Hello and welcome to Essential Utilities Q3 2022 Earnings Call. My name is Sarah and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call your lines will be in listen-only. [Operator Instructions] I will now hand you over to your host, Brian Dingerdissen, to begin today's conference. Thank you.

Thanks, Sarah. Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter 2022 Earnings Call. I am Brian Dingerdissen, Vice President of Investor Relations and Treasurer at Essential. 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 that we will be referencing and a webcast of that event will also be found there. Here is our forward-looking statements. 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 website. Here is our agenda for the call today. We'll start with Chris Franklin our Chairman and CEO, who will discuss the highlights from the quarter and provide a Company update. Next, Dan Schuller, our Executive Vice President and CFO will discuss our financial results. Lastly, Chris will provide an update on our acquisition program and conclude the presentation with a summary of our guidance before opening the call for questions. With that, I will turn the call over to Chris Franklin.

Hi, thanks Brian and good morning, everyone. Thanks for joining us. Let's start-off with some highlights from the quarter. We continue our focus on the fundamentals of operational efficiency, infrastructure improvement and service-related priorities. And as a result, we had a strong third quarter with earnings per share of $0.26 and year-to-date net income growth of 11.2%. Dan will provide you some details on this in just a few moments. Our commitment to investing in critical infrastructure has resulted in an investment of $719.7 million through our water - wastewater and natural gas systems in the first-nine months of the year. This compares favorably to $675.8 million from the same-period in 2021. We remain on-target to achieve our capital plans of approximately $1 billion of capital spending for the year. Currently we have asset purchase agreement signed for seven municipal acquisitions totaling nearly $365 million in purchase price. This year 2022, we've closed two acquisitions, which added over 19,000 customer equivalents to our footprint. As I'll discuss later, we continue to have a robust pipeline of opportunities. Now just this month - last month in October, the Board appointed Bryan Lewis to our Board. Bryan currently serves as the Chief Investment Officer for U.S. Steel Corporation, which is headquartered in Pittsburgh, Pennsylvania. Bryan is responsible for the Company's global investments for both the defined contribution and defined benefit plans, as well as other related programs at the Company. Prior to his appointment at U.S. Steel, Bryan managed $30 billion pension fund for the Pennsylvania State Employees Retirement System and before that served as Executive Director of the $20 billion Illinois State Universities Retirement System. Now in addition to Bryan's professional career, he is dedicated to increasing the financial literacy and leadership presence in underrepresented populations and serves on several non-profit…

Thanks, Chris, and good morning, everyone. Moving to Slide 13, looking at the third-quarter highlights we ended the quarter with revenues of $434.6 million, about 20% from last year. Our regulated water segment contributed $301.3 million and our regulated natural gas segment contributed $119 million, with the balance coming from our limited non-regulated operations. We continue to see higher natural gas commodity prices and therefore purchased gas costs increased by $26.6 million year-over-year and gross margin increased by $46.2 million. The largest contributors to the increase in gross margin for the quarter were additional revenues from regulatory recoveries, increased volumes and organic and acquisition-related customer growth from our water segment. O&M expenses increased to $151.4 million for the quarter, up from $139.4 million in the third quarter of last year. Employee-related costs, higher water production costs, recoverable costs related to our natural gas segment customer assistance program and other expenses were the main drivers for the quarter. Net income was up year-over-year from $50.5 million to $68.6 million and GAAP earnings per share increased from $0.19 to $0.26 for the quarter. Next, we'll walk through the waterfall slide starting with revenue. As we look at the third quarter for 2022 regulatory - revenues increased $72.8 million or approximately 20% on a GAAP basis. Regulatory recoveries were the largest driver of increased revenues, since the third-quarter was the first full quarter to include the new rates from the Pennsylvania water rate case. Next you'll notice the recovery of higher purchased gas costs of $26.6 million due to the significant increase in natural gas commodity prices which we've been reporting throughout the year so far. Increased volumes and growth from our regulated water segment contributed an additional $15.7 million and other provided $3.4 million towards the revenue increase, which was offset slightly…

Alright. Thanks, Dan. Appreciate it. Let's move on to our municipal transaction activity, which along with investing in infrastructure in our existing business is the core of our growth strategy. So in August we announced the closing of East Whiteland Township wastewater system. The system serves nearly 8,200 customer equivalents, including residential and commercial connections in Chester County in Pennsylvania. Now to connect the dots for you, this is one of the systems served by the two different Township trunk line we purchased in December of 2018. You may recall this is the nine-mile pipeline that passes waste to the large Valley Forge Sewer Authority for treatment the plant that they have. And we've already identified $17 million in infrastructure improvements in the East Whiteland area, expected to be completed over the next decade. We look forward to having a positive impact on this community and continuing to provide excellent service and area where we already provide the water service. We also think there is a lot more opportunity as a result of that trunk line. As of this call, we have seven signed asset purchase agreements pending, which together will add over 217,000 customers or customer equivalents. And total nearly $365 million in the purchase price. We are pleased to report that we received approval from the Illinois Commerce Commission to close the Oak Brook Illinois water transaction and anticipate closing this year. Now on Slide 21, let me take a minute to talk about DELCORA. On our last call, we indicated our optimism on this transaction based on the PUC restarting the process and the ALJ - with the ALJ and the strong legal outcomes in our favor. And even since that time, the Delaware County Court determined pleased just on November 2nd this month, once again found…

[Operator Instructions] The first question comes from the line of Travis Miller from Morningstar. Please go ahead.

Hello. Thank you.

Hi Travis.

Good morning, Travis.

Hi. You made a couple of comments there at the end Chris. But on the muni M&A, just wondering, obviously been a big shift in cost-of-capital here over the last call it three to - even just the last month, right, but accordingly in the last three months. How is that impacting from the financing side? I understand kind of the fundamental side, meaning, wondering to get more thoughts in terms of financing those and making them accretive relative to what you've had in the past.

Yes. I think, listen, long-term as you know we finance these things accordingly with our capital structure that roughly 50-50. What it really does, I think, Travis is makes us think about our hurdle, in order to do the transactions, we look at these and we got hurdles as we think about these are multi-year often almost always we bring these municipal transactions in at less than four earnings power, right. They need capital investment and they need rates. And so therefore we look at a multi-year, look at a hurdle and probably nudges that hurdle a little bit further north, as we think about what we need to do, to do these deals. I don't think it dump - it slows our interest, in fact, as I look at it, some of the financing challenges are not only on our side but also on the municipal side and could actually trigger a little bit more activity. I just don't see there's just not enough federal dollars to build these things out. And I just think there is continued opportunity for us. Daniel do you have anything to add to that?

Yes, Chris. What might I add, Travis, is just that, obviously on the debt side, we tend to finance these - niche in our revolving credit facility and then with long-term debt that we put into place. And of course, we are seeing higher costs as, if you look at LIBOR over the past year, which is really the marker for our revolving credit facility. It's up nearly 400 basis points. So what that does is, it creates a higher initial cost of borrowing than we finance long-term that's a higher-cost than we would have had a year, year and a half ago. And so it's just really create some additional lag between now and when that new acquisition comes into full earnings with a rate case. So period from closing the transaction to new rates, we'll see a bit more of a lag and we model that in as we looked at our pro-forma and have the conversations with the investment community to decide what we're willing to accept in terms of that lag.

Okay. That's great, I appreciate that. And then one follow-up, anything in terms of the election or new people who might come into offices in terms of fair market value anything along those lines in other states?

Well, I think we always focus initially on our largest state, Pennsylvania. The expectation here is that, on the state-level which is with most impactful for our business. That it will be a Democrat for Governor looks like Josh Shapiro was solidly ahead in the polls. And then it looks like the Republican legislature both House and Senate remain firmly in place. And that's probably a pretty nice outcome here in Pennsylvania. The probably the impact that we will see most immediately, the Chairman of the Public Utility Commission, Gladys Dutrieuille is up for renewal or retirement, whichever she decides in the first quarter of next year. So the new Governor and the Senate will have a say on who that is. It will be a Democrat, whether it's Gladys or replacement. So that's probably the first major impact of the newly elected officials. But I - what we're hearing some noise about fair market value, at this point all indications would be that, that those statutes will stay in place, without too much trouble.

Okay. Any states where you think they can they the legislature or Governor whoever is in charge of doing that might institute it?

Well it's good question beyond our stage. In all eight of our water states, we have one statute - no, it's not always called fair market value, but we've got the ability to use a tool like fair market value. But beyond our states, there might be others, I'm just not - I'm not familiar with where that might be added.

Sure. Okay. Thanks so much. Appreciate it.

Thanks, Travis.

The next question comes from the line of Ryan Connors from Northcoast Research. Please go ahead.

Hi, Ryan.

Good morning, Ryan.

Hi. Good morning. Good morning. So, I'd wanted to ask you about the interest-rate environment from a different perspective in terms of returns on equity and the outlook in some of your rate proceedings and whether there is any appetite among these commissions especially with the larger cases in North Carolina and Texas. But I guess also your early read in Pennsylvania too. Is there any appetite to move ROEs up as interest rates go up? I know they held up pretty well when interest rates went down but what's your outlook there from what will happen with ROEs going forward?

It's a good question, Ryan. I think that to your point, ROEs were sticky on the way down as interest rates fell. There likely to be somewhat sticky on the way back off. Now if we saw a consistent period with high-interest rates and that's a higher cost of equity capital when you calculate that. We would obviously be making the - making the case for higher ROEs. I don't think and we think that's a justifiable case if that is the economic situation of the time. I think the other thing that's important for all of us is utilities, we think about it. As we talk to our commissions is that, the utility industry is not immune from the inflation that everyone else is experiencing. And so you will see that those conversations need to be had with regulators as well as utilities filed cases going-forward.

Yes. I think to add to that, hopefully what we continue to see is additional regulatory mechanisms put in place that address lag, because if you don't have future test years what they're going to find is, just in addition with rate cases in all these commissions. And so we need to continue to focus on how do we address inflation, reduce lag, so that the case load isn't overwhelming to these commissions.

Got it. Okay. And then kind of a follow-up to the prior question there by, Travis. on the electoral scene. Specifically the Pennsylvania, the Water Quality Accountability Act, there the SB 597, that seemed like it had some momentum, seems like it's kind of stalled. I don't know that it's actually come to fore and is that something that - is there any key leaves here suggesting that might move forward based upon the early read on the election here?

Yes. It's good question, Ryan. I think probably that Bill has passed out of the senate now, now sits in the house, probably need some amendment to it, to get it advanced further. I think, we'll have to see what the committee chairmanships look like in the reformed house. But I think that bill is going to take some amendment. We've got some thoughts and we are still hopeful, we can get it passed both the House and the Senate next year.

Got it. Okay. And then one last one. Look I apologize, I know you don't want to focus on Bucks County. But if you could just kind of give us your perspective, Chris, on the other one didn't go your way, you mentioned there is lots of smaller and mid-sized deals. So it's certainly not the end of the world. But what is your quick postmortem there? I mean, is there anything that the company learned from that process things you - may not have done differently and things that might have changed the outcome there? Just kind of curious what's your sort of thoughts are now that's in the rear-view mirror?

Yes. But I think - I'm not sure there was anything that the company could have done differently as you know at the end, release came from the commissioners basically saying that the timing wasn't appropriate. So whether something happens in the future or not is going to be up to the elected officials. But I think, two takeaways and I would say this holds true for most of these municipal acquisitions. Upfront the seller has to identify clearly why are they selling the assets and what are they doing with the proceeds. And I do think the lack of clarity in Bucks County did hurt the prospect of ultimately completing the transaction. The Bucks County has a structural deficit, they need the money. And so it would have been ideal had they said listen, we're selling because we got a structural deficit. And we're going to hold rates steady for the next decade through a fund, which was the plan and that we'll go delete or pay-off all county debt. I think those would have been powerful statements. And they just weren't made and articulated. So I would say, for all the transactions that we're working through, those two aspects have to be cleared from the seller. Why am I selling and what am I doing with the proceeds? I see time and time again where those aren't clearly articulated and it just hurts the transaction.

Okay. And that was - so that was - these were the two, was that the first or - those are the two?

Those are the two. Yes.

Got it. I see. Okay.

Listen, I think politics in Bucks County where it was pretty nicely aligned, I think they - Republics and Democrats get along fairly well in Bucks County, in terms of the economic conditions of the county. So, I really felt pretty good about that and certainly the people who were against the transaction, Ryan, you attended some of those hearings and lot of the same people that continued to attend. One of the disappointments that I think we have is that, so much misinformation was repeated at those public hearings. People were just not well-informed and - or chose not to be well-informed either way, but so much misinformation.

Yes. Yes. Well, I appreciate you updating us on that. Thanks for your time today.

Thank you, Ryan.

Take care.

[Operator Instructions] The next question comes from the line of Julien Dumoulin-Smith from Bank of America. Please go ahead.

Hi, Julien.

Good morning, Julien.

Hi, good morning, team. Thank you guys very much for the time, appreciate it and congratulations to everyone on the various stewards here. Just maybe if I can kick it off here, just coming back to '23 and expectations, you talked about DELCORA and obviously the timing is shifting there a little bit, you've got this ATM, that's certainly fluid and you talked about some cost pressures in the quarter. Can you give us a little bit of an update? I know you reaffirmed five to seven and midpoint here for '22 but how are you thinking about it over the longer-term? What are some of these shifts position you as you think about '23? Anything that just flag, I guess, that you haven't launched your formal '23 process yet? But maybe early indications, how do you think about some of the offsets here, maybe some additional capital starting to offset the impact of the timing for DELCORA and the associated spend that you would have done at DELCORA as well?

Yes. I think, we're looking at our budgeting now and we're obviously our 2023 budget will be approved by the Board in December. But as things look right now and I said it in my comments, despite the continued delay in DELCORA, we remain confident in our previously discussed guidance. And so, we'll have an update for you all and another month or so here. But at this point we remain confident that, we can achieve our long-term guidance that we've communicated already. Dan, anything to add?

No, I think you covered it, Chris.

Okay. Could you guys talk about some of the offsets maybe just as you think about? I know it's in flux, so maybe just speak to - through some of them here in terms of the ability to raise that adjust CapEx? And over the timing of the dilution itself as you think about clearly some of that capital raise would have been in tandem with third quarter itself you would think?

Yes. I think you're thinking about it the right way. You know, as we think about our capital spend, we do have some flexibility and obviously whether and our ability to execute against the capital budget, gives us some flexibility there not a ton, but there are levers we can pull there. And yes, listen, then I think discussed pretty well our equity needs. I think we've covered that.

Yes. And I would say just add too, as you think about offsets and achieving objectives, that we're constantly working with our state teams to look at their controllable expenses and make sure that we're rebidding things and we're getting the best contract with the best price. And all of our state team management teams have - they all have incentives in place, that really rely on them achieving their cost metrics. So they are incentivized to help drive cost-down as well.

Got it. Excellent. And you roll forward your outlook with the next update too?

Yes. Well - our plan is to share all of our guidance just after the first of the year. And at this point we would anticipate that looks like guidance we've provided in the past, meaning EPS guidance for 2023, EPS growth rate guidance, capital guidance, and then the other ESG related metrics.

All right. Excellent team. Best of luck. Speak to you then. Cheers.

Thanks, Julien.

The next question comes from the line of Gregg Orrill from UBS. Please go ahead.

Hi, Gregg.

Hi. Sorry to - hi there. So do we know what the duration of the growth rate guidance is going to be that you're going to update us on?

At this point, we would presume the three-year guidance like we provided in the past.

Okay. And then on the PFOs from rule from EPA, we're still looking for that this year?

December timeframe, it sounds like, we expect that MCL to be established around that time. I think that's still on track.

Okay. Best of luck. Thanks.

Thanks, Greg.

Thanks, Greg. Take care.

We currently have no further questions coming through. I will now hand you back to your host.

Thank you all for attending. And as always we stand ready to answer any questions - any follow-up questions you might have. Thanks again for joining us today.

Thank you for joining today's call. You may now disconnect your lines.