those rates to go into effect in May of this year.

Now turning to Slide 8, as I mentioned, 2018 was a really strong year in our municipal growth strategy. In December, we closed two new transactions, East Bradford Township and Treddyfrin Township, both in Chester County, Pennsylvania. Treddyfrin was notable because it was a non-regulated transaction of a Trunk Sewer System, that connects five municipalities to the Valley Forge sewer treatment plant, which is a large municipal plant. So this brought the total to six municipal transactions in 2018 and brought the Company approximately $100 million in new rate base.

Our pipeline of signed municipal acquisitions that are expected to close this year 2019 is also really strong with seven transactions, totaling more than 19,000 customers and another approximately $100 million in new rate base. This is really significant. Fair market value legislation played such an important role in our acquisition plan in 2018.

And as I mentioned, fair market value legislation was passed in North Carolina and just signed in January into law in Ohio. So this is moving across our platform nicely. With the passage of that legislation in Ohio and North Carolina, we now have the legislation in six of the eight states where we currently do business. And I should also mention that in Virginia, though fair market value legislation has not yet passed there, the Virginia commission allows a similar treatment of municipal acquisitions, essentially purchase price as rate base in many cases. Now, Pennsylvania and Illinois, where fair market value was first passed, have seen significant acceleration in new transactions and we are optimistic that that similar acceleration will occur in North Carolina and Ohio once it becomes established there.

Bottom line is that as municipalities face the challenge of replacing deteriorating infrastructure and increased regulatory requirements, we believe we provide a viable and valuable solution to communities by bringing our expertise, our economies of scale and our efficiencies. And fair market value just helps facilitate that solution and gives local governments the opportunity to pursue other key priorities with the proceeds from the sale of their utilities.

Now let's take a look at Slide 10; really proud of this slide. 2018 was a record year for safety and compliance. Our incident rate has been down in each of the past five years, and reached 3.5 per 100 workers in 2018. This really speaks to our corporate culture and to the values that we hold firmly. Similarly, our compliance -- our environmental compliance for water operations is up the last five years, hitting 99.7% in 2018. And to put this in perspective, at any given time, roughly 7% of water systems across the United States have health-based violations. In our Company, only 0.6% of our systems had a violation. So this means that our rate is about 10 times better than the national average. We're very, very proud of that. And we think of safety and compliance as core strengths at the Company, these will continue to be important priorities in the new combined company.

From time to time we acquire sometimes small and mid-size water -- wastewater systems that already have environmental compliance issues. These issues also arise sometimes just in the normal course of operations or result of regulatory changes, but we continue to respond quickly by aligning CapEx improvements and process changes to address any compliant -- environmental compliance issues that might arise. Over the last decade and a half, we have invested very heavily, as you know, in pipe replacement in Southeastern Pennsylvania, and the result is a 53% reduction in water quality-related service orders and a 60% reduction in main breaks, again significant numbers.

As many of you know, there's a dire need for a water -- wastewater infrastructure replacement in the United States. Infrastructure improvement is such a key part of our mission and improves the lives of the people in the communities where we serve. In 2018, we invested nearly $500 million and this includes installing about 190 miles of pipe which we laid out in 2018. We expect to invest $550 million in '19 -- 2019 and a $1.4 billion through 2021. Those of you who follow this know that this represents about 7% rate base growth in our water and wastewater business.

The next slide, our mission, as I said many times, of protecting and providing Earth's most essential resource is at the core of everything we do. And though we have a strong commitment to be a corporate citizen, in 2018, our efforts to communicate our many initiatives by issuing an inaugural Corporate Social Responsibility Report and by the way this is available on the website today. We also participated in the CDP survey, the Carbon Disclosure Project survey, for the first time and we received an exceptional first-time score by reaching the Awareness level, which puts us already and our first one in the top 40% of all companies registered with CDP. We expect to incorporate Peoples gas into both of these in the near future, probably in 2020 or 2021.

With that, we'll pass the call over to Dan to discuss our financial results. Dan?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thanks, Chris. Good morning, everyone, and thanks for joining the call. Starting on Slide 14, you'll see that we are reporting non-GAAP numbers this quarter, which adjust for the impact of the Peoples transaction. I'm going to focus our discussion in the full-year results, but you can find the quarterly results and the quarterly waterfalls in the appendix. We reported revenues of $838.1 million in 2018, up 3.5% compared to $809.5 million in 2017. Operations and maintenance expenses were $308.5 million in 2018 compared to $282.3 million in 2017.

Moving on to GAAP net income, which includes items related to Peoples transaction, we reported $192 million compared to $239.7 million in 2017. GAAP earnings per share including Peoples-related expenses were $1.08 in 2018 compared to $1.35 in 2017. When adjusted for Peoples related charges, income was up 4.6% from $239.7 million to $250.8 million. Now moving to the bottom row of the table, on an adjusted basis, you'll see that income rose 4.4% to $1.41 per share up from $1.35 per share in 2017.

Now, let's move to the revenue waterfall on Slide 15. Breaking down the 3.5% revenue increase, you'll notice that rates and surcharges was the biggest contributor at $20.6 million. Next, regulated growth, which includes acquisitions, as well as organic growth, added $6.6 million to revenue. Other items added $2.5 million and these other items included additional wastewater revenues of $2.9 million due to increased treatment volumes at one of our Indiana utilities. Revenue from market-based activities declined by $1.2 million. And as you'll recall, we've been exiting many of our market-based businesses and we've done that over the last couple of years, so you can see the impact here.

Next, let's review the O&M waterfall, on Slide 16. Operations and maintenance expenses were $308.5 million for 2018 compared to $282.3 million in 2017. Lower expenses from market-based activities reduced O&M by $2.4 million. The largest driver though was advisory and financing related costs from the Peoples transaction, which increased O&M by $14.2 million. Walking through the other drivers, employee-related costs increased by $8.3 million including the full year impact of the market-based salary adjustments that we implemented for non-officer level employees in late 2017, as well as merit increases in healthcare offset by pension. Other increased O&M by $4.3 million. Regulated acquisitions added $1.4 million of expenses and increased production costs contributed $560,000. Excluding the transaction costs, the increase in O&M was more in line with historical levels.

Next, let's review the drivers of EPS, on Slide 17. In walking through the EPS waterfall from left to right, you can see that increased rates and surcharges and regulated growth increased EPS. Other operating expenses and MBA & Other were negative, bringing the adjusted earnings per share before transaction-related charges to $1.41. This reflects an increase of 4.4% over the 2017 EPS. The two charges for the Peoples acquisition, a mark-to-market adjustment on the interest rate swap and other transaction financing fees reduced EPS to $1.08.

Let's talk about the swaps for a minute. As you probably saw in our various filings at signing, and as we discussed on prior calls, we executed 10-year and 30-year interest rate swaps to hedge the underlying interest rate risk associated with financing the transaction. At the time, we believed that interest rates would rise. Swap rates have actually gone the other direction and thus we have a non-cash mark-to-market charge for 12/31/18. We will eventually settle these swaps when we place our permanent acquisition debt. If we do end up issuing at lower-than-anticipated rate, it will be reflected in the income statement for the 10-year and 30-year terms of the debt. So you should expect to see a mark-to-market impact in each quarter, leading up to and including the closing quarter. In addition, during this time period, we will have transaction and integration-related expenses flowing through the income statement.

Now, let's turn to Slide 18 to discuss our rate activity for the year. We completed rate cases or surcharge filings in all of our eight states, resulting in $22.5 million in additional annualized revenue in 2018. So far in 2019, we've completed rate cases or surcharges in Illinois, Ohio and Pennsylvania, totaling annualized revenue of $4.4 million. We also have rate cases or surcharges pending in New Jersey, Ohio and Pennsylvania, where we're requesting an additional $75.1 million in revenue.

As Chris mentioned, we have a settlement filed in Pennsylvania for approximately $47 million on an annualized basis. We're awaiting the review and approval of the settlement agreement by both the Administrative Law Judge and the Pennsylvania Public Utilities Commission. As a reminder, this was our first rate case in Pennsylvania since the filing of the 2011 rate case. The $47 million annualized increase is an addition to the 7.5% DISC that's been in place. So we expect new rates to go in effect in May, at which point the DISC will be reset to zero. For further detail on rate activity, please refer to the slide in the appendix.

And now, I'd like to turn the call over to Matt, who will provide an update on growth.

Matt Rhodes -- Executive Vice President of Strategy and Corporate Development

Thanks, Dan. Moving to Slide 21, fair market value legislation has been a major catalyst in our municipal growth strategy in 2018 and we completed six municipal transactions totaling over $100 million in rate base. In addition to the five regulated transactions in the table, and to be clear, Peotone Water & Wastewater is counted separately. In December, we also completed the acquisition of the Valley Creek Trunk Sewer System from Treddyfrin Township Municipal Authority for $28.3 million. This is a unique opportunity to own a wastewater system that connects five municipal systems to a treatment plant and includes 49,000 linear feet of gravity sewers, as well as two pump stations and force mains. When we add these acquisitions to our organic growth of approximately 8,500 customers, our total customer growth was over 22,700 customers or about 2.3% in 2018. This was in line with the guidance we set for 2018.

Turning to Slide 22, you can see that we expect another year of strong customer growth performance in 2019. This is largely a result of the fair market value legislation-driven municipal activity we are seeing. We currently have signed purchase agreements to acquire seven municipal systems and one additional privately owned system in Northern Neck in Virginia that we expect to close in 2019. This totals approximately $100 million in additional rate base and approximately 20,000 additional customers. Looking further ahead to future opportunities, we are also seeing a solid pipeline with an increasing number of municipalities showing interest in turning to Aqua as a solution. Our list of top prospects includes over 250,000 new potential customers.

And now I'd like to give you an update on the Peoples acquisition process. So, starting on Slide 24, for those of you who are new to our story, Peoples is a transformative transaction and a unique fit. Both Aqua and Peoples share a deep expertise in infrastructure rehabilitation and all aspects of delivering essential utility services to customers. Both are focused largely in Pennsylvania, which has a constructive regulatory environment where both companies have served their communities for over 100 years. Peoples will operate as a subsidiary under a to-be-named holding company and is expected to have strong rate base growth of 8% to 10% per year from 2019 and beyond, and the transaction will add an additional 740,000 customers. In January, Peoples filed a rate case for its Pennsylvania subsidiary, and on Slide 25, I'll provide more details on that rate case.

While we do not expect to close on the Peoples transaction until mid-2019, we know many of you are looking for details on the Peoples rate case. Slide 25 provides those details. On January 28th, Peoples announced that its Peoples Natural Gas, LLC subsidiary filed a rate case with the Pennsylvania PUC. Peoples Natural Gas accounts for approximately 620,000 of Peoples total customers. This is the first rate case for Peoples Natural Gas since 2012 and it requested $94.9 million in base rate increases, which is primarily to recover the costs of Peoples' infrastructure replacement program.

Peoples' long-term infrastructure improvement plan or LTIIP is the largest infrastructure initiative in the company's history. In 2018, through LTIIP, the company replaced 146 miles of pipe. The rate case also request the consolidation of base rates for the Peoples and Equitable divisions. Since Peoples acquired Equitable in 2013, the company has invested nearly $600 million to replace over 400 miles of aging pipelines. This rate case is also the first to use the fully projected future test year method. Rates should be in place by the fall of 2019 based on the Pennsylvania PUC rate case process.

Slide 26 is a reminder of the size of Peoples pipeline replacement program. Peoples has identified over 3,100 miles of at-risk mains to be replaced under the LTIIP by 2034 in Pennsylvania alone and majority of this capital, approximately 70%, is eligible for DISC like mechanisms. This plan allows for 20 years of capital spending in Pennsylvania, assuming 150 miles of pipe is replaced each year. This replacement program should drive 8% to 10% rate base growth for Peoples.

Moving on to the financing of the transaction, on Slide 27, as we explained in the acquisition announcement and later updates, the transaction will be structured to maintain strong investment grade credit ratings and the pro forma company -- in the pro forma company and to allow for the continuation of the successful municipal acquisition program that we have described on the call today.

As we approach the equity and debt offerings, we will continue to evaluate our options for the structure and timing of the financing. We still anticipate primarily equity financing, including equity-linked securities for the transactions with a smaller portion of debt financing. We continue to meet with existing and prospective investors about the transaction and look forward to completing the equity and debt offerings once we have line of sight to regulatory approval in Pennsylvania. We are reviewing all options to ensure a successful financing of this transaction. To this point, we have had over 200 investor meetings with many more planned in the near future.

On Slide 28, you will see a reminder of the key milestones related to the Peoples transaction. In November, we filed for regulatory approval in the three states where Peoples operates. Kentucky has a four-month statute and thus regulatory approval should be in March. We expect West Virginia to follow, and as mentioned, once we have line of sight to Pennsylvania approval, we will then consider doing the equity and debt financing. As you would expect, we have certain windows when financing can be completed based on the need to provide full year or Q1 financials for both companies.

I'd now like to pass the call back over to Chris.

Christopher Franklin -- Chairman, Chief Executive Officer and President

All right. Thanks, Matt. I think as you would agree, 2018 has been a truly remarkable year for our Company and a year that I think as we look back on it, will consider a milestone in the Company's history. Let's conclude the fourth part of our discussion today by providing the 2019 guidance.

On Slide 30, you'll see that Aqua's stand-alone guidance for 2019. As we discussed previously, we were waiting on the Pennsylvania rate case to be finished before we published our guidance for this year. We expect income per share for Aqua alone to be in the range of $1.45 to $1.50 on an adjusted basis. We plan to invest approximately $550 million in infrastructure in 2019, another record amount for us, and approximately $1.4 billion of CapEx will be spent over the next three years, call it through to 2021. And just a reminder we always give that this CapEx doesn't include any investment in the purchase of systems that we would acquire or the CapEx that would then be spent to fix those systems in that period.

Aqua's water and wastewater rate base growth is expected to be approximately 7% through 2021 and we filed a joint settlement agreement of our water-wastewater rate case in Pennsylvania on February 8th, as we've said, and we expect PUC approval in Pennsylvania sometime so that rates can be in effect in May of this year. Year-over-year, we expect total customer growth to be between 2% to 3% and we expect the Peoples acquisition to close mid-year in 2019.

And with that, let's open it up for your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we'll take our first question from Ryan Connors with Boenning and Scattergood.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Hi, Ryan.

Ryan Connors -- Boenning and Scattergood -- Analyst

Thanks, Chris. How are you doing? So I got a couple on water and then one on Peoples as well. So starting on this (inaudible) last week regarding fair market value and there was some talk about affordability as an emerging concern, particularly where there is the potential for rate shock in more I guess economically challenged areas. So, obviously you've got a track record of closing deals in communities where that's not likely to be a problem, Treddyfrin is a great example of that. But could give us your take on those panel comments about affordability and how that plays into your fair market value strategy assessing opportunities going forward?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Absolutely, and we've told the story before Ryan, that we'd actually walk from opportunities and sizable opportunities that where we believe that the rates wouldn't be sustainable in communities from an affordability standpoint. And we continue to look at every deal with that same eye. So that it's got to be a win for customers, as well as shareholders and employees. And if it can't be a win all the way around then we have to seriously evaluate whether that's a real opportunity for us.

And I would say this that annually we review our position and rates across our platform with our Board of Directors, because we have a keen focus not only at the management level, but also at the Board level on the continuation of making rates affordable for our customers. And one last comment I'll make and it's really about the incremental increases that are allowed by the distribution system improvement charges. Customers don't like sharp rate increases. They do appreciate an investment in their infrastructure that make sure that they have reliable, clean, safe drinking water and they would prefer to get those increases on a incremental basis as opposed to sharp increases and so we work carefully to try to make that happen. So I'll just conclude that piece, Ryan, by saying we have a sharp eye on affordability.

Ryan Connors -- Boenning and Scattergood -- Analyst

Got it, OK. My other one on water was, it's kind of been a bit of breaking news, but a lot of movement on PFOS the last couple of weeks, had EPA saying they wouldn't regulate it, then they're saying they will, and then Pennsylvania came out saying they are going to regulate it, it looks like, one of you if you had a chance to look at any of that and give us any comments, and my particular question is, if in fact that is going to be regulated both federally and in Pennsylvania, are we right to interpret that as a rate base tailwind as those -- presumably those investments will become deemed prudent and you could move ahead with some additional capital investments there?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Yes. So let's think about this. First, let's state rate out loud. We are in full compliance with the federal health advisory standard rate. And so we meet that 70 parts per trillion. In most cases, well below that. We are in the process currently of going through every system in our Company to make sure we have thoroughly tested all systems to make sure that whatever PFOS or PFOA we find, we address. And, yes, we believe that any treatment or requirement of treatment from the EPA or DEP in each of our states would be fully recoverable through rates as it benefits the customers. And in fact, in some cases, we've already put treatment on. I would point to our plant in Bucks County, Pennsylvania where we put treatment on and that is -- we will be in rates in -- as of this case.

So I would say this though, Ryan, as you think about the tailwind, it's an opportunity for us but given the size of the Company, I wouldn't say this is a massive investment that we would expect to have to make across the Company. PFOS and PFOA have been found, but it's not that -- has not been found in all of our systems.

Ryan Connors -- Boenning and Scattergood -- Analyst

Got it. Okay. And then my only one on Peoples was, you mentioned a rate case; obviously, there's a lot of data they threw out there as part of that rate case, which is great. But on the other hand, it raises some questions and my question was on the tax rate, when you look at their stuff, it's pretty clear that they have been operating at a higher tax rate considerably different from Aqua and I presume that has to do with them not having the same repair tanks type treatment. How should we think about the tax rate of the combined entity, the hypothetical combined entity going forward? Is that closer to your rate, their rate, somewhere in the middle, any guidance there?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes, Ryan, this is Dan. So I think you're absolutely right. They do have a higher tax rate than we do. And it is tied to the fact that they have not taken the repair tax election if not implemented that. So I think going forward, still work to be done in terms of that resulting tax rate. But you can -- you can presume that it's between the two, but you'd have to think about it in terms of the scale of the two entities that are being coming together here as well.

Ryan Connors -- Boenning and Scattergood -- Analyst

Sure. Right. Okay, great. Well, thanks for your time.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Thank you, Ryan.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thanks, Ryan.

Operator

We will take our next question from Durgesh Chopra with Evercore ISI.

Durgesh Chopra -- Evercore ISI -- Analyst

Hi, good morning.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Hi, Durgesh.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Hi, Durgesh.

Durgesh Chopra -- Evercore ISI -- Analyst

Thanks for taking my questions. Just can you help us on the $47 million, Dan, just to clarify, does that include the DSIC revenues or does it not and then ultimately like what are the drivers of that number. So if I'm thinking about the what ultimately goes to the bottom line. Is that the complete $47 million or some of that is depreciation expense?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes. So, good question, Durgesh. So the $47 million is -- does not include the $47 million is -- does not include the DSIC or DISC that's already in place. We have a 7.5% DISC that's in place. So that is about $28.9 million -- call it $29 million in terms of revenue, and so you add the $29 million plus the $47 million to get to really the increase in base rates that come when you reset the debt to zero. Does that help?

Durgesh Chopra -- Evercore ISI -- Analyst

Yes. And then as part of the -- that helps, thank you very much. And as part of the rate settlement, unless I missed it, I'm assuming that DSIC would be sort of available to you prospectively after these rates go into effect?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Following the fully projected future test years, you can't implement the DSIC during the fully projected future test year, but subsequent to that for capital invested after that point, you can.

Durgesh Chopra -- Evercore ISI -- Analyst

Okay, so year two, perfect. And then just one last question, just in terms of -- just, I think you've said this earlier, but I just wanted to make sure because the CapEx plan was extended another year. So when you look at the CapEx projections, both on the water side and the gas side, fair to assume under normal course of business, you would fund that with internally generated cash and/or debt with that kind of modest or no equity issuance needed under normal course of business, the CapEx plan as you laid out.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes, that's correct. So I think as we've said on prior calls, we would expect further equity issuances in the event that we need to fund a significant municipal transactions, but in terms of funding the CapEx program for the businesses, we would expect that to come from combination of operating cash flows and debt.

Durgesh Chopra -- Evercore ISI -- Analyst

Perfect, thanks. And I appreciate the additional color on the timing of the financing of Peoples acquisition, that's super helpful. Thank you.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thanks, Durgesh.

Operator

Let's take our next question from David Katter with Baird.

David Katter -- Robert W. Baird & Co. -- Analyst

Hi, guys. Thank you. I have a quick question on the prospect list you guys talked about for your municipal acquisitions. How has the Peoples acquisition impacted that list? Have you seen any turnover there, and more broadly, how are the municipalities responding to the Peoples deal?

Matt Rhodes -- Executive Vice President of Strategy and Corporate Development

So the 250,000 of prospective customers that we mentioned is something that -- sometimes changes, but we have good line of sight to a lot of those acquisitions and so that's why they are included on that list. As we think about the Peoples acquisition and what that is added, obviously, it will put us in a different part of the state than we currently operate for the most part and could potentially open up different opportunities in the Pittsburgh area.

And so will be closely monitoring those going forward once the Peoples acquisition has closed. It also puts us in two new states, West Virginia and Kentucky, and we're just starting an evaluation of the opportunities both on the water and the gas side for municipal acquisitions in those two states as well. So that's something we've started looking at and we'll continue to look at as the Peoples acquisition comes closer to closing.

Christopher Franklin -- Chairman, Chief Executive Officer and President

And I would say, David, just on last part of your question, the municipals that we're talking to now, I think they find it interesting that we've opened up another platform. As you know, there's not nearly as many municipal gas -- natural gas systems as there are water. So I would say generally no impact from the acquisition of gas to those interested in water. They're primarily interested to understand the impact of the fair market value legislation, and that seems to be the nature of main of the questions.

David Katter -- Robert W. Baird & Co. -- Analyst

Got it. That's helpful. Then, congratulations on the settlement in Pennsylvania. I don't want to get too far ahead of ourselves here, but can you kind of walk us through where your next focus is on the rate-making front? Which rate cases are coming due?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Just while you're pulling that up Dan, I would say, as we think about, although we don't own Peoples yet, David, but that's certainly going to be a focus of ours. We have responsibility to sign off on any settlement discussions and that rate case could certainly be concurrent or nearly similar timing on -- with the acquisition case itself. So that's assuming a settlement, if we were to go more toward a fully litigated case, it could push deeper into the summer or early fall. But assuming a settlement of that case, it could be as early as, call it, July and we would hope that the transaction could be completed at that point. So the Peoples rate case is one that will be keenly focused on, in addition to our water-wastewater cases, and Dan, I'll turn the water-wastewater stuff, over to you.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes. So, the quick answer there is, you know, the two that are coming or one's in progress, it's the New Jersey water case that's in progress. Then, we would expect the New Jersey wastewater case late in 2019.

David Katter -- Robert W. Baird & Co. -- Analyst

Got it. Thank you, guys.

Christopher Franklin -- Chairman, Chief Executive Officer and President

You bet.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

We will take our next question from Richard Verdi with Coker & Palmer.

Richard Verdi -- Coker & Palmer -- Analyst

Hi, good morning, guys and thanks for taking my call here.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Hi, Rich.

Richard Verdi -- Coker & Palmer -- Analyst

I jumped on a little bit late here. And so I apologize if I might have missed my two questions. But my first question is this for the Peoples acquisition. I know that we're very early in the whole concept here and -- but when you think about, it's a good strategic fit for us, right. And when we think back to Aqua back in the '90s it was Philadelphia suburban and now it's grown, it's over and -- it's more than a half a dozen states where Aqua has regulatory footprint. Thinking over the long term for Peoples, I mean, could that be something where five years, 10 years from now, we're in more than three states, maybe we're in six states, maybe we're in 10. Could you just talk about the long-term vision for Peoples for us?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Sure. I think the way we thought about this, Rich, initially is, you're right, it's a great strategic fit, obviously, key states and puts us in two additional states. There's a lot of reasons that the strategy works. As we think about long term, what we said is, let's take this a chunk of the time. First, for the next couple of years, we've got a good size integration to do. We said this is not about synergies, this deal is not about synergies. And so as we roll the Peoples SAP platform over Aqua, right -- we are not on SAP today, there are probably opportunities for efficiencies as we rolled out across. So that's going to take us a little bit of time and as we think about this digestion period, what we're also going to look at is whether or not our book, our hypothesis is correct and that is that the multiple that will survive this transaction with 70% water, 30% gas transaction, the multiple will be either on top of very close to the water only multiple.

And so we want to see how the digestion goes and then how the multiple fares, and then, let's take a look at how the growth occurs. I think also considered in that formula is throughout that period of digestion, we will continue to do municipal transactions and that will continue to at least temporarily tax the balance sheet while we bring those units in for rates and get full revenue associated with them. And then, we'll look at what opportunities are there in gas, and Matt Rhodes has already begun to look at opportunities in gas. But I would just caution you that for the next couple of years, I think we would say you won't see major M&A in gas as we digest this one, and then depending on where the multiple lands and how strong our currency is, maybe there's opportunities to do some other things.

Last thing I'll say about it is, we are obviously not shy about getting into additional states. We'd love to expand our platform, both in water and in gas, and so as we think about new and additional states, I will say that we have a couple -- I own a couple already, and so, don't be surprised if you see expansion in other states in the coming years.

Richard Verdi -- Coker & Palmer -- Analyst

That's great color. Thank you, Chris. And just for the second question. For the guidance range -- this is what I'm concerned. I might have missed, I apologize if you need to repeat this. What would cause the Company to come in closer to that $1.45 mark, and what would cause the Company to come in closer to that $1.50 mark?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Good question. Look, you always have the weather component that can always impact and we always say that could be a couple of pennies either way in any and that's one of the reasons we provide a range. But as we think about the progress of this year, there's a lot happening in 2019, not only with the transaction, obviously, better -- that's considered separately. But other things that could come up. And Dan, I don't know if you have any additional color you want to put through beyond that.

Dan Schuller -- Executive Vice President, Chief Financial Officer

No, I think that's good, Chris.

Richard Verdi -- Coker & Palmer -- Analyst

Okay. So, you guys would say it's just more maybe weather based than anything else?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes, I mean weather and some things that are kind of beyond your control that come into the cost structure right that either break your directional little bit or break the other way.

Richard Verdi -- Coker & Palmer -- Analyst

Perfect. Thank you for that. And I just want to follow-up actually on the first question on your commentary, Chris, regarding the SAP. That's something -- am I understanding that right, you're going to take what Peoples has with SAP and then overlay that into the water format there at Aqua?

Christopher Franklin -- Chairman, Chief Executive Officer and President

That's the plan.

Richard Verdi -- Coker & Palmer -- Analyst

Okay. And then, so I'm assuming that if you -- that cost savings and could generate additional dollars to put back into CapEx in the rate base then right?

Christopher Franklin -- Chairman, Chief Executive Officer and President

I think -- one way of thinking about it is, number one, we would do like we do all CapEx, we would spend it prudently. So we would expect to recover any cost associated with SAP in terms of that's all -- that would be a capital project. And then further, if we can find efficiencies in our back office, and I think there's opportunities to do that, maybe hit some efficiencies in the field over time. But as we said, Rich, we see the need to keep all the people. And so we don't see a reduction in force in anyway. Over time, might there be opportunities to attrit some people in areas where we find the efficiencies, I would say the answer is probably yes.

Richard Verdi -- Coker & Palmer -- Analyst

Okay. Okay, great, hey, thank you very much for the time guys. Great color. I appreciate it.

Christopher Franklin -- Chairman, Chief Executive Officer and President

Thanks, Rich.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

We will take our next question from Jonathan Reeder with Wells Fargo.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Hi, Jonathan, how are you?

Jonathan Reeder -- Wells Fargo -- Analyst

Good morning, how are you all doing?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Good, Jonathan.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Very well.

Jonathan Reeder -- Wells Fargo -- Analyst

So the water settlement, is it filing on the traditional rate of return parameters, in particular ROE as has been the case in the past?

Dan Schuller -- Executive Vice President, Chief Financial Officer

It was. So it's a black box settlement. So, no specificity around those things.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. Can you share your perspective on how the Peoples regulatory approval process has been going in all three of the states so far?

Christopher Franklin -- Chairman, Chief Executive Officer and President

Yes. So we testified in Kentucky just last week. Dan Schuller and I were both in Kentucky, as well as management from Peoples. And we felt very, very comfortable with the line of questions, the answers we provided in and the discussion, I would say, was a very constructive hearing, and we had some follow-up questions from the Commission and the Attorney General who has access to consumer advocate essentially in Kentucky and those follow-up questions are questions that will need to answer in the coming days. There was nothing that was of any concern, they were standard questions.

And so we expect that the Commission will stay on track. They want to be finished on time, which would be put it -- call it March 20th time frame, Jonathan, for approval. And then we would hope that West Virginia would be soon to follow the Kentucky approval, those discussions with West Virginia continue in terms of discovery and answering questions. And then, of course, Pennsylvania would follow that and just to give you an idea of timing, the testimony from the interveners of which there are 11, is due on April 5th -- 2nd, I'm sorry, April 2nd. And so --

Matt Rhodes -- Executive Vice President of Strategy and Corporate Development

That's in PA.

Christopher Franklin -- Chairman, Chief Executive Officer and President

In Pennsylvania, yes. And so, we would expect that informal discussion while discovery is being promulgated and answered -- we would expect informal discussion around settlement to occur in the coming weeks and it would be our hope to get to a settlement in early April and then that would allow us to proceed. We'd like to have line of sight to that settlement before we put the bulk of our equity up, Jonathan. So that's timing as we think about it now, obviously it's very dynamic.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. Now you said you'd like the line of sight before you put the bulk of the equity out. Does that mean you're still considering maybe private placement, something like that and if so, are there any like barriers or milestones that we should think about whether it's quiet period, anything along those lines?

Christopher Franklin -- Chairman, Chief Executive Officer and President

So yes, we are still interested in a private investment call it pipe type arrangement and. And so the hope would be that that would be either just before or concurrent with our equity raise or larger equity raise. So those discussions continue.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. And then that's great color by the way, Chris. Did PA ask people to file the rate case while the merger proceeding was ongoing or was that completely up to them and then since the deal is kind of ongoing and like you said the timing of that case and a potential settlement is potentially shaping up around the timing of deal close, should we expect those to kind of merge together like a global settlement, if you will or anything like that?

Christopher Franklin -- Chairman, Chief Executive Officer and President

So, the answer to your first question is, no. There is no -- they were not called in. So the decision to file a rate case at that timing was solely that of Peoples Natural Gas and SteelRiver Partners who owns them. So that was -- the timing was theirs. In terms of putting the two cases together, the acquisition approval case and the rate case, I can only tell you that history would tell you that Pennsylvania does not do that.

They take very separate issues and they keep them very separate. And I think there is plenty of cases where that -- which suggest that's the history of Pennsylvania. I would say -- more recently, I would point to our case during the Pennsylvania Aqua rate case, despite the fact that the acquisition case was ongoing, it was -- the two are not intertwined, they were kept very very separate. And so, we would expect the same treatment of the Peoples case and the acquisition approval case in Pennsylvania.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. And then last question, I know, it is really modest amount, but you kind of bumped up the equity portion of the Peoples deal to 2.5 (ph) from 2.4 (ph), anything that prompted that or anything we should read into it?

Dan Schuller -- Executive Vice President, Chief Financial Officer

No, it's just math -- really just about making sure that we have plenty of dry powder on our balance sheet for additional municipal water acquisitions and just making sure that we maintain the strong investment grade credit rating, but nothing really more than that to read into it.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay, great. Thanks for taking the time to answer my questions. Really appreciate it.

Christopher Franklin -- Chairman, Chief Executive Officer and President

You bet, Jon.

Operator

Our last question is from Angie Storozynski from Macquarie.

Agnieszka Storozynski -- Macquarie -- Analyst

Thank you. So I have a question -- actually, two questions about the rate case settlement in Pennsylvania. So number one, I see the -- that the settlement includes a regulatory asset or liability associated with the repair tax deduction and so how does that compare to the previous setup before the rate case?

And secondly, based on this outcome, you remember before the rate case, you were saying, it might take you a couple of rate cases to see an increase in earnings more commensurate with the rate base growth. Given that there is a stay out until the next rate case until early 2021. How do you see this EPS versus rate base growth? Thank you.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes. why don't I jump in there, Angie. So, in terms of the repair tax, previously, there wasn't any sort of limit to the repair tax deduction. So, what's incorporated into this case -- and as you recall, as we've talked about this case what we've said is, through this case, the repair tax benefit really shifts from the shareholder to the customer because the lower effective tax rate is being incorporated into this case.

So that's one piece of this and a piece of them that settlement is this concept of a limit on the amount of capital eligible for the repair tax. So, again, repair tax benefit going to the customer, and limiting the repair tax eligible capital, so there is not any kind of wiggle room around that or there's very little wiggle room around that. Is that helpful?

Agnieszka Storozynski -- Macquarie -- Analyst

Yes. So how does it tie into your earnings growth expectations in Pennsylvania? I see the 7% growth in the rate base. I understood that this is for the entire Company. So on a stand-alone basis when or if -- when will we ever get to that 7% earnings growth?

Dan Schuller -- Executive Vice President, Chief Financial Officer

So, you'll see that occur over a period of time here that includes a couple of rate cases; think about it that way that your effective tax rate will step up from case to case. And as that effective tax rate returns to a more normal level, you'll see the rate base growth and the earnings growth become more aligned.

Agnieszka Storozynski -- Macquarie -- Analyst

Okay. So, we are talking more like 2023 or even -- and beyond, right, because we -- you cannot file the next rate case until April of 2021?

Dan Schuller -- Executive Vice President, Chief Financial Officer

Yes, I think that's fair.

Agnieszka Storozynski -- Macquarie -- Analyst

Okay, thank you.

Dan Schuller -- Executive Vice President, Chief Financial Officer

Thanks, Angie.

Operator

That concludes today's question-and-answer session. Mr. Dingerdissen, at this time, I will turn the conference back to you for any additional or closing remarks.

Brian Dingerdissen -- Chief of Staff and Head of Investor Relations

Thank you all for joining us today and look forward to any follow-up, you might have, we're always available. And I appreciate your time today. Thanks so much.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 55 minutes

Call participants:

Brian Dingerdissen -- Chief of Staff and Head of Investor Relations

Christopher Franklin -- Chairman, Chief Executive Officer and President

Dan Schuller -- Executive Vice President, Chief Financial Officer

Matt Rhodes -- Executive Vice President of Strategy and Corporate Development

Ryan Connors -- Boenning and Scattergood -- Analyst

Durgesh Chopra -- Evercore ISI -- Analyst

David Katter -- Robert W. Baird & Co. -- Analyst

Richard Verdi -- Coker & Palmer -- Analyst

Jonathan Reeder -- Wells Fargo -- Analyst

Agnieszka Storozynski -- Macquarie -- Analyst

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