Thank you for standing by. My name is Gini and I will be your conference operator today. At this time, I would like to welcome everyone to the Essential Q2 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Good morning everyone and thank you for joining us for Essential Utilities' second quarter 2024 earnings call. This is 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 the webcast of this event can also be found on our website. Here is our forward-looking statement. 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 any non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. We will begin the call today with Chris Franklin, our Chairman and CEO, who will provide an update on the company. And then Dan Schuller, our CFO, will provide an overview of our financial results before Chris closes the call. With that, I will turn the call over to Chris Franklin.

Thanks Brian and good morning everyone. Thanks for joining us. Let's start with some highlights from the quarter. First, we posted GAAP earnings of $0.28 per share, which really was a strong result when you consider the weather in Pittsburgh, which is our largest natural gas service area. It was about 45% warmer than normal. This, of course, resulted in significant lower gas usage and marks the second year in a row weather has been warmer than normal. You'll recall that weather normalization is a key element of our current Peoples rate case in Pennsylvania. In an expression of its confidence in our business plan, our Board voted last week to increase the dividend by 6%, which continues our 33-year track record of annual increases in the dividend. The increases in expression of our continued commitment to delivering shareholder value, both through the dividend and long-term stock appreciation. Let me touch on a couple of regulatory developments in Pennsylvania that have occupied our time. First, back in June, the Pennsylvania Public Utility Commission voted 5-0 to approve a C-motion that initiated some reform of the fair market value statute that was passed back in 2016. We see this as a positive step that should moderate purchase prices and rate impacts associated with municipal acquisitions. We also believe the new formula provides a guideline of how much purchase price will be allowed in rates, and we think it still promotes consolidation in the industry to a fair balance. We appreciate the commissioners work on this important statute that helps consolidate a fragmented industry, and I believe it will provide a much greater certainty in the closing of transactions. Now, secondly, and importantly, we reached a non-unanimous settlement on our Peoples rate case in Pennsylvania. And then recently, the Administrative Law Judge…

Thanks Chris and good morning everyone. In this first slide, let's talk high level, and then we'll get into the details on the waterfall. Operating revenues were down due to 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 natural gas business as compared to the prior year. In fact, as Chris mentioned, Pittsburgh was 44% warmer than normal for the quarter, and it's been 20% warmer than normal for the year so far. We also experienced lower water consumption in the second quarter than we did last year. While we continue our focus on managing O&M expenses, the quarterly O&M shows an increase due to a few onetime factors, which I will cover on the waterfall. However, I will note that year-to-date O&M expenses are up a reasonable 2.9%. We achieved EPS of $0.28 for the quarter. Last year's second quarter was especially strong given higher-than-budgeted water volumes, some onetime credits in O&M and the impact of the natural gas Safe Harbor rule. We remain on track relative to our stated EPS guidance range when normalizing for weather and excluding the substantial gain on sale from the energy project sale. Next, let's walk through the second quarter waterfall. On Slide 9, we have the revenue waterfall for the quarter. Moving left to right, we have rate increases and surcharges of over $18 million, with about $15 million of that coming from water and $3 million from gas. Acquisitions and organic growth in the water business contributed $3 million, and then decreases due to lower volumes in both water and gas, as well as the impact of the purchased gas cost. You may have experienced or noticed the excessively warm weather in June in…

Thanks Dan. Let's touch on the municipal acquisition program for just a couple of minutes. As of this call, we have six signed asset purchase agreements in two states, and we have existing water and wastewater operations in both of those states. These acquisitions will add over 215,000 customer equivalents and total approximately $385 million in purchase price. Now, let me note that over $100 million of that rate base is from deals that are not DELCORA. We continue to see a strong and healthy pipeline of opportunities for additional growth. And as I've said many times before, our pipeline is more than 400,000 potential water and wastewater customers, and we are having active discussions with all of those. As I said before as well, with Chairman DeFrank C-motion approved by the Public Utility Commission in Pennsylvania, we are optimistic that there should be a much clearer path to closing municipal acquisitions in Pennsylvania in the future. In addition, with the recently published EPA rules regarding PFOS, which includes a time line for compliance, we expect to see an increase in the number of opportunities, which should help further consolidate the water space in addition to mitigating the PFOS problem. All right. So, in closing, let's review the guidance we provided in February and then updated in May and we'll reaffirm it today. In February, we provided guidance for 2024 net income per share to be $1.96 to $2. Now, on a GAAP basis, we anticipate exceeding this 2024 guidance as a result of the gain on sale of the energy plant assets. We mentioned the impact of warmer-than-normal weather a few times on this call that resulted in lower regulated natural gas operating revenues for the year-to-date. Through 2028, we plan to invest approximately $7.2 billion in regulated infrastructure…

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Ryan Connors with Northcoast Research. Please go ahead.

Good morning. Thanks for taking my question.

Good morning.

Good morning. I want to start on -- Chris, you mentioned the C-motion and the PUC reform on Act 12. On a separate parallel track of that, which I know there's some legislation out there that would actually make some legislative change, including, I guess, there's talk of even a repeal of Act 12, does the PUC reform process kind of stall that and for now? Or are those things still -- are those efforts still ongoing legislatively?

Yes, Ryan, it's a great question. And I think we've made tremendous progress with the C-motion. Chairman DeFrank really showed real leadership in the commission in getting that through. But I don't think it deters the legislative action. I -- just given the schedule in Pennsylvania, the election and the short schedule in the fall, not even sure that the House will come back in session in the fall, I'm not overly optimistic that something could pass this fall. What I would say is there's not an appetite when you look at the full House and Senate to pass a repeal of Act 12. And so I would say there's probably opportunity to get a compromise bill that has some of the things that you see in the C-motion codified and maybe a couple of other things. When I think about opportunities, I think about a greater definition or guardrails around affirmative public benefit. And I think if we get some of those things, done with some of the folks that want reform, I think there's an opportunity to get real progress accomplished. But I remain confident that we don't have the votes in the -- particularly in the Senate to re-peal Act 12 at this point in time.

Yes. Okay, that's fair. Now, on the Pennsylvania rate case, I know that not a whole lot you can say. It's a pending matter. But in other recent cases in Pennsylvania, we've seen where very significant turnout and so forth that some of these public hearings has been kind of an early indicator of some issues in some cases. I mean I know your public hearing cases input hearings are ongoing, I think this week and next. Any early read from your team about what's coming out of those public input hearings? Any surprises, anything that would give you any concern as it relates to the public feedback.

Yes, so far, we've not seen anything that would surprise us or particularly come to concern. Listen, I'm always empathetic to customers who are concerned about rising bills. It's continuous discussion internally here on affordability. And so I have a great empathy for folks, and we're going to do everything we can to try to accomplish the mission and do it at the most affordable levels. And I know I told you at one of the hearings too, Ryan, I try to get out personally. I want to hear from people personally, so I sat in the back of the room yesterday and listened to some of the comments. But the good news is there really wasn't anything about service or reliability or the core capabilities that we provide to our customers in terms of water and wastewater services in this instance. So, listen, we'll continue to listen and react appropriately, but nothing has been surprising to this point.

Got it, okay. And then just one last one on housekeeping. Maybe, Dan. On the tax rate, I mean, I know there's been noise as you said, in the timing of the repair benefits, any directional help you can give us for the balance of the year modeling on the income tax line?

Yes, a little bit for it, Ryan. So, we still anticipate that we'll have a slightly negative ETR at the end of the year. So, I think, like single-digit negative ETR for 2024. I mean as we think ahead to 2025, I think that probably getting a little more toward breakeven.

Got it. Okay, that’s helpful. Thanks for your time.

Thank you.

Thanks Ryan. Take care.

Your next question comes from the line of Durgesh Chopra with Evercore ISI. Please go ahead.

Hey Durgesh.

Morning Durgesh.

Hey team. Good morning. Thank you for giving me time. Just -- Chris, I wanted to get your thoughts on the PFOS program that you have in place. Just the Supreme Court decision since the last time we spoke, how does that change things, if any?

Yes, we -- it's a good question, Durgesh. So, we've been in communication with the commissions that oversee the states where we have the majority of the work to do. And what we're hearing from our regulators is they'll get this thing done and focus on a PFOS mitigation, focused on the current levels, and that's exactly what we're doing. So, we're full speed ahead. We remain with an estimate of about $450 million to do our work on 280 systems, as I said in the formal remarks but I think importantly, when we're getting the right signals from leadership at the commissions, then we have high confidence that not only will we accomplish the task of mitigation, but that we'll get recovery in the appropriate level in rates once the work is done. So, we're full speed ahead.

Got it. It sounds like the commissions in different states are driving this, and so no changes there. A couple of modeling questions for Dan. Just Dan, can you remind us or tell us if you have issued any equity so far versus the $250 million target? That's one? And then just second, as we think about balance of the year, I think you mentioned that we'll see some weather benefit in Q3 in Pennsylvania, but then you said other states were lower relative to -- in terms of sales -- or weather-wise relative to last year. Can you just sort of talk in terms of guidance? Q3 so far, is it positive from a weather standpoint relative to guidance relative to normal? Or is that still a headwind? Those two questions, please. Thank you.

Yes, certainly. Let's start with the weather first, Durgesh. So, we are seeing in July or July numbers, not fully baked yet, but we are seeing some positive benefits from weather as we anticipated for July. Now, first portion of the year, we were behind a little bit on weather. So, this helps us catch up, if not, get a little bit ahead. And then in terms of your question regarding equity, so we're just in the process now. We'll stand up that ATM next week. You might have looked and not seen a filing for that yet. And just given the fact that we didn't immediately need the cash and for much of the time between our last earnings call and this earnings call, our stock was kind of at a depressed price, we weren't really in a hurry to issue equity. But we will get started on that shortly here and still look to issue, as I said in the prepared remarks, about $250 million through the balance of the year.

Perfect. That’s all I had. Thank you guys again.

Take care Durgesh.

Your next question comes from the line of Michael Gaugler with Janney Montgomery Scott. Please go ahead.

Morning Mike.

Good morning Mike.

Let's start on DELCORA. Some good news there, obviously. Just wondering what the next steps for you, if any, might be? Or are we kind of still in just a waiting mode?

Well, we continue to have ongoing conversations at the county. And I think we're all watching carefully to see what it looks like there in terms of their budget this year. As you might recall, last year, they had raised taxes about 5%. There is some public discussion about having to raise taxes again this year. We think we should be part of that conversation because certainly, the sale of DELCORA would raise them more than they would need coming from tax increases. And our modeling continues to show that even despite some reduced capital spending, the plan, we would still have lower rates. And in our model, we're showing a 2% annual increase over a decade. And so really strong outcomes for the county. So, we still think we have a pretty compelling case, and maybe even more compelling as they come into budget season here in the next six weeks. So, you have that aspect, so that conversation is going on. And then we still have the Federal Bankruptcy Court judge, who is dealing with the bankruptcy of the city of Chester, who has to stay on all progress at this point. So we continue to wait for an appeal there. And we're hopeful that, that stay is lifted sometime in the relatively near future. And then if that were to occur, it would immediately then start right back at the Public Utility Commission in Pennsylvania. And I'm optimistic about proceeding there. So, I can't put a time line to it, but we -- our guidance has been estimated by midyear 2025. We're midyear 2024 here. So, we still think we have a shot at that should something break loose here soon.

That's good. And then in terms of the second half of the year, I noticed here in 2Q, the estimates were somewhat all over the map. And I know you've got a rate case coming up. That's going to be settled soon on the gas side. Just wondering what you're seeing in terms of cadence or what people should expect in terms of earnings cadence, 3Q and 4Q, particularly given the commentary that was just offered on positive weather impacts here in the third quarter?

Yes. Happy to do that, Michael. So, when we think about the -- our forecast versus consensus, we would say that consensus for the third quarter is high and consensus for the fourth quarter is low. So, as you think about refinement to your models, let me give you a couple of pointers here. For Q3 2023, that included an extra $0.085 of earnings from the gas repair safe harbor rules. So that if you're building off the 2023 reported $0.30 from the third quarter, you'd be too high. So, keep in mind that this quarter will not yet have the impact of the pending gas rate case. And we've also got another year of lag on the water side relative to where we were last year. Now, weather looks good so far on the water side, but -- as you know, the impact of weather on water is not as extreme as it is on the gas side.

Understood.

Let me touch on Q4, if I could, Michael, real quick.

Sure.

Q4 -- by comparison, we think about Q4, the -- as I said, the Q4 estimates are light. And if you're light, you might not be accurately reflecting the benefits of the pending rate case in gas. And also if you're building off the Q4 for 2023, you want to keep in mind that last year, the reported $0.50 was weakened by warmer-than-normal weather in December and a one-time tax charge had an impact of about $0.068 in the fourth quarter last year. So, those items should be helpful as we think about the balance of the year. And as we've said, we expect to be in the $1.96 to $2 range on a weather-normalized basis once we exclude the impact of the energy project sale.

Very helpful. Thank you, Dan. And then I'll up just one more in 10-Q filing today, tomorrow?

Today or tomorrow, I think that's -- think about it that way, Michael.

All right. Thank you.

You'll get soon. Thank you.

Your next question comes from the line of Jonathan Reeder with Wells Fargo. Please go ahead.

Hey Jonathan.

Good morning Jonathan.

Good morning Chris and Dan, how are you all?

Well, thanks.

Good. I wanted to get your thoughts or maybe what went on in the Board's decision this year to only increase the dividend 6%. I know it breaks the streak of doing 7% going back to like 2017.

Yes. So, our dividend payout ratio, as you've seen, has been fully increasing. And our stated objective is to keep the dividend payout ratio full of 65%. So, we set our dividend growth rate at 6% this year really to moderate the increase in that payout ratio. It's really that simple.

Okay. So, now the payout ratio is kind of where it needs to be or where you're targeting? And then if we're thinking about the going forward rate, you'd be likely increasing the dividend commensurate with, I guess, the EPS growth? Is that fair?

Yes. I mean, as you know, we make this decision 1 year at a time, but we'll continue to think in those terms.

Okay. And then just kind of -- sorry, were you saying something Chris? Sorry?

No.

Okay, I don't want to cut you off. So, just clarifying something. The estimated $0.08 weather headwind year-to-date, is that also including the lower volumes of the water segment? Or is that just purely the gas?

No. That's purely the gas. And maybe that's something we could be more clear on in the future. But we haven't talked much about weather impacts on the water side. On the water side, if we thought just about the quarter, water consumption probably is about a $0.005 impact for the quarter, whereas on the gas side, I think $0.08 year-to-date for an impact and about $0.03 for the quarter.

Got it, okay. So, then the lower water volumes and revenues that you talked about, I mean, that's just exclusively due to that meter recycle? Or is there something--

No, I think it's -- we just had lower water sales through the first part of the year in a number of our states. Specifically, what I mentioned in the prepared remarks were that in Pennsylvania, in the back half of June, we had very hot, dry weather, and we would have presumed to see a bump in revenue. We certainly saw a bump in that month in terms of our send out from our plants, but the way the meter read cycle works is the back half of the month ends up being primarily estimated, so you pick up that revenue in the subsequent months, so in July. And our numbers for July for Pennsylvania, they do reflect that pickup from the back half of June.

Okay. So, then that light, $0.025 difference between Q3 -- or sorry, Q2 2023 and Q2 2024 should reverse largely?

Yes. Exactly. That specifically on it. But I would say, if we look at our comparison to last year, as you saw, we had a pretty stark comparison of water revenue. The water volumes relative to last year had a $9.7 million impact. But last year, what I'd say is water volumes were significantly ahead of budget or normal, whereas this year, we've been a bit below.

And I'm trying to get if that's because of this the meter cycle or if it's actually underlying usage? Because I know you and American Waterworks on sort of the same territories, but they were kind of talking the opposite direction saying the anticipated declines in usage from those elevated levels in 2023, the anticipated decline in usage weren't as great as they were thinking they would be in 2024?

Yes, that sounds like that is the result for them. But in our case, I'd say we had significantly higher water sales last year relative to budget and somewhat lower sales this year relative to budget.

Okay. And those are not really necessarily weather influenced, I guess?

Well, and I would say last year, we saw a significant influence in a couple of states that -- including states that are not in like Texas, for example.

Yes, okay. All right. Thanks. Thanks for bearing with me there and giving me the additional detail.

No problem. Thank you.

[Operator Instructions] And your next question comes from the line of Davis Sunderland with Baird. Please go ahead.

Good morning Davis.

Hey Davis.

Good morning Chris, good morning Dan. Thanks for taking the time guys, I appreciate it. Two for me, both on the M&A pipeline. And actually, the first one, just a quick one. Chris, since the C-motion earlier in the quarter, have you seen any change in -- or any uptick maybe in M&A activity? Or now that there's a bit more certainty or I guess, maybe a level playing field is the right way to say it, or just a broader understanding there. Have you seen any change to that pipeline?

It's hard to say because it's been so soon, whether there's a change in the pipeline. But what I would say is there's a lot of discussion with municipals trying to understand the new rules. And so what I would expect to see is once the -- there's RRR, which is this guideline that they're going to issue in the coming days here, once that's issued, I would expect municipal to start doing the math and say, okay, if I take depreciated original cost, and I look at the multiple, how do I think about that? Is that fair or not? I'd like to think that they will think it's fair. It's not going to be certainly excessive as somewhere before, but I think they'll see it as fair. And I think that will begin to initiate even more conversations once that's issued, and that's coming in the coming days here.

That makes sense. And yes, super early, so thank you for those comments. And then maybe just secondly, a few peers in the industry have talked about maybe seeing some softening of sellers' expectations as it relates to valuations for their systems, and maybe some of this is due to realizing PFOS is going to be really expensive or otherwise. But maybe any thoughts on what you guys are seeing in this regard for M&A in your guys' jurisdictions?

And are you speaking specifically about municipals at this point or just generally?

Generally speaking, but I guess thoughts on municipals would be helpful, too.

Yes, I do think that, that's also ramping up. And of course, those are conversations that we're having directly with municipals in terms of what they're facing and the levels of contamination they're seeing and then how they go about it. And once those costs start to become real to them, I think they'll start to look at, in many cases, look at optionality. And I would expect those conversations to be had really in this year. I don't think this Supreme Court issue really impacts them. I think people will look to comply.

That makes sense. That’s helpful. Thanks for the time guys. Appreciate it.

Take care.

That concludes our Q&A session. I will now turn the conference back over to Chris Franklin for closing remarks.

Thank you, and thank you all for joining us. As you know, we're always available. Dan, Brian, myself, make ourselves available if there are any follow-up questions, but really appreciate you joining us today. Thanks again.

This concludes today's call. You may now disconnect.