Essential Utilities, Inc.

Good morning, everyone, and thank you for joining us for Essential Utilities' fourth quarter and full year 2024 earnings call. This is Dan Shuler, Chief Financial Officer at Essential. I'm stepping in for Brian Dingerdissen, who welcomed twins this past weekend. 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 essential.co. The slides we'll be referencing and the webcast of this event can also be found on our website. I did want to take a moment to introduce our new IR director, as you may have seen his photo in the deck that is posted. Ed Vallejo, with whom most of you are familiar from his time in the industry, joined our team just last week. Ed hit the ground running and will be fully engaged in our IR activities right away. Welcome, Ed. Let's move to the forward-looking statement. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10Q, 10K, and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of any non-GAF to GAF financial measures is posted in the investor relations section of the company's website. Begin the call today with Chris Franklin, our chairman and CEO, who will provide an update on the company, and then I'll provide an overview of our financial results before Chris closes the call with our guidance. With that, I'll turn the call over to Chris Franklin.

Chris? Hey, thanks, Dan. Ed, welcome aboard. Nice to have you with us. And good morning, everyone. Thanks for joining us. Hey, listen, as I reflect on 2024, I have to tell you I'm really proud of the performance of the company, the team that leads it, and all of those that did the work to make the year so successful. Financially, 2024 is another year in a string of years that we have reported earnings per share in line with our 5% to 7% guidance. In fact, on a GAAP basis, we delivered $2.17 per share The GAAP earnings, of course, include the gain on sale from the Pittsburgh energy projects. When you think about repeatable earnings, I'm talking non-GAAP now, we would think about finishing the year at about $1.97 earnings per share. Dan's going to provide more detail on this in just a few moments. Now, these outcomes would not be possible without the discipline of our operating teams. They held operating expenses this year to only 2% growth year over year and completed our $1.3 billion capital plan right on target. Our operating expense control is key to keeping rates affordable, and our timely capital investments improve water quality, gas safety, and service reliability, all while building rate base and, of course, earnings for shareholders. Over the course of the year, We responded to investors who wanted to get to know our operating team leaders a little bit better in both water and natural gas. And so Colleen Arnold, the head of our water business, and Mike Huar, the head of our gas business, spent time on the road with us in investor meetings throughout 2024. And that'll continue into the future as I know you enjoyed the interaction with both Mike and Colleen. Now, when we think about our accomplishments and our consistency, Consider that the board raised the dividend by 6% in 2024, and that's consistent with our 30 plus year track record of growing the dividend at a healthy rate. In fact, sort of amazing to consider that we've grown the dividend approximately 40% in just five short years, and we've paid a dividend now for 80 straight years. probably the accomplishments that we're most proud of in 2024 are the successful water and natural gas rate cases in pennsylvania the state that contains you know 75 of our operations both cases were black box settlements but most of you could easily estimate the approximate equity layer and roe that were granted in those cases we believe these strong regulatory outcomes combined with the recent changes at the Office of the Consumer Advocate are reminders that Pennsylvania continues to be a constructive regulatory state. We also believe that our strong regulatory reputation of doing the right thing should continue to facilitate positive regulatory outcomes that are both good for customers and shareholders. In fact, since the recent change in leadership at the OCA, agency has withdrawn its protest of the people's rate case, a really good sign that a more moderate approach to regulatory relations may be coming to that agency. One of the key accomplishments in the people's rate case was the establishment of weather normalization. This regulatory solution has already proven to be beneficial to both shareholders and customers. In January of 2025, just last month, Because of abnormally cold weather, the company will give back about $8.2 million to customers, but shareholders will also reap some benefit from this cold stretch. Bottom line is that in that short time, since October, when the weather normalization was first put in place, the smoothing of weather volatility and the associated revenue is working exactly as designed. Now, while we're talking about regulatory accomplishments, I want to mention that in 2024, there was some reform of the Fair Market Value Statute that was passed by the PA Public Utility Commission. As I think you already know, we were actively engaged in that solution with the PUC. We believe that this reform will bring greater certainty to the process and should also help keep rates at affordable levels. Already, we're seeing increased activity for municipals that are interested in selling their utilities. All right, when we think about 2024, I have to mention the progress that we've made in PFAS mitigation. We spent about $27 million in capital and completed the mitigation work in 13 plants. This is toward our four-year goal to mitigate approximately 300 plants at an overall estimated capital spend of $450 million. The solution we're applying to most of our plants is a patent-pending approach that we're also marketing to other utilities as a solution to their PFAS issues. Now, it's too early to predict whether our solution will be additive to earnings or not, but I'm proud of the team for engineering the solution and for the pace of our installations. One of our top priorities in the natural gas business will always be risk reduction. In fact, in 2024, we focused on several key risks. First, we installed 30,000 Intellis meters. These are the meters made by ITRON. We believe that these meters are literally a game changer for safety. The meters are lighter weight, slightly smaller and more accurate, but most importantly, They prevent overpressurization. When you consider the catastrophic incidents that have occurred within the gas industry just over the past decade, if these meters had been installed, they hadn't been invented when those incidents happened, but had they been installed, many of these fires could have been prevented. Now, we'll install at least 60,000 more of these meters in 2025 as we ramp up this new potentially lifesaving technology. When we think about risk in the gas business particularly, we also think about underground storage wells. That's why we reconditioned some of our older wells and abandoned some others. Overall, the work we did on underground storage wells in 2024 reduced our risk scores by 50%, a significant accomplishment. And as part of our capital plan in 2024, we replaced more than 370 miles of water and natural gas mains, which is key to the continued reduction in our carbon footprint. Our expectation remains that we will spend nearly $7.8 billion in capital over the next five years. So in preparation for that work, we continue to deepen our bench of talent by creating development opportunities for members of the team so we can continue the long-term consistency of results. that has been our reputation. Now, we had our challenges in 2024 as well. In Pennsylvania alone, we were named receiver for 10 water and wastewater systems. These are systems that the former owners neglected and they were undercapitalized. We responded quickly when the Pennsylvania Public Utility Commission asked us to operate these systems. We invested capital and made improvements. But I got to tell you that receiverships are not the best solution. We will be in all of our states with the environmental agencies to push the improved enforcement. This deferral of investment and ultimate dilapidation did not occur overnight. And we'll use this example to encourage environmental agencies to enforce earlier. which could provide us an opportunity to rescue these systems before they reach a critical stage. The other macro challenge that we face in the water industry is stock performance. Now, we're no exception, and I'll say that we were pleased to be the strongest performing water stock in 2024, but still disappointed in not seeing our successes reflected in our overall current valuation. Now, moving to 2025, I already mentioned the successful Pennsylvania rate case. It did receive final approval on February 6th by a unanimous vote of the public utility commissioners in Pennsylvania. If you look forward, our theme this year is Leading Today, Shaping Tomorrow, which captures our dual focus, solving today's issues with urgency while building a foundation for tomorrow throughout 2020. focus on sustainable business practices now to facilitate this work a key theme in 2025 will be a focus on lean practices across our footprint and throughout our corporate functions operational excellence has always been a cornerstone of our company and we're going to lean into that even further beginning this year some of the best performing utilities across our country have adopted lean practices And we believe that Essential will benefit from this approach in the coming years. The last issue I'll mention is probably the hottest topic in the utility industry right now. Load growth generated by data centers. This creates a challenge and an opportunity. See, some investors see greater growth in the electric utility industry compared to the stability and more measured growth of water and natural gas. However, Our company and investors are uniquely positioned to benefit from both growth and stability. Our investors have the stability and growth of the second largest investor-owned water utility in the United States, while also benefiting from the potential load growth from data center construction within our natural gas service territory. This is important. As of today, We are in discussions with data center developers that represent up to five gigawatts of needed power generation in the Pittsburgh region if the data centers are built. While all of that may not be built and the exact financial implications for us aren't known, it is exciting to see the state of Pennsylvania is engaged in these opportunities. And we would welcome both the increased throughput and any capital improvements that would be associated with that growth because of the potential benefit to customers and to shareholders. So listen, we were really pleased to reinitiate long-term growth guidance in November with expected annual EPS growth of between 5% and 7% through 2027 off of the $1.97 non-GAAP base we earned in 2024. This does not include any potential earnings associated with the pending acquisition of Delcorra. Additionally, we'll spend between $1.4 and $1.5 billion in capital in 2025, and we'll invest nearly $8 billion in infrastructure improvements over the next five years. That will lead to 8-plus percent annual rate-based growth before accounting for any acquisitions. All right. Let me pass it to Dan to get into the financials for 2024.

Thanks, Chris, and good morning again, everyone. This first slide, let's talk high level on full year 2024, and then we'll get into the details on the waterfalls. During the year, we had exceptional execution on two large rate cases, Pennsylvania Gas and Pennsylvania Water, which actually just concluded earlier this month. And we reached a great outcome with the sale of our non-core Pittsburgh area energy projects, which allowed us to reduce our financing needs in 2024. We continue to see the merits of our long-term strategy of providing outstanding service to our customers, investing in needed capital improvements, managing our day-to-day O&M expenses, and maintaining our disciplined regulatory practices to deliver long-term shareholder value. Operating revenues were up due to rates and surcharges and increased water volume. This was offset by the decline in natural gas commodity prices year over year, which positively impacted our customers' bills, and due to weather, which was warmer than normal for the gas business as compared to the prior year. Importantly, as a reminder, we now have the weather normalization mechanism that provides customers better certainty and alleviates the volatility associated with extreme weather. While we continue our focus on managing O&M expenses, the full-year O&M shows only a slight increase, reflecting our long-term focus on operating efficiently and the sale of our West Virginia and Energy Project assets. As Chris mentioned, on a GAAP basis, we achieved EPS of $2.17 for the year, which is up from $1.86 in 2023. These results include the gain on sale plus the impact of warmer-than-normal weather in the first half of 2024 for the gas business and drier-than-normal weather in the Mid-Atlantic and Ohio for the second half. If you adjust for these factors, you'd be squarely in the 2024 guidance range of $1.96 to $2. Next, let's walk through the full-year waterfalls. slide 11 we have the revenue waterfall for the year moving left to right we have rate increases and surcharges of nearly 83 million with about 51 million of that coming from water and 32 million from gas increases in water volume of 11.6 million and then other which is mainly the weather normalization adjustment and the gas customer assistance program rider offset by the loss of revenue from both the west virginia utility assets and the energy projects of $8.4 million, plus acquisitions and organic growth in the water business of $8.2 million, offset by lower gas consumption, as well as the impact of the lower purchase gas costs of approximately $75 million. As a reminder, we experienced dry, warm weather over the summer and into the fall in Pennsylvania, New Jersey, and Ohio, which led to increased water usage. Let's talk about the natural gas business for a moment. Through June, each of the months of 2024 was warmer than normal, and this had a significant impact on our financial results. This is exactly why we asked for the weather normalization adjustment in our people's rate case. Now we've already seen the benefit of weather norm, both for the company in the fourth quarter and for customers in early 2025. Next, let's look at the O&M on slide 12. O&M increased just 2% or under $12 million year over year in 2024. Increase included additional costs from the gas segment universal services rider, which is recoverable through a revenue surcharge, as well as employee related expenses, increased water production costs, so mainly purchased wastewater, power, and purchased water, offset by lower chemicals, and expenses related to serving acquired water and wastewater systems. Those increases were offset by lower bad debt costs and lower expenses due mainly to the sale of the West Virginia utility assets and the energy projects. So overall, a good story on O&M, consistent with our long-term efforts. Next, let's look at the EPS waterfall on slide 13. Turning the left side of the waterfall with gap earnings per share of $1.86 from last year, the next thing we see is the nearly $0.22 increase from regulatory recoveries, $0.05 from other, which includes the approximately $0.25 gain on sale of assets and related transaction activities, plus weather normalization adjustment revenue offset by increased depreciation, interest, and taxes other than income, as well as lower income tax benefits then we see the three cent gain from water volume and nearly one and a half cents gained from water growth which were then offset slightly by higher expenses and lower gas volumes that gets us to the two dollars and 17 cents of gap eps for 2024. We thought it was important to clarify that the $2.17 includes 25 cents of gain on sale of assets, which includes the energy project and a true up for post acquisition activities on the previously closed West Virginia gas utility assets. And then if we normalize the weather impact of 5 cents of EPS for the year, we get to $1.97 of adjusted earnings per share, which is a non gap measure. And that $1.97 is our weather normalized results without the asset sale impact. That $1.97 is nicely in the original $1.96 to $2 guidance range for the year and above the current full year 2024 consensus of $1.95. Notably, the 5 cent weather impact incorporates both the positive impact of the dry summer and fall on our water segment sales and the larger unfavorable weather impact you may recall from the first half on our gas segment as you may be aware we're currently experiencing drought conditions in the mid-atlantic that we've not seen in about 20 years given our water supplies and the resiliency of our systems this is not having much of an effect on us now but we'll keep you posted as the year progresses next let's move to the slide on rate activity This slide highlights our regulatory activity during the past year and into 2025. We continue to manage our regulatory activity to maintain safe and reliable service, earn a fair return on capital that we invest, and minimize regulatory lag while always considering affordability for our customers. As you can see on the slide, 2024 was a significant year for regulatory activity. We completed rate cases or surcharges in many of the water states to raise annualized revenue by nearly $54 million. This included the late 2024 settlement in Illinois. And as we previously discussed in September, we completed the first rate case since the merger at Peoples Gas, which included a $93 million revenue increase and the weather norm adjustment we mentioned earlier. In total, we had annualized rate or surcharge increases of about $148 million in 2024, which I believe is the most significant year on record. Earlier this month, the PAPUC voted 5-0 to approve the settlement previously announced for the Aqua Pennsylvania rate case, increasing revenues by $73 million on an annualized basis. In total, so far in 2025, we've received rate cases or surcharges to increase annualized revenues by $86.5 million in the water business. Additionally, we have pending rate cases or surcharges totaling approximately $16 million across the company today, with the majority of that being an ongoing rate case in our Kentucky gas business. And later in 2025, we expect to file rate cases in Texas, North Carolina, Ohio, and Virginia. And as a reminder, we expect to file a people's rate case early next year. With that, I'll turn it back to Chris.