Good day, and welcome to the Essential Utilities Inc. Q3 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. Please go ahead, sir.

Thank you, Lauren. Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter Earnings Call. I am Brian Dingerdissen, Vice President and Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our Web site at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our Web site. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, 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 Web site. Here's our agenda for the call today. We will start with Chris Franklin, our Chairman and CEO, who will discuss the third quarter highlights and provide a company update. Next, Dan Schuller, our CFO, will discuss our financial results. Chris will then provide an update on our growth strategy, the municipal water and wastewater acquisition program and conclude the presentation portion before opening the call for questions. With that, I will turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Thanks for joining us. Let me start the call today with a thank you. Thank you to many of you who took the time to participate in our recent investor perception study. We conduct that survey about every other year, and it helps us provide us with another perspective, an overall perspective, if you will, from investors which then supplements what we hear from all of you and our amount of about 300-plus meetings with investors throughout each year. We really appreciate the strong confidence that you expressed in management and in the work we're doing in that survey and especially around municipal acquisitions. I do want to bring clarity though to one issue where there seems to be some ambiguity in the minds of at least a few investors about how we think about our work in natural gas. First, we're really proud of the work and the results our natural gas team is achieving. Our careful study of the market indicates that natural gas, especially in our key service area of Pittsburgh, Pennsylvania, will be an important part of the energy mix for probably decades to come. And in less than 15 years, we will be at least 60% of the way toward our aspirational goal of net zero emissions. So listen, we acknowledge the fact that natural gas utilities are currently achieving suboptimal trading multiples in the public markets. And this despite the very high private market multiples achieved in recent natural gas company transactions. But with these things in mind, I want to be really crystal clear. Growth through acquisition in natural gas is not in our strategy. Our strategy in natural gas is to replace the nearly 3,000 miles of gas main to improve safety, reliability and the environment…

Thanks, Chris, and good morning, everyone. Before I move into our results, knowing the question is likely coming, please keep in mind that we have insurance to help mitigate impacts of a storm event like Ida. And while not certain, we'll also seek to recover any storm related costs not covered by insurance. That said, however, the results we'll describe next include the revenue impact of voluntary conservation efforts and the increased expenses associated with Ida. Furthermore, we'd expect any major changes in the Pickering treatment plan configuration to be included in future capital plans. Let's start with the third quarter financial highlights. We ended the third quarter with revenues of $361.9 million, up about 3.8% from last year. Our regulated water segment contributed $259.9 million and our regulated natural gas segment contributed $94.8 million. O&M expenses increased 2.3% to $139.4 million in the third quarter, up from $136.2 million in the third quarter of last year. Net income was down year-over-year from $55.7 million to $50.5 million and GAAP earnings per share decreased from $0.22 to $0.19. Next, we'll walk through the waterfall slides, starting with revenue. As we walk through the $13.2 million revenue increase in the third quarter of 2021, you'll notice the main drivers were purchased gas, adding $8.7 million and rates and surcharges contributing $8.2 million. Q3 2020 rate credit growth from our regulated water segment and other provided an additional $6.9 million towards the revenue increase. These revenue increases were offset by decreased volume resulting in $9.6 million decline in our water segment and an approximately $1 million reduction in our gas segment. As a result of the weather conditions, the return to post COVID normalcy and Ida related conservation in Pennsylvania, we experienced water consumption reduction in seven of our eight water states.…

Great. Thanks, Dan. Let's talk a little bit about our status of municipal transactions. And you can see on this slide that during the quarter, we announced the closing of the Village of Bourbon A. This wastewater system serves about 6,500 customers in Kankakee County, Illinois. And then in October, we announced the signing of an asset purchase agreement with Beaver Falls, and this was a wastewater system in the Pittsburgh area, which serves about 7,600 customer equivalents. And this one is important because it gives us a water foothold in Western Pennsylvania in addition to our already strong gas platform in that same area. So it's an important one for us. Now as of this call, we've signed seven asset purchase agreements and they're all pending, which will add over 234,000 customers or customer equivalents and a total of $468 million in purchase price. These seven pending transactions, plus the two closed transactions, will add over 241,000 customers or customer equivalents, again, and a total of over $500 million in combined purchase price. We remain confident that we will close the DELCORA transaction, the litigation with Delaware County regarding the enforceability of our asset purchase agreement with DELCORA was heard by a three judge panel in Pennsylvania, the Commonwealth Court, back on October 18th of this year, just a couple of weeks ago. And a decision is expected in the first half of next year. We're also still hopeful that we can reach a settlement with the county, which would help accelerate the closing of this transaction. I'm sure I'll answer questions when you have them in a few moments. In addition to the signed municipal transactions we just discussed, our pipeline of municipal opportunities remained healthy and strong. Key contributors to the strength of our pipeline include fair…

We'll take our first question from Insoo Kim with Goldman Sachs.

First question related to Ida, could you just tell us what the total costs associated with that was in terms of maybe capital and operating expense. And did any of the operating costs get deferred at all or what we're seeing in the results all reflecting the OpEx?

And so let me just walk through this. In terms of expense, the expenses and they are reflected in the results are $2.1 million, and we don't expect to have trailing expenses into the fourth quarter from Ida. In terms of capital so far, about $1.7 million. Now capital, there will be future capital associated with that Pickering plant that Chris talked about earlier. And then the conservation related consumption there, we estimate that to be about $2 million, but that's hard to pin down exactly

And Insoo, it's important to note that, as Dan kind of alluded to, we have some questions to answer for ourselves at that plant and follow on capital. One, obviously, we need to get the plant to a point where it produces the level of quality water that it did before. It's producing quality water but we need to continue to increase its capacity. But the question is, do we rebuild on site hire walls and waterproof doors, all that sort of thing, or do we move some of these things to higher ground on that same property, which could obviously be increased cost -- capital cost. So those are things that we're still wrestling with and I think that's what Dan is alluding to in terms of how we think about future capital.

And just to address the other part of your question there, Insoo. As I noted earlier in the kind of prepared remarks, we will seek insurance recovery and we'll also seek recovery from -- through the regular regulatory process for those expenses that I mentioned.

Maybe just as a follow-up to this one, in terms of the treatment plans that were affected. Are they all fully functioning? So when we think about just operating costs going forward and delivering the treated water, we're kind of back to normal versus maybe in the next quarter or two still having to utilize the other plants that could maybe increase the cost profile a little bit?

I would say, for all intents and purposes, it's back to normal. We do have what we call clear well, this is where the finished water sits that was collapsed under that. So we can't store as much finished water there but the plants themselves are operating well. We have some tweaks yet to do. But I would not expect the current situation to result in added expense.

My last question is on your growth rate. You reiterated the 5% to 7%. Correct me if I'm wrong, but I think when we had prior discussions, when we just think about the longer term, maybe beyond that '21 to '23 period. I think you've mentioned that there could be potential incremental upside opportunities on a longer term basis. So as we look forward to conclude this year and look at a new multiyear growth rate. Any latest thoughts on achieving maybe something more robust given the potential outcomes in the PA rate case or DELCORA timing among others.

I think I'll reserve comment as we give next year's guidance. We typically haven't gone out beyond that three year window we provided. So why don't we chat about that when we come to our guidance call.

Is that going to be early next year as typical, sometime in the January period?

It will be early next year, it could be January -- January, February time frame. Yes, we haven't locked down exactly the date. We also want to take a look at what's happening with some of the growth projects we're working on so that we align that timing when we can maybe have some good news.

Next question comes from Ryan Greenwald with Bank of America.

Maybe to start, it seems like the EPA is taking a bit more active role just in terms of PFAS and emerging contaminants with the road map that they recently announced. Any initial thoughts around how this is going to impact the municipal pipeline and acquisition opportunities?

I think generally and a lot of the specifics are yet to come from the EPA, but especially as we talk about maximum contaminant levels and that sort of thing. I think we are generally of the opinion that the more stringent it becomes, the more difficult it is for smaller or midsized utilities who don't have our level of expertise to meet those compliance levels. And so it should put more utilities in a position where they're struggling and they're looking for solutions like we can bring. So again, generally, given there's no -- not a whole lot of specifics out there yet, I would say it would help in our municipal acquisition program.

And then maybe on a similar note, just in terms of the infrastructure bill and the latest from the house here around reconciliation. Any updated thoughts in terms of how you guys are thinking about potential impact there?

Well, the way we think about this, in the scheme of the needs in water and wastewater across the country infrastructure that is, even though it seems like it's a decent size. When you consider the needs, particularly in larger cities and some of the needs around storm water, it's a drop in the bucket and we don't see it as an impact to our growth plans. We hope that if we have access or the utilities have access to low-cost money or no cost money, we would actively look at that as well to keep rates down for our customers. But generally, we don't see it having an impact on our acquisition program.

And then maybe just one more, if I may. In terms of the competitive landscape, NextEra was pretty vocal around kind of expanded water efforts here with their latest update. Anything in terms of what you guys are seeing as you go into the bids here in terms of changes to how competitive it is out there any states in particular where you're seeing more competition in tuck in pursuits?

Well, we have seen NextEra in a couple of situations in Pennsylvania and in Texas. Certainly, we've seen their comments in the market. And frankly, we've been fairly welcoming to the electric utilities as they come into our space and bring more cloud to regulated water. And so listen, as we think about this privatization trend, the more that that occurs successfully, the better it is. We think about this as a pretty big market. We've certainly been successful in our market share and we think we can continue to do that. As electrics enter the business, they've got to build their water expertise. So I think the offerings -- and remember that despite their large customer base, existing customer base and rate base, they can't spread their water costs on their electric customers. So they've still got to confine any rate increases for acquisitions on those customers they have. So we bring, I think, a pretty competitive position in any time we're competing with electrics or those new entries to the market, given our size, our scale, our capabilities. So not too worried about it.

Our next question comes from Travis Miller with Morningstar.

I was wondering as you look at perhaps your regulatory team, any other states you're seeing or even federal but stick to the states where fair market value legislation or regulation is working its way through various sales of government?

I mean, I know it's taken -- we haven't in all of our states where we do business now. And so where some form of it, right, it's not always called fair market value. So we're really comfortable in the states where we are. I can't tell you exactly where outside of our footprint it may be moving through, but it seems to be taking hold in a lot of different places beyond our states as well.

And then when you think about the capacity you guys have internally for doing acquisitions, water acquisitions. Are you at -- give me a sense for how much capacity you have to do those acquisitions? When you think about -- currently, you talked about $500 million or so of rate base, even if you take out DELCORA somewhere in the 250 or so pending deals. Can you go much above that just in terms of executing and closing the deals, soliciting more deals, stuff like that?

Yes, I think we can and here's why. We have a combination of things we use for our workforce in the various states. So we have a state president and a state business development person in every state. Both of whom have responsibility for growth. And then we supplement that with others, both inside the business and outside the business to help us accelerate growth. And those could be consultant. They could be former political people, that sort of thing that help us with these municipal acquisitions. A lot of these acquisitions take a lot of time, as you know. I mean, I know there's frustration around how long it's taken with DELCORA, in particular. But given the amount of time they take in terms of getting to APA and sometimes ultimately getting to closing, there's time to fill in around the edges to keep a lot of them in the air. And then in addition to those state teams I described, you’ve all met Matt Rhodes, Matt and his team here at headquarters, which helped facilitate that as well. And then now we've plugged some people out in our Western area at Peoples, who are notable people in that region to help us with some of the water projects as well. So I think we have deep capabilities to continue to build our municipal program.

Our next question comes from Ryan Connors with Boenning & Scattergood.

So a couple of big picture questions. First, I wanted to go back to the talk you had there with your first question regarding Ida. And Chris, you mentioned still sort of formulating your thoughts about whether to build back in kind or to build back with a more robust flood proofing. And obviously, a lot of that will be dictated by what the commission thinks about rate recovery and things like that. So is there any early read or color? Obviously, you probably had some some discussions in formal and otherwise. Any idea how they're looking at things like that in terms of cost benefit, would they rather you spend the rate base and build against that rare flood or would they just say, what you guys seem to handle it pretty quick, got it back up and running pretty quick, let's just let it ride. What's their thinking?

I thought for a second there, you're going to ask me if I was going to build back better, Ryan -- you stayed away from that. Yes, I think you raised an important question and one that one that we're spending a lot of time on. So what we've done is we said, okay, what's the probability that a storm of this magnitude would hit our plant and then what are the various improvements we could make to the plant. It's almost like I'll use a slang term here, a submarine door, right, on our doors to the plant. What could we do to reinforce that plant so that it wouldn't take on water at the same level again. And then we're saying, okay, let's think about the probability of a storm like that and then the reinforcement we could do to keep it from getting the level of damage it did this time versus moving at least aspects of that plant to higher ground. We have a pretty good size property there, and then what are those costs, and then how do we think about that from a timing standpoint? In other words, could they be spread out over a period of years and therefore, cost impact be mitigated to customers? So the questions you raised are good ones that we are grappling with ourselves. I don't have final solutions. But rest assured that, that will be a conversation with the regulators as well to make sure that we're all aligned and whatever we do, we get the proper regulatory treatment.

So still up in the air. Now I wanted to actually probe your initial comment I thought was interesting in your prepared remarks about your Investor Relations survey and the comments you made about gas and M&A. I mean what scenario, if any, could you envision yourself diverging from that intention not to pursue M&A in gas? For example, the PUC in Pennsylvania, or Kentucky, or West Virgin, you were to tap you on the shoulder and say, look, we have a troubled asset here. Can you help us out? Those types of situations. Is there any situation where you could envision yourself being receptive to something like that or is it just sort of real black and white on that?

Yes, I think it's real black and white, Ryan, at this point. I just think as a public company and looking at the current multiples, it's just difficult to see a path where you'd want to add additional natural gas. That's not to say that we in any way are thinking less of our gas utility contribution. I mean, listen, this is a utility that the acquisition went well. It's exceeding all of our expectations and our targets we set for ourselves; safety, financial contribution, capital plan. It's exceeding all of our targets very, very nicely. And so it's a great addition to our company and operating extremely well, but hard to say that it would be good sense to add to that today. And so we are entirely focused on growing the water utility. And then our -- keen focus of our management team in Pittsburgh and on the gas utility is focused on the things I talked about replacing that pipe, making it more secure, safe, reliable and environmentally sound. And so I think it's a solid strategy at this point on the gas side. But it's solely focused on the capital program and those aspects I just mentioned, we're not going to grow in gas through acquisition.

And then my last one quickly. You've been a good source of keeping us up to date on the Pennsylvania sort of the soap opera with the commission and the vacancies there, and some of the gamesmanship with the governor around appointments and things like that. Can you just give us the latest on where that stands with the commissioner’s situation in Pennsylvania?

Yes, and I guess the easiest way to say this is no change. So the commission remains at three members: two Republicans and one Democrat despite the fact that the governor is a Democrat. So the Chairman appointed by the governor is the only Democrat on the commission. And then we would not expect, given the governor's continued strong position on the regional greenhouse gas initiative, RGGI. And the Senate -- the State Senate’s opposition to his position, frankly, that he could enter that position without their approval or consent. So the Senate is not going to move on his appointments. And so we don't see any change in that unless the governor were to change his policy, the Senate says they're going to hold firm. So it could go through the whole year next year with the commission remaining in much of the status that it is today.

And our next question comes from Jonathan Reeder with Wells Fargo.

Most of my questions have been answered, I got two left for you though. Any word from the Pennsylvania Supreme Court regarding whether it's going to take up the appeal of the lower cords order by the CWA?

No word from the Supreme Court yet. It could take them a few months to give an answer on that, whether they decide to take it up or not.

So it still could be a few months before we even hear if you're taking it up. And then if they do, you have another, what is it, is it nine months to a year for an order or…

I mean I think that's a fair estimate, hopefully not that long, but I think it would be fair to say it could be that long.

And then I know you mentioned Chester City counsel voted to move forward and signed the APA and they add the [receiver] to give his blessing to it. What's kind of the process and time line for the receiver to act?

There's not a public time line for the receiver at this point. I think that's one of the things that the city is pressing for today -- the receiver has some important work to do. Obviously, balancing the city's finances. But in the meantime, it is literally running out of money on the pensions. They're almost out of cash. And so it's very difficult to not do anything. So there are some impending, let's just say, burning platforms that need to be addressed. So while the city is pressing the receiver, its next step would probably be to go to the Commonwealth Court that oversees the receiver and ask for the receiver or the court for a defined time line. We understand that that's where they may go but that's entirely up to the city and in terms of the next step.

No, I thought I had read something about that pension issue and yes, they were just kind of a few months left. So I guess it would be your expectation that you could at least get something from the receiver prior to that, and then your bid has that upfront payment and that allows kind of Chester to stay afloat.

Yes, that's exactly right.

Our next question comes from Verity Mitchell with HSBC.

I've got a question. I'm very interested in your opening remarks about RSG and capture from wastewater treatment plants. Just quite a simple question, I'm sure you'd like to unpack it a bit. Is that -- would that be something that would be added to rate base if it was initiated? I mean, how do you recover the investment on capturing RSG from waterwall treatment plants?

I'm not sure we've fully come to terms with whether that's rate base or not. And I guess as you think about Verity, let's step back one step first. Most of our plants, and we have over 200 wastewater plants in the fleet now, most of our plants are too small to consider an operation like this. So as we acquire a larger plant or as we build them, i.e., DELCORA would be -- maybe an example, are there opportunities to then create some energy. And I think when it comes down to whether it would be rate base or not, a lot of that question comes to what is the impact ultimately to the rate payer. And so as we think about -- there's a lot of moving parts to this, do we keep or sell any credits that we might gain and obviously, keeping the credit is good for our ESG. Selling the credit might be good for customers. And I'm getting a little bit ahead of myself here because we don't even have a project like this yet. These are the things we're strongly considering as we start to acquire larger and larger facilities. But I think the end of the story is probably more to come on this. And Dan, I don't know if you have anything you want to comment in addition.

No, not really. I mean you can -- what we've seen in the past in certain situations, if someone has an NRO with digester and they generate RSG or are achieving their own wastewater treatment plant, they would use that on site, potentially, that could be included in rate base. But there have been an offset in expense because there would be less in terms of purchased energy that would go to the customer. So that's another way to think about it. And sort of the next is here between the water wastewater business and the gas business, how that RSG is used or RNG is used, still to be determined here. But as Chris said, Verity, I think more to come on this one from us.

And we have no further questions at this time. I'd like to turn the conference back to Chris Franklin for any additional or closing remarks.

Thank you, Lauren, and thank you all for joining us today. Obviously, Dan, Brian, myself, are all available for follow-up questions if you have them. Thanks for joining us, and have a great day.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.