Essential Utilities, Inc.

good morning everyone and thank you for joining us for essential utilities third quarter 2024 earnings call during which we will provide an update on new long-term guidance the slides that we will be referencing and a webcast of this event can 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 implied by such forward-looking statements. Please refer to our most recent 10Q, 10K, and other SEC filings for 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 any non-GAAP to GAAP financial measures is posted in the investor relations section of the company's website. We will begin the call today with Chris Franklin, our chairman and CEO, who will provide an update on the company, and then Dan Schuller, our CFO, who will provide an update on the financial results before Chris closes the call with our guidance. With that, I will turn the call over to Chris Franklin.

Hey, thanks, Brian, and welcome, everyone. We've got some really exciting news to share with you today. I've got some more color, but let me just run through it in a very, very brief summary on top here. We had a great quarter. Financially, we had a strong capital investment so far this year, and we have an approved Pennsylvania gas rate case that included a weather normalization mechanism. We had a settlement in our Pennsylvania water rate case, yielding us $73 million. And we are reinstating our multi-year EPS guidance at a 5% to 7% growth rate through 2027. which, importantly, does not include Del Cora, any earnings associated with Del Cora. And then we're also going to talk a little bit about our strong recovery from the Hurricane Helene that hit North Carolina. So a lot of good things to talk about for the quarter, so let me get into the details. First, we posted $0.25 in earnings per share for the quarter, which was above expectations. Our capital spending remains right on schedule this year, We've invested $932.5 million through the end of the third quarter, and we'll spend about $1.3 to $1.4 billion to improve water, wastewater, and natural gas infrastructure this year. Dan will get into more details about the financials for the quarter in just a few minutes. So in September, the Pennsylvania PUC unanimously approved the first rate case for people's natural gas under our ownership. The approval included an annualized revenue increase of $93 million and a weather normalization mechanism. You probably know this mechanism because others have it. It's designed to provide a greater financial stability and predictability for both our customers and our investors by mitigating the financial volatility associated with abnormal weather impacts. I know you'll recall that Both this year and last year have been unusually warm weather and have impacted our results. However, it could have just as easily gone the other way and we could have had two abnormally cold years, which would have negatively impacted our customers. So this new mechanism will provide the ability to mitigate these abnormalities in weather and should assist with reducing the volatility for all parties going forward. I do want to mention that the Office of the Consumer Advocate filed a petition for review of the approval in the PNG case. Dan will talk a little bit more about that in a minute, but I did want to mention that. Let's also talk about the water rate case, the Aqua Pennsylvania rate case. We filed our briefs on October 28th, and in those documents, you'll see that we have a settlement agreement designed to provide a total annualized revenue increase of $73 million. our water and wastewater operations we expect the settlement agreement to be filed formally on november 7th and available on the puc website at that time it's important to note that this settlement agreement as all settlements would be remains subject to a recommended decision by the administrative law judges and approval by the puc i should also mention that east whiteland uh you'll recall that acquisition it's a wastewater acquisition in pennsylvania uh was excluded from the settlement and will be fully litigated in front of puc with an expected decision on that coincident with the rate case decision in february now on the next slide our significant progress on the two pennsylvania rate cases have provided us the opportunity to re-establish long-term guidance this guidance which I'll review in more detail later, includes EPS growing at a compound annual growth rate of 5% to 7% for the next three years. That's through 2027. Continued rate-based growth of over 8% combined, and our continued commitment to improving and upgrading water, wastewater, and natural gas infrastructure by investing $7.8 billion over the next five years through 2029. Importantly, we expect to achieve this EPS growth without including any addition to the EPS from the Delcorra transaction. So to be clear, we remain confident that our valid and enforceable asset purchase agreement will ultimately prevail and that we will close the Delcorra transaction. But we want to remove any potential overhang that might be associated with the delayed closing of Delcorra, so we've taken it out of our numbers. And we believe this guidance communicates the right balance of growth for our investors built on the right level of infrastructure investment that ultimately results in rates that are affordable for our customers. Truly a win-win. As this slide indicates, we've consistently executed our plan to grow earnings between 5% and 7% every year. We've delivered these results despite elevated inflation, higher interest rates, some of the warmest weather on record in our natural gas territory hopefully our most recent achievements and the continued strong results indicated on this slide underscore our ability to execute and our regulatory credibility in the jurisdictions where we operate all right let's just take a moment we were hit hard by by the hurricane as so many uh people were in our country particularly in the south want to talk a little about the impact of hurricane helene on our north carolina operations thankfully our team was quick to respond clearing trees and other debris that allowed us to do some damage assessments early on after the storm had passed we prioritize communications with our customers most importantly providing regular updates through our disruption map and other forms of electronic communication and physical communication signage and etc we also dispatched a special reconnaissance team equipped with drones to inspect damage in areas that were either inaccessible or unsafe particularly in the more mountainous communities where we serve now in total 90 of our systems in north carolina were impacted but through really strong work by our teams all but six systems were back up in just five days after the storm And as of October 19th, everything was back in power and repaired and fully functional. We're grateful for the patience of our customers and the understanding they provided, and we also appreciate the dedication and extensive work effort of our North Carolina team. And with that, let me turn to Dan, and he's going to cover our financials for the quarter and some regulatory matters.

Dan? Thanks, Chris, and good morning, everyone. As Chris mentioned, we're pleased with the financial results for the quarter. On this slide, I'll discuss high-level Q3 financial highlights, and then we'll get into the details with the waterfalls. Our revenues for the third quarter of 2024 were $435.3 million, marking an increase of about 6% compared to $411.3 million in the third quarter of 2023. This increase was driven by rates and surcharges, increased water sales, an increase in the price of gas, and water customer growth. These factors far offset the minor revenue decline from lower natural gas sales. The quarterly operations and maintenance expenses decreased for the third quarter compared to the third quarter of 2023. This decrease was primarily due to a reduction in bad debt expense and a decrease in expenses associated with the West Virginia gas utility assets and the Pittsburgh area energy projects. both of which we have divested. We achieved quarterly earnings per share of 25 cents, which compared to 30 cents in earnings per share in the third quarter of 2023. So while we had an increase in revenue and a decrease in O&M expenses, last year's EPS in the third quarter was positively impacted by significant one-time tax repair benefits associated with the Natural Gas Safe Harbor, which of course didn't repeat this year. Next, let's look through the waterfalls, going to the first, the revenue waterfall. Moving left to right, we have regulatory recoveries of over $11 million, with the vast majority of this increase coming from the regulated water segment, plus over $10 million in increased water segment volume, and about $4 million coming from an increase in purchase gas costs, as well as acquisitions and organic growth in the water business. This was offset slightly by lower volume of gas sales due to the warmer than normal weather as well as the other category. Revenues from the regulated water segment increased just shy of 8% for the third quarter of 2024 compared to the same period in 2023. We saw excessively warm and dry weather at various times in the Mid-Atlantic as well as in Ohio, which in turn led to higher water volume. But we experienced lower water consumption in Texas and in North Carolina. Next, let's look at the O&M on slide 10. We saw a relatively modest increase of approximately $1.6 million in water production costs due to the higher volumes previously discussed. And among the smaller increases to O&M were the impact of the customer rider in the gas business, routine increases in employee-related costs, and customer growth in the water segment. The overall reduction to O&M costs was primarily due to a decrease in bad debt expenses and a reduction in expenses related to the now divested West Virginia gas utility assets and the Pittsburgh area energy projects. Importantly, our year-to-date O&M performance is quite strong, expenses only up about 1% over the previous year, which demonstrates our continued commitment to operating efficiency. Next, let's look at the EPS waterfall on slide 11. Starting on the left of the EPS waterfall with $0.30 from last year, the next thing we see is the nearly $0.03 increase from regulatory recoveries and close to $0.03 from increased water volume, the benefit of $0.06 from the decline in expenses, and $0.03 in customer growth in the water segment. These increases were offset slightly by decreased gas consumption and then more materially by nearly 11 cents from other, which reflects lower tax repair benefits and increased depreciation and interest expenses. As I noted earlier, the lower repair tax benefits this year are mainly the result of the timing of the natural gas safe harbor impact in 2023. In conclusion, we're pleased with the performance for the quarter, given strong results in the water business and slightly lower expenses year over year. More importantly, we remain on track for a year in line with our guidance and investor expectations once we adjust for the sale of the energy project and normalize weather for the gas business. Let's review the guidance we provided in February, updated in May, and reconfirmed in August, as well as today. we provided guidance for 2024 net income for diluted common share to be $1.96 to $2. We expect to achieve this once we consider the gain on sale and weather impact. So, think about it this way. Due to the energy project sale, gap earnings per share will exceed our guidance range, but if we subtract the 24-cent gain from that figure, and add back $0.08 to reflect the warmer-than-normal weather in Q1 and Q2, we'd expect a result into the $1.96 to $2 EPS guidance range. As Chris mentioned, in 2024, we expect to invest between $1.3 billion and $1.4 billion. We're on track to do this, as we've already invested over $932 million through September. Turning to the next slide, let's look at regulatory activity. The Pennsylvania Natural Gas, or P&G, rate case was filed in December 2023, and we received an order from the Pennsylvania Public Utility Commission back in September. This order included an annualized revenue increase of $93 million, mainly due to the doubling of rate base due to replacing aging infrastructure since the last case, as well as weather normalization, which is good for both customers and investors. This order also fully incorporates the repair tax benefit into the revenue requirement, thus benefiting our customers. This case has a fully projected future test year that extends through September of 2025. Rates went into effect on September 27th, so you'll see the increased revenue from the rate case in our Q4 results. Unfortunately, as Chris mentioned, in a highly unusual action, one of the parties that didn't sign on to the settlement agreement, the Office of the Consumer Advocate, has appealed the PUC's order to the Commonwealth Court and has asked for a remand of the PUC, essentially claiming that the PUC needed to include more information to support its findings to approve the rate increase. We believe that the order is very sound, and while based on a non-unanimous settlement with all parties except for the OCA, it was supported by both the administrative law judge and the commissioners who voted 5-0 to approve the order. We'll be supporting the commission and its order on appeal, and we're closely monitoring the situation. The company does not expect accounting implications related to this appeal process. Moving on to the next slide, as Chris mentioned, we've reached a settlement for the rate case that we filed for Aqua Pennsylvania in May of 2024. The settlement would be reviewed by the assigned administrative law judges and then the commission. Once approved, we expect the new rates from this settlement to go into effect in February of 2025. This rate case includes a fully projected test year through the end of 2025. The settlement is designed to provide an annualized revenue increase of $73 million on the water and wastewater operation. It's important to note that the East Whiteland wastewater system is excluded from the settlement and thus is being addressed separately, but we'll conclude with the rate case outcome in February. Moving on to the next slide, in 2024, our regulated water segment received rate orders or infrastructure surcharges in several states, including Illinois, New Jersey, Ohio, North Carolina, Texas, Virginia, and Pennsylvania, totaling $51 million. This does not include the settled rate amount for the Aqua Pennsylvania case that we discussed a moment ago. Our regulated natural gas segment also received infrastructure surcharges in Kentucky and Pennsylvania, totaling approximately $22 million, in addition to the $93 million that we just discussed, for a total of approximately $115 million in increased annualized revenue. Looking ahead, we currently have rate cases or infrastructure surcharges pending in Illinois and Ohio and the pending Aqua Pennsylvania rate case settlement for our regulated water segment. Combined, the revenue request in these cases is $149.2 million. We also have an infrastructure surcharge pending in Kentucky in the amount of $465,000 for our regulated gas segment. And with that, I'll hand the mic back to Chris.