Essential Utilities, Inc.

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the essential Q2 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for the second quarter 2025 earnings call. If you did not receive a copy of the press release, you can find it by visiting our website. The slides are also found on the 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, references may be made to certain non-GAAP financial measures Reconciliation of any non-gap-to-gap financial measures is posted on our website. We will begin the call with Chris Franklin, our chairman and CEO, who will provide an update on the company. Then Colleen Arnold, the president of our aqua business, will provide an update on the water business. Dan Shuler, our chief financial officer, will then provide an overview of the financial results before Chris closes the call and opens it up for questions. With that, I will turn the call over to Chris Franklin.

Hey, thanks, Brian. Good morning, everyone. Let's just jump right in on slide five there with some highlights from the quarter. We delivered another strong quarter reporting gap earnings per share of 38 cents. That's a 35% increase over the same quarter last year. Both our water and gas businesses performed very well and in line with our expectations. And simply put, both divisions are firing on all cylinders. Our gas business continued its impressive trajectory with net income for the quarter of 17 and a half million dollars i'm not going to steal any thunder from colleen she's going to share a little bit more about the water business in a few minutes but as you come to expect we are executing nearly flawlessly in both our water and our natural gas segments based on our strong year-to-date performance we expect to achieve gap earnings per share above our guidance range of two dollars and seven cents to two dollars and eleven cents largely due to several non-recurring benefits. We're also reaffirming our capital investment plans with a target of approximately $1.4 billion in infrastructure investment for 2025. As of June 30th, we've already deployed $613 million in critical infrastructure improvements across our footprint. Now let me take a moment to highlight some exciting developments happening in our home state of Pennsylvania. Earlier this month, we participated in the Pennsylvania Energy and Innovation Summit, which was hosted by our new United States Senator, Dave McCormick. Energy leaders from around the country gathered to share thoughts, breakthroughs in energy and technology. And our Gas Division President, Mike Huer, showcased our ongoing hydrogen pilot project. This is a cutting-edge technology developed in partnership with HQuest, and the University of Pittsburgh. Now, the comparatively low price of energy in Pennsylvania makes it such a logical choice for hyperscalers looking to locate data centers. And we continue to have active discussions with some of those hyperscalers as we speak. Now moving from Pennsylvania to Texas, we serve customers in the Kerrville area of Texas. You'll recall the terrible flood that took place just several weeks ago. Fortunately, All of our employees and their families made it through the storm. One of our employees and his family had nine feet of water in their home and had some absolutely harrowing moments. But thank God, they're healing from their injuries and working to reestablish their home. During the height of the event, we had some customer outages, but restored service to most customers within 24 hours and all customers within 48 hours. A really exemplary job done by our Texas team. Speaking of employees, last month we wrapped up our most recent employee engagement survey under the theme Better Together. And I know employee engagement is becoming a common topic for investors. Now, our results reflected the impact of our focused efforts to enhance our work environment. In fact, participation in the survey increased 23%, which was fantastic. Satisfaction scores rose by 6%, and on average, survey scores improved by seven points. These results reflect our continued focus on creating an engaging, inclusive, and supportive workplace. Each year, we take great pride in reminding shareholders that for more than 30 years in a row, we've increased our dividend. And as an expression of continued confidence, Yesterday, the Board of Directors approved a 5.25% increase in the dividend. We remain committed to delivering long-term shareholder value through dividends and share price appreciation. So let's take a look at slide six. I want to touch on a couple of community engagement issues. In April, we successfully concluded our fourth annual Essential Earth Day. And this is a 30-day campaign dedicated to environmental stewardship and community engagement. The slide showcases our efforts in recent years, which include volunteer events, environmental programs, and a significant investment from our essential foundation. As a recognition for our community engagement and leadership, we were recently honored as one of Greater Philadelphia's most community-minded businesses. This is a recognition that we really appreciate and take to heart. modeled after the Points of Light National Program, the award recognizes companies that set the standard for civic engagement through using their time, talent, and resources. This commitment to community engagement is something we do in all of our states where we have businesses. And finally, on a personal note, I am thrilled and honored to be named the Chairman-Elect of the Philadelphia Chamber of Commerce. I look forward to partnering with leaders from around the region to promote economic growth and regional priorities, which hopefully end up with more utility customers. Moving to slide seven, let's talk about the shareholder value. We continue to deliver steady, reliable growth in earnings and dividends. 2025 is shaping up to be another strong year with core earnings per share expected to grow this year between 5% and 7%. Most of this growth is driven by investments in water and natural gas infrastructure. Of note, since we started providing annual guidance back in 2016, we have consistently met or exceeded market expectations. This consistency has enabled strong dividend growth underpinned by the outstanding execution of our operations team and their commitment to communities we serve. I have to tell you, I continue to be impressed by what our team has achieved, and I'm honored to continue to be steward of this great company with its 140-year history. Today, I want to continue the tradition of spotlighting our business segment leaders. Last quarter, you heard from Mike Huard, president of our natural gas division, and today we welcome Colleen Arnold, president of our water division. We'll share some thoughts on our water business.

Thanks, Chris. I'm happy to be here today and especially appreciate the opportunity to highlight the important work that the team at ACWA is doing. As a reminder for our investors, ACWA, as Chris just mentioned, has a strong 140-year history and has grown from a small water company in suburban Philadelphia to serving more than a million customers with over $7 billion of weight base in eight states. As shown on slide 9, we are expecting annual rate-based growth of 6% through 2029, not including acquisitions. And the need for infrastructure investment has never been greater. The DPA estimating $1 trillion of need in water and wastewater infrastructure. That growth rate could easily grow with acquisitions. Now, I've worked in the water industry for over 30 years. including as a consultant for municipalities and for a large city itself. Between the increasing complexity of PFAS, cybersecurity, wastewater, and declining funding, the conditions have never been more opportune. Now, highlighting our operational excellence on slide 10, as you see on the left, our O&M efficiency performs in the top quartile and has done so for over a decade. We take pride in ensuring that we are spending our customers' dollars efficiently. But equally important is that it is not at the expense of safe, reliable service. The top right-hand side chart shows that we outperform water systems nationally with five to nine times fewer health-based and aesthetic violations. The bottom chart also shows our strong safety record, the top quartile performance Also, as we move to slide 11, we are tremendously proud of our industry-leading PFAS commitment. We have been working on this for our customers since 2016, well before the EPA and state MCLs, because it was the right thing to do for our customers. Our laboratory in Pennsylvania was one of the first certified, and we sampled all of our sources proactively. enabling us to be where we are today. At this point, we have over 50 of our 300-plus sites mitigated and approximately another 50 under construction. This level of execution was made possible by the ingenuity of our engineering team, who designed a proprietary modular system with applicability for groundwater systems. We've recently signed a distribution agreement with Chartwater to sell this patent-pending solution called PFAS Guard to community water systems. It is generating a lot of interest. While we expect increased regulation to enhance acquisition opportunities, municipal systems, speaking from my experience having worked with one, are slow to meet regulatory requirements, and many are just beginning to do the initial monitoring for PFAS now. The extension of regulatory deadlines may enable them to delay longer. However, we remain optimistic that as the monitoring results come in, with our strong leadership, proven track record, and partnerships, this will be a strong avenue for acquisition growth. Lastly, speaking of growth, I wanted to spend a little bit of time on Aqua Texas, where we have grown by nearly 25,000 connections to over 100,000 connections over the last 10 years and currently have another 90,000 under contract or negotiation. This is in line with the impressive growth the state has seen with 16% population increase and corresponding 30% GDP growth or economic expansion. Our three core operational areas outside Spring, Austin, and Fort Worth, Texas grew from 20% to 40%. Most notably, Austin Metro, our area of highest developer growth through 40%. Based on customer growth and infrastructure needs, we expect to nearly double repeat the $1.1 billion in Texas by year end 2029. And now would be a good time to mention that we recently led, with the Texas Association of Water Companies, passage of future test year legislation. This will enable us to recover that capital investment and minimize regulatory lag. I would like to thank our amazing employees who really made that possible. We are excited for our future in Texas. And with that, I will turn it to Dan for a review of the financials.

Thanks, Colleen. Let's begin on slide 15 with a high-level view of the first quarter results, and then we'll get into the details on the waterfalls. Our quarterly performance was strong, with revenues up 18.5%, due primarily to favorable rate case outcomes in Pennsylvania, both for our gas and water subsidiaries, higher purchase gas costs, and increased gas volume. Corresponding earnings per share are up 35.7% on a year-over-year basis due to those drivers, partially offset by higher O&M depreciation interests and taxes. On slide 16, we have the revenue waterfall for the first quarter. Revenue has increased $80.5 million from $434.4 million a year ago to $514.9 million this year. Approximately $44 million of that increase is a result of rates and surcharges, with $31 million of that attributed to water and $13 million from natural gas. Purchased gas, which represents the cost of the gas sold by the company, increased $23 million year-over-year due to an increase in gas commodity prices and higher natural gas usage. The other category of $9.8 million includes $4.6 million in weather normalization and $4.1 million in reduced tax-referred store credits to customers as a result of last year's people's rate order. Increased gas volumes provided $4.3 million in increased revenue, while growth in the water business contributed $2.1 million. These were offset by $2.6 million from lower water volumes. Due to wet weather, we saw decreased consumption in a number of our states. Next, on slide 17, our O&M slide, we see O&M expenses up about $6 million, or 4.2% year over year. The main drivers include an increase in employee-related costs of $6.1 million compared to prior period, an increase in bad debt expense of $2.2 million, and increases in legal expenses, partially offset by favorability and other expenses, primarily as a result of capitalization. The increase in employee-related costs includes about $650,000 of increased insurance reserves as we move the people's employees from a fully insured health plan to a self-insured health plan. If we normalize out the growth, the universal services rider increase, and the higher-than-normal employee expenses, such as the insurance reserve, we get to a year-over-year increase of less than 3%, which is in line with our historic norms. On slide 18, our earnings slide, we can see the previously mentioned effect, an 11-cent positive impact from rates and surcharges, a one-cent increase due to higher natural gas volume, and a two-cent negative impact due to lower water volume and increased expenses. Then turning to slide 19, as you remember, this is the slide we introduced last quarter that provides more insight into how our annual EPS breaks out by quarter. We've now added the two quarters as reported, with both at the high end of the shaded ranges. For the third quarter of 2025, we expect our EPS to be between 10% and 20% of our annual guidance. We expect our fourth quarter to be between 20% and 30% of our yearly guidance. We have some non-recurring items this year that benefit earnings. So on a normalized basis, we continue to target $2.07 to $2.11. And as Chris mentioned, we currently expect GAAP EPS to exceed $2.11. Lastly, let's move to slide 20 to provide an update on regulatory activity. On July 1st, 2025, our natural gas operating subsidiary in Kentucky received an order from the Kentucky Public Service Commission. This order approved the settlement agreement that allows base rate increases designed to increase total annual operating revenues by $7.7 million, or 11.2%. New rates in Kentucky went into effect on July 1st. We currently have three pending rate cases or surcharges in North Carolina, which is a three-year forward-looking rate case, Ohio, Texas, and Virginia, with requested annual revenue increases of $96.6 million. So it's a busy year on the regulatory front. We continue to manage our regulatory activity to maintain safe and reliable service, earn an appropriate return on the capital that we invest, and minimize regulatory lag. while always considering affordability for our customers. Before I conclude, we wanted to take a moment to recognize Bob Rubin. Bob's been with the company for 36 years, and he's been our chief accounting officer for 20 years. During this time, Bob's had ultimate responsibility for our financials and SEC filings, and he's played a critical role in our earnings call prep. Thanks for your contributions to the company, Bob, and for your friendship. You will be missed. Fortunately, Over the past few quarters, Bob has worked to transition his role to Brad Palmer, our new chief accounting officer, so we won't miss a beat. Welcome to that new role, Brad. And with that, I'll turn it back over to Chris. Chris?

All right. Thanks, Dan. Now, let's move to slide 23, where we touch on our long-term growth acquisition strategy that, for many years, and really continues to be, focused on growing our water and wastewater business. Last week, we finalized our $37.75 million purchase of the City of Beaver Falls wastewater system in Beaver County, Pennsylvania, serving about 7,000 customers. That's out near Pittsburgh. We plan to invest $10 million in the system, focused primarily on improving both operational efficiency and environmental compliance. We're very excited to welcome our new customers and bring their system up to our standards. Now, for 2025, in total, the company has acquired systems which serve approximately 10,300 customers for approximately $58 million. We also have another four signed purchase agreements for relatively small systems in Pennsylvania and Texas. I'll remind you. that progress on Del Cora continues to be stalled by a stay put in place by a federal bankruptcy court judge related to the bankruptcy of the City of Chester. Now, there is really nothing new to report on Del Cora, but I'll remind you that Del Cora is not included in our current guidance numbers. Now, turning to slide 24, I'll close by reiterating some of our goals and aspirations, both short-term and long-term. We continue to see strong growth potential in both our water and gas platforms and expect our combined utility rate base to grow at a compounded annual growth rate of about 8%. Breaking this down a little further, the regulated water segment is expected to grow about 6%, and our regulated natural gas segment rate base will grow about 11%. We are reaffirming our 5% to 7% multi-year earnings per share guidance through 2027. This includes acquisitions expected to close in 2025 and 2026, but as we've said before, excludes Delcoura. This projection includes the crucial work that we're doing to remediate PFAS across our water platform, as well as our work to replace aging water and natural gas pipes. We remain committed to maintaining a strong balance sheet improving our cash flow and debt metrics, and delivering consistent dividend growth while keeping our payout ratio between 60 and 65%. All in all, we see a bright future for our company as we continue to invest in our nation's infrastructure and continue to deliver long-term value to our shareholders. And with that, I'm going to conclude the formal remarks for today, and we'll open it up for questions. Let me send it back to you, Operator.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And our first question comes from the line of Julian Dumoulin-Smith with Jefferies. Your line is open.

Hey, good morning, team. Hey, good to chat with you guys. Happy Friday. Maybe actually just to break it down, a bit of a nuanced question, but it has implications here. You guys provide this timing to the year in terms of quarterly earnings. If you take the midpoints from those and kind of look at what's implied, Kind of implies maybe high-end or better if you look at implied third quarter and fourth quarter here. Again, I don't mean to nitpick too much, but if you have any comments there, I'd love to kind of read between the lines there if there's anything you'd say.

Yeah, for sure. Yeah, so what we had said, you know, what we said on the call here, both Chris made the point and I did as well, that we're going to come out on a gap basis above our guidance range, so above that $2.00. Is that Julian? Yeah, yeah. Yeah, no, no, no. All of a sudden, we had some strange music going on. So, you know, let me give you a little bit of detail there. So as I said, we're going to come out above the GAAP guidance range. We had strong revenue in gas this winter with more gas usage than weather alone would have predicted. And then this year as well, we benefited from some tax items. and the reversal of a regulatory reserve as a result of the Pennsylvania rate order. We had some insurance proceeds as well. Those are on the positive side. We've also had some headwinds this year. We've had a wet summer in several of our states, which has impacted us in Q2. It's currently continuing to impact us in the early part of the third quarter. Interest rates, of course, remain higher than expected. Inflation is still impacting some areas like chemicals, And we're still in the investing stage on our lean initiative. And of course, you know, it's still early in the year relative to the gas business. We've had one half, you know, we've had half of last year's heating season. We still have November and December to go this year. So things can still move around. And thus, you know, we're not being overly specific on where we'll land, but we're saying on a gap basis, it'll be above the guidance range.

Yeah, got it. Thank you very much. Just wanted to elaborate a little bit there. And then just on the cash flow front, I mean, just, you know, where are you trending on FFO through the year here? And then specifically within that, how are you thinking about PFAS here and some of the tail points from the settlements here and the timing for the collection of those, if you will?

Yeah, so you'll see – let me touch on those in pieces. Okay. Our focus really for this year is to be above that 12% downgrade threshold. Ideally, you know, put some distance in there, call it like a 12.2% target area. Because we've obviously been in close conversations with Moody's and we'd like to see that negative outlook removed in early 2026 once they see full year 2025 results. And then in terms of PFAS settlement dollars coming in and being helpful from a cash perspective, You'll see when we file the queue on Monday next week, you'll see that we received just about $7.1 million in PFAS proceeds from those lawsuits already. And we expect a number this year that's kind of in the $45, $46 million range in total.

Got it. All right. Excellent. Thank you. Appreciate that. You know what? I'll leave it there. I'll let others have questions. But thank you, and nice to be done. Good luck in Texas here.

Thanks, Julian.

Our next question comes from the line of Ryan Connors with North Coast Research. Your line is open.

Hey, Ryan.

Good morning.

Good morning, Ryan.

So a couple big picture questions on Pennsylvania and then a housekeeping for you, Dan. Sure. So I know you're out of rates in Pennsylvania at the moment, but obviously we have the new consumer advocate there. And I assume your team watches other matters going on really closely. So curious whether you've gotten able to get any feel for the approach that he's going to take and how that will differ from the prior consumer advocate. And then secondly, I've been hearing some chatter about the office's small business advocate being tougher to get to the settlement table on various matters and maybe being the next fly in the ointment, if you will. So I wonder if you have any perspective on that as well.

Yeah, listen, I think our engagement with Daryl Lawrence and the OCA has been very positive, and I would expect that Daryl and his team will continue to do their job as advocates for the customers and, you know, will do our job. But I do think that there is maybe an enhanced desire in that group to figure things out, you know, put this puzzle together in a way that's constructive and that all parties feel like they've come out of it with a – a win if you will or at least not with a loss and so i i do expect a more constructive relationship there at the oca that's been our observation so far you know listen uh the small business advocate she has a role as well and and uh you know these are statutory parties and they've got uh they've got their priorities i would say this um the advocate has been very open to conversation. She's visited us here at the company in Bryn Mawr, and she has been open to conversation on all the topics. So listen, I'm hopeful that we can have constructive relationships with all the advocates, and that's been our experience so far.

Great. That's very helpful, Culler. Thank you, Chris. And then secondly, on the fair market value front, I've been hearing that there are some municipal sellers out there holding out for a price above the reasonable review ratio that was set in the reform to FMV in Pennsylvania. And I guess the reasoning is that the PUC does have the ability to approve something above that level on a case-by-case basis. Is that something you've seen? And would you be willing to go take that risk over the cap, or would you just be staying kind of at or below the RRR?

Yeah, you know, I can't say that we've seen that yet, but I will say that on occasion, we might pay more than the RRR if we thought that, for example, there was huge rate-based growth and we could grow into it. I'd like to think that the RRR is a target for both seller and buyer, given the impact on rates, right? And I think that was the chairman and the commission's primary goal here was to minimize impact on rates from transactions. And we're big believers that that's important. And so I'm not saying it would never happen, but we'd like to see both buyer and seller be closer to that RRR than above it.

Got it. Okay. Very helpful. And then, Dan, yeah, just on the tax rate, it really continues to kind of jump around, and at least for us, we found it very difficult to model. So any perspective you can give us on how we should think about the landing zone there, not only for the balance of 25, but even into next year? What's your advice here on trying to model that tax line? Because it really seems to be kind of a random spin.

Yeah, so the way I think about that is the full of 2025 think of a low single digit benefit and then for the whole of 2026 at this point of course we haven't finished our budget plan but i think of that as a low single digit expense so think of a crossover you know from at year end from small benefits this year to small expense next year got it that's exactly what we were looking for thank you very much thanks guys Yeah, for sure, Hugh.

And again, if you would like to ask a question, press star then the number one on your telephone keypad. And we have a question comes from the line of Davis Sunderland with Beard. Your line is open.

Hey, Davis. Good morning, Davis. Good morning, Chris. Good morning, Dave. Good morning, Colleen. Thank you for the time. Happy Friday. Two questions from me. Maybe first, just jumping back, Chris, to your comments about the hyperscalers and obviously a lot of activity going on in Pennsylvania right now. Could you maybe just talk a bit more about the potential opportunity here and specifically the timeline for ultimately folding some of these into rate base? I just, I guess I'm trying to square the stable customer count through 27 makes me think maybe beyond that would be the opportunity, but just wanted to clarify some of the thoughts there. And then I have one more.

Yeah, I think, listen, most of the hyperscalers that are talking are talking about really short-term turnaround. They want to build and get in service. And as I said, I think Pennsylvania is a prime location for that, particularly western Pennsylvania, where there is low-cost energy. I have to be careful in what I say. There are some NDAs in place, and I can't really talk much about the opportunities we're engaged with right now. But I will say, quick turnaround, and I would also just maybe position it to think about, as you think about these things, maybe not all rate-based or all regulated, but some unregulated opportunities as well.

That is super helpful. Thank you for that. And then maybe second one. Colleen, I appreciate the comments on PFAS, and thank you for that. Maybe just wanted to ask about this potential EPA push out and the rule may be coming out later this fall. I would assume no change to how you guys were thinking about it and plowing ahead with the upgrades, but maybe just more about what you're thinking munis might do. Is this any change in maybe the acquisition pipeline if there's maybe a push out in some opportunities related to that or or any thoughts? Thanks guys.

Yeah, thanks for the question and as I said in my comments, there's no change to our program at all. You know we're full steam ahead. I do think really in terms of the acquisition and the growth opportunities, there's no change there either. Most municipalities. You know, are going to wait till the last possible minute. They're just starting monitoring and so they'll just give them a little bit more time to keep their head in the sand. But the opportunities are going to be there. And like I said, with our position, the amount of experience we have with systems operating well, we're going to be really well positioned to help them.

And Colleen, as you think about it, yeah, they might have a couple more years to comply, but given the fact that we have a resource, a solution, maybe we can help accelerate some of those solutions with our filtration system. And who knows, maybe that starts some conversation, which would be great.

Yes, and when I was at the American Water Works, annual conference this year, you know, generating a lot of interest, a lot coming up to me, the engineers coming up to me, asking about it, and as they, like I said, get their heads out of the sand and know they have to comply, I know our solution is going to be a great fit.

This is great. Thank you both. Appreciate the time, guys.

Take care. That concludes the question and answer session. I would like to turn the call back over to Chris Franklin for closing remarks.

Thanks, folks. Appreciate you joining us today. As always, the team is ready to answer questions or follow-ups if you have them. Thanks so much. Have a great weekend.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.