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Aqua America Inc (WTRG 0.08%)
Q2 2019 Earnings Call
Aug 7, 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 Quarter Two, 2019 Earnings Call. [Operator Instructions] At this time, I'd like to turn the conference over to Brian Dingerdissen. Please go ahead.
Brian Dingerdissen -- Investor Relations
Thank you, Eduardo. Good morning, everyone, and thank you for joining us for Aqua America's Second Quarter 2019 Earnings Call. If you did not receive a copy of the press release you can find it by visiting the Investor Relations section of our website at aquaamerica.com. The slides that we will be referencing and a webcast of this event can also be found on our site.
As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP Financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the company's website. After the presentation, we will open the call up for questions. Now, I would like to pass the call to Chris Franklin.
Chris Franklin -- Chairman, Chief Executive Officer and President
Hey, thanks, Brian, and thanks everyone for joining us. The second quarter was certainly a busy one. We installed a large amount of capital, advanced several municipal acquisitions, continued our work on the Peoples acquisition and the Peoples rate case. And in terms of today's agenda for the call, here is what we would like to do. We'll start with some highlights since our last earnings report in May. Dan Schuller will then talk about our financial results, as well as our rate activity. Then I'll give you a brief overview of our progress on the municipal growth strategy. And we have Kim Joyce, our Vice President of Regulatory, Legislative and External Affairs joining us this morning, and she will give you an update on fair market value and the regulatory aspects of the Peoples transaction. And finally, we'll conclude the call with a review of our guidance for 2019 and then take any questions that you might have.
So let's jump right in. During the second quarter, our employees delivered another strong performance demonstrating our long-term strategy of growth through acquisition, our investment in infrastructure renewal and of course, our consistent delivery of value to customers, communities and our shareholders. In fact, the first two quarters of the year, this year, we invested nearly $270 million in infrastructure investment. That's up 24% over last year's first half and on track for another record capital spending year of approximately $550 million this year.
Investing in infrastructure is at the core of our mission to deliver safe and reliable service. And as you know, it also helps fuel our growth in earnings. Our municipal acquisition strategy is on pace for another strong year. We added a signed purchase agreement in Campbell, Ohio just recently. And also announced a letter of intent with DELCORA, which is a large municipal wastewater authority here in Southeastern Pennsylvania. I'll share a little bit more on those in a few moments.
Our municipal strategy has been fueled in large part by the passage of fair market value legislation. It has allowed more municipalities to consider companies like ours as a solution. In June, the Texas State Legislature passed a fair market value law, which should open more opportunities for companies like Aqua to serve many more communities in Texas. And then in July, the Board approved a 7% dividend increase, which marks 28 years in a row of dividend increases. And lastly, the Peoples transaction is on track for closing this fall and through secured financing and final regulatory approval in two states and are awaiting for final regulatory approval in Pennsylvania, and Kim will take you through that in just a moment.
Now on slide 7, you can see our dividend track record. The announced a 7% dividend increase marks the 74th year in a row of consecutive quarterly payments. We continue to have a stated payout target ratio of between 60% and 70% and we're comfortable in our ability to continue to increase the dividend for shareholders into the future.
As a reminder, we are still over 30% retail owned, which is really a significant given the size of our company now, and this is post equity offering for Peoples. We take great pride in our long and consistent track record of delivering shareholder value and our dividend policy is a statement or a testament to our financial strength and discipline as well as our ability to grow. And with that, we pass the call along to Dan to discuss the company's financial results.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Thanks, Chris. Good morning everyone and thank you for joining the call. As you can see on slide 9, we're reporting non-GAAP numbers again this quarter that adjust for the impact of the Peoples transaction and integration. You will see this throughout the year. We reported revenues of $218.9 million in the second quarter of 2019, up 3.3% compared to $211.9 million in the second quarter of 2018. Operations and maintenance expenses were $86.4 million in the second quarter compared to $73.5 million in last year's second quarter.
Moving on to GAAP net income, which includes items related to Peoples transaction, reported $54.9 million compared to $66.6 million in the second quarter of 2018. GAAP earnings per share including Peoples related expenses and incremental shares were $0.25 in the second quarter compared to $0.37 in 2018. When adjusted for Peoples related charges, income was up 0.3% from $66.6 million to $66.8 million. And as you can see on the bottom row of the table, adjusted income per share was in line with last year's EPS of $0.37.
Now let's move to the revenue waterfall on Slide 10. Breaking down the 3.3% revenue increase, you'll see that growth was the largest contributor, which includes acquisitions in Illinois, Pennsylvania, and Virginia, as well as organic growth, adding approximately $4 million to revenue. Rates and surcharges added an additional $4 million. Other items decreased revenue by $297,000 and then consumption was lower by $677,000 given the normal trend from conservation and wet weather in some of our state.
Next, let's move to the O&M waterfall on Slide 11. Operations and maintenance expenses were $86.4 million for the second quarter compared to $73.5 million in the second quarter of 2018. The largest driver was cost from the Peoples transaction and integration which increased O&M by $12.7 million. This charge includes a material portion of the bridge fees which were written off when we raised equity and debt in April.
Walking through the other drivers, growth, both from acquisitions and organic growth added $1.1 million of expense, employee-related cost decreased by $57,000, production expenses were lower by $143,000 and other items decreased by $745,000. Excluding the transaction-related expenses, O&M would have been roughly in line with Q2 of 2018.
Next, let's review the drivers of EPS on Slide 12. And walking through the EPS waterfall from left to right, you can see that increased rates and surcharges and growth increased EPS. Consumption was down slightly and other items, including depreciation and interest, reduced EPS by $0.026. This brings the adjusted income per share for the second quarter to $0.374, up just slightly from last year's Q2 EPS.
GAAP EPS included three items from the Peoples transaction. A mark-to-market adjustment on the interest rate swaps, which we mentioned on the last call, provided a positive $0.049 in Q2. Other transaction and financing fees of $0.148, as well as $0.025 to adjust for the dilutive effect of the equity offering. This brought GAAP EPS to $0.25 in the second quarter.
Next, let's look at slide 13. Since this quarter’s share count for GAAP EPS includes the impact of the Common Stock and Tangible Equity Unit Offerings in April, we wanted to spend a few minutes on the tangible equity units or TEUs. We issued 13.8 million units at $50 per unit, each $50 unit includes a prepaid Stock purchase contract valued at approximately $41.37 and a three-year amortizing note valued at approximately $8.63.
This amortizing note provides the 6% coupon on the TEU and it accrues interest on the outstanding balance at 3%. You can see the schedule of interest payments in the issuance document. It's a fairly modest number each quarter and it decreases over time. The number of shares issued as part of the prepaid Stock Purchase contract varies depending on our stock price at the conversion date and specifically, the volume-weighted average stock price for the 20 days preceding the settlement. If Aqua stock is above the threshold appreciation price of $42.41 per share, we will issue 1.179 shares of WTR for each unit. This results in the minimum number of shares being issued. On the other hand, if Aqua stock is less than or equal to the reference price of $34.62 per share, we will issue 1.444 shares of WTR for each unit. This results in the maximum number of shares being issued. In between those 2 points, so in, between $34.62 and $42.41, the number of shares issued per unit equal to $50 divided by the share price. Between now and conversion, the minimum number of shares as used in the calculation of basic EPS and the additional incremental share count if any, based on the 20-day volume-weighted average price at quarter-end is included in the diluted EPS calculation.
I will note that for Q2, the new common shares and TEU, sorry -- the new common shares and TEUs only count in the EPS denominator for 69 days of the second quarter. Hopefully, that helps you think about our share count going forward. We've also included a more detailed breakdown of the share calculation in the appendix. Finally, recall that we'll be adding 21.7 million additional shares for the full quarter from the pipe when the Peoples transaction closes.
Moving on to rate activity on Slide 14. In 2019 so far we've completed rate cases or surcharges in Illinois, New Jersey, North Carolina, Ohio, and Pennsylvania, totaling annualized revenue of $57.5 million. In 2018, that we filed our first-rate case in Pennsylvania since 2011. During the 7-year period, we invested over $2 billion in infrastructure. We filed a settlement agreement for this case in February, and following a commission order new rates went into effect on May 24th, totaling approximately $47 million in additional annualized revenue and the DSIC was reset to zero. Additionally, the company currently has a surcharge proceeding pending in Ohio for $2.3 million in additional annualized revenue.
Let's talk about the Peoples Pennsylvania rate case on Slide 15. Peoples filed a rate case in January 2019 and in July, filed a settlement agreement for $59.5 million in additional annualized revenue. I know that many of you have an interest in the potential repair tax election for Peoples in Pennsylvania. We want to make it clear that the repair tax election is something we plan to pursue in 2020 once we own the company. Even though we are in the process, I would caution against making assumptions in your models on the possible impact of repair tax. We'll provide more guidance on this in the coming months, likely at the Analyst Day we're planning on December 5. And now I'd like to hand the call back over to Chris.
Chris Franklin -- Chairman, Chief Executive Officer and President
All right. Thanks, Dan. We've noted in the last several calls that we continue to see a strong pipeline of acquisitions in our municipal strategy, especially in the states where we have fair market value loss. On Slide 17, you can see our eight signed municipal purchase agreements which total about 22,600 customer connections. We're very excited about these customers joining us. Just recently we signed an agreement to acquire the water system of Campbell, Ohio which has approximately 3,200 customers. And as a reminder, Ohio is our second-largest state with roughly 150,000 customers and a state where we are the only regulated water utility of size.
Ohio also has 1,400 municipal water systems and about 1,000 wastewater systems. So there is a lot of opportunity for us to be a solution in Ohio. Now that Ohio has a fair market value law, we expect to see interest from municipalities continue to increase as it has in Pennsylvania and Illinois where the laws have been in effect for a longer period of time.
And I should mention on this slide that we do expect that couple of these transaction is to close in early 2020 simply because of some regulatory process extensions. And however we do expect to see our total new customers added in 2019 along with organic to still be within our targeted range of 2% to 3% growth. It's also important to note that as you think about what this adds to earnings that for every $100 million in rate base from acquisition, we expect about $5 million in additional earnings to be generated from that increase assuming normal ROEs. And that will, of course, exclude any pursuit costs.
In addition to our signed acquisitions, in recent quarters we've also highlighted some of the opportunities we're pursuing that are still in the earlier stages. On slide 18 you can see that we're actively pursuing some fairly large municipal systems and a total of over 400,000 customers in our active pipeline. In July, a large municipal wastewater system in Southeastern Pennsylvania known as DELCORA signed a letter of intent committing to exclusive discussions with Aqua. Give you a sense of the size, DELCORA serves approximately 500,000 people. We talked about our companywide serving about 3 million people. So we have 1 million customer connections. So it gives you a sense this system has a number of wholesale and larger industrial customers. So it's not all retail. But it serves approximately 500,000 people in about 42 municipalities. And so this is significant to us. If we reach an agreement on an opportunity of this size, we would likely look to put an ATM or an at-the-market program in place to raise some additional equity. But as we said, aside from acquisitions we do not see any additional need for equity in the near term.
And now with that, we pass it to Kim to provide some updates on the Peoples front. Kim?
Kim Joyce -- Vice President of Regulatory Legislative and External Affairs
Thank you, Chris. This morning I'll provide an overview of the transaction timeline related to the regulatory approvals needed prior to our joining with People. At the outset, I'd just like to say that it has been a pleasure working with the Peoples team on this joint effort and I also appreciate all the hard work of those who participated in the approval process in the various dockets and all the state.
And looking at slide 20, Aqua and Peoples filed applications in the three states where Peoples currently provides natural gas service. which are Kentucky, West Virginia and Pennsylvania. As was reported on the last earnings call, the parties were able to reach unanimous settlement agreements in both Kentucky and West Virginia and those few commissions have both issued orders, allowing the transaction to proceed to closing.
Kentucky has a four months statutory timeline and we received approval on March 13, and we received approval in West Virginia on April 23. Next, I'll focus on the Pennsylvania regulatory approval process for the Peoples acquisition. The first highlight on the timeline slide that there were two other very important dockets being processed at the Commission as well. The Aqua Pennsylvania water and wastewater rate case and the Peoples Natural Gas rate case, both in our view, reaching very positive outcome.
Turning to the next slide. For the Peoples acquisition with Kentucky and West Virginia regulatory approval already received, we are now waiting for a review in Pennsylvania. A non-unanimous settlement agreement was filed with nine of the 11 interveners either supporting are not opposing the agreement, which was filed on June 25.
The settlement agreement was supported by the Office of consumer advocate, the two intervening unions, low-income advocates, several gas suppliers, the Oil and Gas Association, among others. The two parties that did not sign on were the Bureau of Investigation and Enforcement known as I&E, which is an arm of the Pennsylvania Commission that oversees gas compliance and the Office of Small Business Advocate, also known as OSBA. The major discussion point in the merger docket for the Bureau of Investigation and Enforcement and OSBA has been how to address a Peoples Gas Gathering System that serves approximately 1,700 families and small businesses located in a rural community south of Pittsburgh. This particular system has deteriorated over time and there is significant debate among the two parties about whether to replace and repair this specific gathering system or possibly convert those customers receiving natural gas service to an alternative fuel service, most likely propane.
While we're disappointed that we could not reach a unanimous settlement agreement and continue to have conversations with all the parties, ultimately, the settlement agreement we reached with the majority of the parties seek to set a path for resolution of this issue which is the repair and replacement of the gathering system which we believe is consistent with Pennsylvania policy and benefits customers, including approximately 100 small businesses in this area and the overall economy of the region by providing continued access to low cost natural gas.
For some further background, natural gas distribution companies have been collectively replacing old-natural gas type on an accelerated basis for many years. And the facts here are similar to many areas in Pennsylvania where the existing natural gas systems were installed decades ago and are in need of replacement.
In fact, these customers that we're talking about have been paying full residential retail rate, in addition to a discharge for many years. And through consolidated rates or single tariff pricing which the Pennsylvania Commission has long supported, we believe, along with the majority of the parties that this is the most direct way to solve this issue. The alternative would be abandonment proceedings for these customers which means converting approximately 1,000 family homes and small businesses to propane which is much more expensive and could be 3 to 5 times more expensive.
Based on our prior experience this would take many, many years, due to the various logistical, legal, economic due process and societal concerns involved in abandonment proceedings at the Commission. Because two of the 11 parties were not supportive of this proposal, in Pennsylvania, the assigned administrative law judges will review the settlement agreement and the evidence and will issue a recommended decision.
Just as a reminder, in the original Peoples SteelRiver acquisition, the recommended decision by the administrative law judge was to not recommend approval of the merger initially. And this was later overturned by the Commission. Here in our docket, when the recommended decision is issued it will be sent to the full commission for review and set to vote at a public meeting.
Slide 21, gives our estimated timeline for a commission decision. There is no statutory timeline in Pennsylvania for approval of this type of acquisition. So our estimates are based on prior cases and similar transactions. We are anticipating a final order this fall. and we have estimated an order on the October 24th public meeting which is the second public meeting in October and closing shortly thereafter.
Shifting gears to a legislative update. There are some very good news for Aqua Texas and Aqua North Carolina. In Texas, fair market value legislation passed, allowing these types of transactions in Aqua's seven states. Now seven of our eight states have some form of fair market value legislation and in the remaining state, which is Aqua Virginia, we are beginning discussions.
Additionally in Texas, Senate Bill 700 opens the door for the Texas Public Utility Commission to consider a water and wastewater DSIC in Texas. This is our last remaining state to adopt this type of infrastructure mechanism. We're also pleased to report that North Carolina has passed legislation allowing the Commission to implement a consumption adjustment mechanism. The Aqua North Carolina team has worked on this concept for a number of years. The implementation of a CAN [Phonetic] stabilizes revenues at levels approximating the approved revenue requirement during times of fluctuating consumption, which can be very important in states like North Carolina or changes in weather can significantly impact customer usage.
And with that, I will pass the call back to Chris.
Chris Franklin -- Chairman, Chief Executive Officer and President
All right, thanks, Kim and I'll conclude the call with a quick summary and review of our 2019 guidance. Looking at page 24, we are affirming our stand-alone 2019 financial guidance for Aqua and we're also reaffirming the expected closing timeframe, as Kim just said, for the Peoples transaction is the same timeline we essentially disclosed in June.
We expect Aqua stand-alone adjusted income to be $1.45 to $1.50 per share. This excludes the impact of the Peoples transaction and equity offering, as well as any earnings from Peoples -- any future earnings from Peoples. We're on track for our best year of infrastructure investment with about $550 million to be spent on replacing an improving pipe, plant and other infrastructure.
Through 2021, we expect to invest approximately $1.4 billion and this will help drive rate base growth of about 7%. As I mentioned earlier, we have eight signed municipal acquisition agreements and expect to close most of those this year. Together with organic growth, our customer count will increase this year by 2% to 3%. And finally, we've passed most of the important milestones in the regulatory process and in our integration planning for the Peoples acquisition and expect to close in the fall after receiving regulatory approval in Pennsylvania.
Importantly, we plan, as Dan mentioned, to hold an Analyst Day in New York City in December. December 5 is our target date. At that meeting, it’s our intention to provide longer-term guidance to you. As I've said on previous calls, we will provide this longer-term guidance only after we finish four things, right?
We said we need to finish the Aqua rate case in Pennsylvania. That is complete. We need to finish the Peoples rate case in Pennsylvania; we do have a settlement on that. We need to close the Peoples transaction, we expect this fall, and then we need to conclude and finish our analysis on the repair tax impact in Pennsylvania with Peoples as well.
So in summary, our performance for the second quarter was a result of a lot of hard work from the team on a number of different fronts. So we continue our long history of dividend growth. The People transaction supports our ability to continue this growth. Our fair market value legislation passed in Texas and again, that's a 7th of our 8 states to pass this important legislation.
Our municipal acquisition program is strong and delivering good results and we're pursuing larger opportunities, including the DELCORA opportunity. Peoples filed a settlement for the rate case, which we've mentioned and for the transaction, we're on track to closing in the fall as Kim discussed. With all of that, I will conclude and open the call for questions.
Questions and Answers:
Operator
Perfect. [Operator Instructions] I'll take our first question from Julien Dumoulin Smith from Bank of America. Please go ahead.
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Good Morning, everyone. This is actually Ryan Greenwald on for Julian. How are you?
Chris Franklin -- Chairman, Chief Executive Officer and President
Hey, Ryan, how are you?
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Doing well. Thanks. Thanks for taking our question. So can you just talk a little bit more about discussion so far in PA? And I know you guys are saying 2020 in terms of repairs tax, if anything is done there. But can you kind of just touch on your overall confidence of implementing it and how it would ideally look?
Dan Schuller -- Executive Vice President, Chief Financial Officer
So, really there are two pieces of that, Ryan. There is the current portion, which we can choose to elect. We go ahead and elect that and you'd see the benefit of that in the income statement immediately. And then there is really the catch-up, which is where you look back and say if repair had been in place over the past years, what would that be worth and how is that treated in terms of going forward?
And so -- and that second portion on the catch-up, for that you actually need a basic commission order indicating how that catch-up would be treated. So to think about our own Pennsylvania situation back in 2011, 2012, we had a significant catch-up that was put on the balance sheet and the Commission order indicated that we would amortize that catch-up deduction over a 10-year period of time.
So that's the kind of thing we’d look for on the catch-up, as some kind of a treatment of that catch-up. I won't say it's exactly what we had. In Pennsylvania, I was just kind of giving that as an example. But it's really the two pieces, and we'd expect that we would go ahead and implement it in 2020 and you’d see the current impact, if you will.
So it's where we are now, we've been really determining what would that framework look like? How much of their capital qualifies for repair under that framework? Quantifying then what that potential current portion is and what that would look like and then quantifying that catch-up and discussing a strategy around the catch-up deduction.
Did that help, Ryan, in terms of giving you a sense of it?
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Yeah. Do you have a sense right now in terms of what would qualify?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Well, it’s a -- it is a pipe business. So in terms of replacement, a portion of that pipe would clearly qualify for repair tax. But I'd say, we're still working through that process. And as Chris commented at the end of the call, as we get through all these pieces, the two rate cases of closing the transaction, the assessment of the repair at Peoples, then we'll give you the longer-term guidance.
Chris Franklin -- Chairman, Chief Executive Officer and President
And you can imagine, Brian. We had actually hoped to have closed this transaction this summer, which then would have put us in on the inside of the company and accelerate some of those – some of that look at these things. But that's been a little bit delayed. I don't want to suggest that we've had anything but really fine cooperation between the two companies. But clearly, we're still not the owner of the company yet. So a little bit of that work is delayed just because of that delay in closing.
Dan Schuller -- Executive Vice President, Chief Financial Officer
And there really is a fair bit of analysis, Ryan, to actually get those things quantified.
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Yeah, fair enough. And then just shifting away from the diversification in the gas, can you touch on your appetite for diversifying more into new states with the core water business, as fair market value legislation is making its way through?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, I think we're wide open to opportunities in other states. Now, having said that, we’ve put a lot of focus on passing this fair market legislation. And as we stated in our prepared remarks, seven of eight states, we’ve seen the passage of it where we currently do business. But having said that, we've always said if we expand into other states, we would look to get a strong foothold, we wouldn't want to dabble in a state, we'd like to if we enter, enter with a presence, call that with a target of at least getting to 30,000 customers. But I will say that where we've seen fair market value passed already in our existing eight states where we're seeing an awful lot of opportunity and activity,
And so it's kept us a pretty busy in our existing states. Not to say we're not always taking a look around, but we are pretty busy in our eight states already.
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Got it. Thanks for the time guys.
Chris Franklin -- Chairman, Chief Executive Officer and President
Got it.
Operator
All right. We will now take our next question from Ryan Connors of Boenning Scattergood. Please go ahead.
Ryan Connors -- Boenning and Scattergood -- Analyst
Great, thanks for taking my questions. I wanted to actually. [Speech Overlap] How are you?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Very well. Thanks.
Ryan Connors -- Boenning and Scattergood -- Analyst
Good. I wanted to spend a little bit of time on the regulatory approval process for Peoples. Obviously, you mentioned, Chris has taken a little longer than expected. Kim mentioned the disappointment at not reaching a global settlement. Can you just kind of talk about what it is, what aspects of the process have surprised you relative to your initial expectations. Just in terms of what exactly has played out differently than you envisioned it initially?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, it's a good question, Ryan, and I could summarize it largely in two words Goodwin and Tombaugh. That’s the system Kim described. It’s the gas gathering system in Southwest Pennsylvania. We knew there was a system that was struggling and that was a topic of conversation between the agencies prior to this transaction. And what had become apparent was -- during the transaction is the various opinions on how to fix the problem and where we find ourselves, and even to some extent the Peoples organization.
We find ourselves between agencies that have two different philosophies on how to fix the problem. And so, it's been very difficult to bring them to one central approach. And I will say, Ryan, that over the last several months, we've had a lot of discussions with all of the agencies about common ground. And we believe that the settlement signed by nine of the parties is really fair common ground. And in fact, we have offered in the documents you've seen some rate credits as part of that to help subsidize that work. Having said all that, at the end of the day, we need to see this discussion play out in front of the administrative law judge. She will issue an opinion and then [Indecipherable] see the results of that in front of the five Pennsylvania Public Utility Commissioners.
Ryan Connors -- Boenning and Scattergood -- Analyst
Got it.
Chris Franklin -- Chairman, Chief Executive Officer and President
And I know there's some strong language in some of these documents. But I think if you read any of those from any transaction, there is an element of that. And then there is the real substance which I'm talking about here, which is really around Goodwin and Tombaugh, give out our [Indecipherable].
Ryan Connors -- Boenning and Scattergood -- Analyst
Sure.
Chris Franklin -- Chairman, Chief Executive Officer and President
Okay.
Ryan Connors -- Boenning and Scattergood -- Analyst
Yes, so my second -- my follow-on to that, and let me just stress this is purely a hypothetical question. So this is, it’s basically not a base case, but let's just say we had a scenario where you do not get approval from the PUC whether they reject a positive initial decision or the converse, are we safe to assume that that's not game over what would happen is you would recalibrate based on Goodman and Tombaugh and then sort of just refile with whatever the -- adjusting the transaction according to what is needed. Is that a fair assumption?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yes. But look, I'm going to give it the Kim. But let me just say this right out of the chute. There is nothing that would lead us to believe that the Pennsylvania Public Utility Commission would go down that route.
Ryan Connors -- Boenning and Scattergood -- Analyst
Yeah.
Chris Franklin -- Chairman, Chief Executive Officer and President
Think about it this way, the various scenarios don't include and have never included the payment of for this system on anybody's nickel but the users of the system and the customers in general. So I think the Pennsylvania Public Utility Commission will follow past precedent and the law and we don't see anything like that happening. But having said that, I'll let Kim give an answer to the speculation.
Kim Joyce -- Vice President of Regulatory Legislative and External Affairs
Sure, Ryan. So just agreeing with Chris, we have full confidence and we're seeing proceeding regulatory approval in Pennsylvania. But if for some reason the commission looked at the settlement agreement and made some tweaks or made some changes to some of the provisions as the parties agreed to, at that point we would just reconvene with those parties and revisit those particular issues and try to resolve them and then resubmit the settlement agreement for approval.
Ryan Connors -- Boenning and Scattergood -- Analyst
Got it. Right, which is the underlying what I'm getting at. That’s not the -- it's a re-thought, it’s not a yay nay, it's a process.
Kim Joyce -- Vice President of Regulatory Legislative and External Affairs
That's more likely in the process, right?
Ryan Connors -- Boenning and Scattergood -- Analyst
Okay. And then my other one was just on the Peoples rate case. Yes, that's great news on the settlement there. Can you just give us -- there was one outstanding item on the mainline extensions, which is a little bit cryptic, especially for those of us who aren't as versed on the gas side. Can you just give us a CliffsNotes version of what that is, how you see that playing out and as -- any residual financial materiality that might come out of the various scenarios with that outstanding item?
Chris Franklin -- Chairman, Chief Executive Officer and President
Again, let me lay the context and then I’m going to slip it to Kim too. But -- so this provision that you're talking about is one that other gas utilities, including Columbia and Pennsylvania already have, right? They already have the ability to use this. And it's the ability to essentially say, and I'm going to use an example to go to a neighborhood of customers and say," Hey listen, if you all sign up for service, we can run a line and recover at least a portion of that line that runs to your homes they get the new gas line to and have a finance generally in rates."
And that's the layman's version of what it does. I think the position of the Office of a small business is essentially that they don't want small businesses to play any portion in that subsidization of those new customers. And so I think that's your point of view and the commissioners will ultimately decide whether or not the small businesses are included. I will say and I'll conclude with that that in a gas-rich low-cost environment in Western Pennsylvania, this is a strong alternative to propane and electric. And so therefore generally, the commission regulators encourage this kind of expansion of gas service for customers who desire it.
And Kim?
Kim Joyce -- Vice President of Regulatory Legislative and External Affairs
Yes. Chris, I think you summarized it very well and it's just a philosophical opinion of -- for the office of small business advocate. As the mainline extensions are built out, certainly, those costs are spread across the entire Peoples, customer base. And the office of small business advocate doesn't believe that their client should have to pay for that. So it's a subsidization issue, Ryan, that I think that the Commission will take a look at. But ultimately a lot of gas companies have similar mainline extension programs that have been approved by the commission in other instances.
Ryan Connors -- Boenning and Scattergood -- Analyst
Okay. Great, well thanks for your time.
Chris Franklin -- Chairman, Chief Executive Officer and President
Thank you. Ryan.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Thanks, Ryan.
Operator
Now take the next question from Durgesh Chopra from Evercore. Please go ahead.
Jeffrey -- Evercore -- Analyst
Hey, good morning. This is Jeffrey on for Durgesh.
Chris Franklin -- Chairman, Chief Executive Officer and President
Hey Jeffrey.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Hey Jeffrey.
Jeffrey -- Evercore -- Analyst
So I just wanted to go a little bit further with the People gas rate case. How should we think about the earned ROEs assuming you get the rate case settlement approved and how does that compare to the -- the earned ROEs in your water business?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, I mean I think it's important to note, it is the black box settlement but we have a pretty good sense of where ROEs come out there. And we think those ROEs come out where you'd expect them to be for a Pennsylvania utility business. And in terms of the settlement and the increase in revenue that comes from the settlement that's very nicely in line with what we had in our acquisition model. So we're quite comfortable with the outcome here on that rate case.
Jeffrey -- Evercore -- Analyst
Got you. And then just moving on. And this is going to be broad strokes on DELCORA since I know you’re in the due diligence process, but how should we think about the potential rate based out there?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, I would say at this point, since we don't have a purchase price announced and there is still work being done around that, that's going to be a hard – a hard thing for us to give you. I think the stated and I'm trying to get the words right, because it's municipal, the depreciated asset base, something like that. Is around 260 or 240.
So -- but that's what stated in their books. And so I wouldn't throw that in a model or anything, it's just, that's -- if you go on the Internet that what probably you could find. I would say wait and see what we come up with in terms of purchase price and -- and rate base.
Jeffrey -- Evercore -- Analyst
Got you. Very helpful. Thanks for taking my questions.
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, Jeffrey.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Thanks, Jeffery.
Operator
Now take the next question from Richard Verdi from Coker & Palmer. Please go ahead.
Richard Verdi -- Cocker Palmer -- Analyst
Hey, good morning guys. Thanks for taking my call. Brian, I mean. Brian is doing a good job of keeping up the -- keeping me up to speed with things. So I'm quite clear. I just have one quick question it’s because I jumped on the call very, very late and I apologize for that. So if this was addressed, again I apologize. Chris, did the company see any kind of unfavorable weather conditions during the quarter that'll impact earnings?
Chris Franklin -- Chairman, Chief Executive Officer and President
There was a minor impact but I wouldn't say it was a, it was a significant contributor to earnings. Dan, you addressed that in your prepared comments.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes, consumption down a little bit. And obviously, we see continued conservation. We did see some wet weather in some state, but it was kind of mix a bit of a checkerboard, if you look across the portfolio. Good weather, I'll say that for water sales in certain locations and wet weather in others.
Richard Verdi -- Cocker Palmer -- Analyst
Okay. Guys. That's it for me. Thanks guys.
Chris Franklin -- Chairman, Chief Executive Officer and President
Thanks, Rich.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Thanks, Rich.
Operator
I'll take the next question from Hayley Zou [Phonetic] from Macquarie. Please go ahead.
Harley Zou -- Macquarie -- Analyst
Hi. Thanks for taking my questions. So could you just give me an estimate of what will be a good estimate of the 2020 share count starting from where we are now and soon we're in the middle of the range for tangible equity units?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes. So you're looking for 2020 share count. Give me one minute I’ll pull something up here. And as said on earlier calls, we'll continue to be, as clear as we can on these. So, if we take so for 2020, what you'll see there we will have kind of call it our original base, we will have the new common offering, we'll have the pipe and then we'll have measure around the TEUs. So in total it will be somewhere around call it between 250 million and 255 million shares.
We’ll probably tighten that up even a little bit more, but think of that as your range.
Harley Zou -- Macquarie -- Analyst
Okay. And now we're at 220 million right?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes, that's right. What you see for -- you see just about 220 million for the second quarter. And then in the third quarter, what you're likely to see there, what you'll see there is the TEU shares and the common shares, you'll see them for a full quarter whereas you only saw those shares for 69 days of the quarter for Q2.
Harley Zou -- Macquarie -- Analyst
Right. Okay, that's very helpful. Thank you.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yeah, certainly.
Operator
[Operator Instructions] I'll now take the next question from Jonathan Reeder from Wells Fargo. Please go ahead.
Jonathan Reeder -- Wells Fargo -- Analyst
Hey. Good morning, gentlemen. In terms of the Peoples rate case settlement, does that assume a full income tax allowance for kind of like a normal tax rate for that business?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes, it does.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay, and then you're saying you don't -- when you elect I guess the tax treatment in 2020, the current portion will just flow to the bottom line and there is no approval necessary, it’s just the catch-up portion that’s subject to whatever treatment.
Dan Schuller -- Executive Vice President, Chief Financial Officer
You're correct that there is not a required approval for that election and to see that current portion. It's really the catch up that requires a Commission decision.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. And then can you give a little more color, Chris, on what a potential deal with DELCORA might look like? Is it definitely an outright acquisition or could there be some sort of like JV, partnership structure? I wasn't entirely clear on that.
Chris Franklin -- Chairman, Chief Executive Officer and President
Yes, no, the anticipated outcome is a full acquisition. And I think the attractive part for Delcora is that they would be -- they would essentially become the company's Pennsylvania wastewater division, and we would aggregate all of our wastewater customers under that new entity and -- but they would be a fully owned component of Aqua America -- Aqua Pennsylvania.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. So they would, in a sense kind of assume all of your other wastewater systems and kind of run it for you to some degree in everything.
Chris Franklin -- Chairman, Chief Executive Officer and President
That's what we anticipate that the -- we're really impressed with the talent there. And so the people, the management, we're impressed by and we think would be a great match with the folks, we already have doing wastewater at the company. Now to give you a sense, Jonathan, company overall we have about 100,000 wastewater customers now. We're talking about DELCORA’s role would really be in Pennsylvania or Southeast Pennsylvania role.
And if you think about that, even announced already, we have 10,000 customers joining us from Cheltenham, which is not yet closed but in our list as well. So it's a -- it will be significant for everybody.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. And then, Mike, is it your typical municipal deal that it would fall under the fair market value legislation that would apply or is there a cap to the size of the deal that can fall under fair market value?
Chris Franklin -- Chairman, Chief Executive Officer and President
Well, here's the way I would put it because we're still in negotiations, and due diligence, so I don't want to front-run the agreement. But suffice it to say, we don't anticipate taking goodwill on this transaction.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. And then how do they like use the proceeds, is it a municipal agency where they can redeploy those proceeds into I guess, other kind of civic uses, like as kind of the driver behind them coming to the table, how should we think of that?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah, one of the impressive parts about the principles that they are approaching this transaction with and they've said this publicly, so I'm not giving you anything that's not out in public realm. But they -- they anticipate taking a 100% of the proceeds and putting them against future rates. So it's a nice outcome for customers, they get a prolonged period of rate stability and a combination with a professional utility. They've got to build another expansion of the plant. They've got a lot of capital to spend in the coming years. And so we can be helpful with on that aspect of it.
And at the same time their team gets some expanded opportunities to grow and their customers get long term rate stability.
Jonathan Reeder -- Wells Fargo -- Analyst
Alright, that's good detail. I appreciate that. And then I guess just kind of a little housecleaning Dan and kind of goes back to Richard's question, but on a non-GAAP basis, help me understand why I guess net income was flat despite having at least a full month of the PA rate relief in place, particularly during a higher consumption month?
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes, so I guess a couple of things to comment on there. Coming off repair, you don't expect to see a big bump in earnings from the case. And remember that case really shifted those benefits – the benefits of repair to the customers because now it's incorporated into the revenue requirement. We did, of course, see five weeks or so of the new rates in Pennsylvania so they're incorporated there. So you do see a revenue pickup when you look kind of at the income, you see it's more flattish.
But with that revenue -- you see the revenue pickup. But even though you've got increased expenses there, depreciation is up year-on-year because of the capital expenditures. Remember we've invested kind of $500 million of capital over the last year. Interest is also up, similarly based on that capital expenditure over that time period. Few additional costs in there related to pensions and so forth. So that's why you see the kind of $0.37 last year, $0.37 on an adjusted basis this year.
Jonathan Reeder -- Wells Fargo -- Analyst
Right. But that depreciation interest, I mean, now you have forward-looking kind of test here in PA, shouldn’t that have kind of contemplated those items where there could have been some accretion or…?
Chris Franklin -- Chairman, Chief Executive Officer and President
I guess that’s fair too.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Yes. Fair point.
Chris Franklin -- Chairman, Chief Executive Officer and President
I think Dan's first point though, Jonathan, if you think about it, coming out of Pennsylvania rate case. First one, seven years and taking the coming out of the repair, which is the key element, they're just not a huge uplift, out of that case. And I think that's the right way to think of it. You come out of it and your – you’ve had to spend an enormous amount of capital to overcome income generated from savings on the tax line, right? And so, there's just not a huge uplift that comes from the first case as there will when the company is back on its normal rate case cadence going forward from here.
Jonathan Reeder -- Wells Fargo -- Analyst
And while the case does contemplate those, remember you're only seeing about five weeks of that new revenue versus a full quarter of the new revenue.
Chris Franklin -- Chairman, Chief Executive Officer and President
Yeah. That's true. That’s a good point.
Dan Schuller -- Executive Vice President, Chief Financial Officer
That you expect to see going forward.
Jonathan Reeder -- Wells Fargo -- Analyst
All right. Now, good point. Again, all right, thank you so much for taking the time. I appreciate it.
Chris Franklin -- Chairman, Chief Executive Officer and President
All right. Thanks, John.
Dan Schuller -- Executive Vice President, Chief Financial Officer
Thanks, Jonathan.
Operator
I'll now take the next question once again from Ryan Connors from Boenning & Scattergood. Please go ahead.
Ryan Connors -- Boenning and Scattergood -- Analyst
Yeah, just a quick follow-up, you were talking about the DELCORA opportunity there, which is great. And then there has been some news flow here locally around Chester that the city wants to put out an RFP that’s to sell that water system and apparently doing some legal maneuvering around the Board and stuff like that.
Do you have any comment on those news items and whether that's -- we should look at that as being back alive again or is that just over reading that?
Chris Franklin -- Chairman, Chief Executive Officer and President
Yes. So let's just level set for everybody. Chester Water Authority located in Chester is one of the most depressed third-class cities in the United States. But it serves also Delaware County and Chester County or portions thereof. And so it has about 42,000 customers, water customers. And so it's a sizable system. In 2012, there was a piece of legislation that passed that took control. This is a 100-year-old utility owned by the city of Chester. It took the legislation though in 2012, change the governance and gave Chester County three votes on their Board, Delaware County three votes on their Board and the city of Chester three votes on their Board. Prior to that it was all city of Chester appointed votes.
So the debate now is, did that change the ownership or did that just change the governance? Because Chester would argue -- the city of Chester argues they were never reimbursed for any transition of ownership. It's really owned by them and therefore they’re in a call it pre-bankruptcy. It's Act 47 here in Pennsylvania.
But -- so they need the proceeds from the sale. So the city is arguing that they're the owner, the rightful owner and that they get to sell it. The authority is saying no, no, we're independent, we’re the owner and you can't sell us. This ultimately will be decided in court. It's being litigated today, in fact, not literally today but currently. And I think once that happens, the city will -- should they be the rightful owner, they'll put it out for bid and sell the authority. But I think it will be tied up in court for the foreseeable future.
Ryan Connors -- Boenning and Scattergood -- Analyst
Okay, so not dead though?
Chris Franklin -- Chairman, Chief Executive Officer and President
Not dead by far.
Ryan Connors -- Boenning and Scattergood -- Analyst
Got it, okay. Thanks again.
Chris Franklin -- Chairman, Chief Executive Officer and President
You bet.
Operator
It appears there are no further questions at this time. I'd like to turn the conference back to Chris. Please go ahead, sir.
Chris Franklin -- Chairman, Chief Executive Officer and President
Thank you all for joining us today. Obviously, Brian, Dan, and I always remain available for follow-up. But thank you for joining the call today and thank you for your questions.
Operator
[Operator Closing Remarks]
Duration: 56 minutes
Call participants:
Brian Dingerdissen -- Investor Relations
Chris Franklin -- Chairman, Chief Executive Officer and President
Dan Schuller -- Executive Vice President, Chief Financial Officer
Kim Joyce -- Vice President of Regulatory Legislative and External Affairs
Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst
Ryan Connors -- Boenning and Scattergood -- Analyst
Jeffrey – Evercore -- Analyst
Richard Verdi -- Cocker Palmer -- Analyst
Harley Zou -- Macquaire -- Analyst
Jonathan Reeder -- Wells Fargo -- Analyst
