Q3 2023 Essential Utilities Inc Earnings Call
Good day and welcome to today's essential utilities third quarter 2023 earnings call. This meeting is being recorded at this time I'd like to hand, the call over to Brian singer.
Please go ahead Sir.
Thank you Sergei and good morning, everyone and thank you for joining us for essentially utilities third quarter 2023 earnings call.
I'm, Brian <unk> Senior 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. The slides that we will be referencing and a webcast of this event can also be found on our site.
Here's our forward looking statement.
As a reminder, some of the matters discussed during this call may include forward looking statements that involve risk uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward looking statements. Please refer to our most recent 10-Q10-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.
I'll begin the call with Chris Franklin, our chairman and CEO, who will provide an update on the company.
With that I will turn the call over to Chris Hey, Thanks, Brian and good morning, everyone. Thanks for joining us today.
I will start the call out Oh by acknowledging our the unfortunate event that some of you may have heard of about a read about back in August.
In a suburb of Pittsburgh, Oklahoma exploded, destroying and damaging multiple homes in the neighborhood.
Unfortunately, there were six fatalities, including one of our off duty employees and his young son.
The fire Marshall has indicated that based on the investigation. The incident occurred inside of the home and it was not a result of an issue with the gas utility.
We continue to of course are fully cooperate with investigators there.
We need to recognize our team for their response to this tragic event their professionalism their expertise and especially the way they performed under extremely difficult conditions, just having lost whenever there Karl that day.
Very difficult day.
For for the team.
Alright, let me shift to shift gears, a little bit here and start off by expressing my appreciation to those of you who participated in our off season governance meetings and our IR perception study, while they are still compiling and synthesizing your comments.
I don't know that we appreciate your time and your feedback and most certainly will take the insights gained very seriously.
Operating a public company, we're always glancing at the stock price throughout every given day and a sizable shareholders ourselves our management team and the board are well aware of the current performance of our stock.
We acknowledge the sector has been trading off much of the industry performance over the past few months. We believe has largely been driven by the macro environment and the recent selloff of utilities due to the Fed's commented actions on interest rates.
We know that dividend paying stocks are typically out of favor during periods. When investors can capture income through interest bearing accounts without the risk of their principal.
We also understand that some investors are concerned about utilities that have robust capital programs, which need to be financed and then recovered through the rate process.
Fortunately our team has a long history of executing large capital programs and achieving timely regulatory recovery, obviously helped by the constructive regulatory environments in the states, where we operate.
Now I also want to acknowledge that we traded below our expected price.
We don't like it we don't believe it's as large as some might imply.
We compare our p/e to that of our most similar water utility peer and assumed a slight discount because our projected growth rate is just slightly lower we estimate that since the peoples transaction in 2020, we've traded at an average discount of about 5% compared to the weighted average.
<unk> of our water and gas peers.
That discount currently sits a little higher roughly 10%.
For those of you who've, followed us or been with us over the last four years.
You know that there have been many fluctuations it often we've traded above that target as well.
Now as investors maybe.
And then if you consider.
Various things, we know that Youre thinking about the fact that our two largest rate divisions will file for rates in the next six to nine months and we've had some challenges recently Q1 weather was difficult on the gas side.
Russell with the Dell Cora in East Whitewing litigation, but remember despite our challenges we have continued to deliver on our EPS targets.
And from a stock performance perspective, some of written that this has been the worst year for utilities in 40 years, while that current climate is challenging we have remained focused on strong execution and enhanced shareholder value.
And I'll point, you to our recent pruning of our small and underperforming West Virginia gas business and the strong result of our sale of the energy projects to further refine our portfolio and offset equity needs.
And on a very positive note.
We view the stock at its current price as a unique entry point and.
And have been hearing from many new investors potential investors that previously view you'd water utilities is too expensive.
So at roughly 19 times 2023 earnings with a almost three 5% yield coupled with our strong record of our operational execution, our large capital program along with continued water system consolidation.
The company is poised for long term success.
I also want to emphasize that we don't need to close the Dell core transaction to meet earnings guidance in 'twenty, three and 'twenty four.
In fact, our earnings guidance 'twenty three 'twenty four is not dependent on any of the acquisitions that are currently in our materials. This includes east weiland to remember that most municipal transactions lose money or breakeven until we bring them through a rate case, and you'll recall that our Pennsylvania.
Water case mobile until 2024.
Now we use this window of time to work with regulators and stakeholders to improve the fair market value process and hopefully alleviate some of the headwinds that the sector has been facing related to municipal acquisitions, especially in Pennsylvania.
We spent time on our last earnings call reminding investors about the primary source of earnings generation the execution of our capital plan.
I'll make no mistake our acquisition program is important to our long term success, but is often not as impactful has the negative impact to our stock price.
Price performance, if these opportunities hit speed bumps or don't fully materializing.
Now listen we.
Going to continue to work hard on our growth through acquisition program.
We're going to go.
We're going to go.
Look at improved methods to communicate those opportunities so that we adjust expectations from the onset we've heard you clearly on that.
And one other factor that I I wanted to mentioned that has been in fact packaging our share price was the need for equity in September we completed our financings for the year, removing any perceived equity overhang.
We heard the feedback related to our new guidance approach regarding equity needs and believe me, we're going to taken into account as we finalize our future guidance plans, we've heard you loud and clear.
Alright, let's move on to some highlights from the quarter and a couple of public company updates.
With a dedicated focus on capital investment and operational efficiency, we had a strong third quarter with earnings per share of <unk> 30.
Dan will take you through those.
And just a moment we remain we remain on track to invest.
One 1 billion won.
In capital projects, this year, and maybe even slightly higher than that improving the service rollout and reliability for our customers, while adding substantial rate base growth.
And the FERC in the first nine months of 2023, we've invested $874 5 million through our water wastewater and natural gas systems as compared to $719 7 million for the same period last year.
Keep in mind that our capital budget is composed of.
<unk> of projects and it takes significant expertise to achieve success in those projects.
We currently have asset purchase agreements signed for municipal acquisitions totaling nearly $354 million in purchase price and continue to have a robust pipeline of out of opportunities.
I mentioned, the sale of our West Virginia gas utility assets, which was announced on October 2nd. This sale really enables management to focus on fewer states and specifically, where we have larger bases of customers and growth opportunities.
Then on October three we announced a $165 million binding agreement to sell three non utility energy projects in Pittsburgh, including innovative micro grids and district energy system.
And finally in late October the board appointed Rod West to the board of Directors. Some of you may know rod from the utility industry. He serves as the group Vice problems right. The group President utility operations at Entergy Corporation, the departure of Chris Womack from our board, we were looking for a seasoned executive with <unk>.
<unk> experience much like the skills that Chris brought to the board, we're really excited about Raj experience and expertise and we think it's a great match for the essential utilities Board we will.
Rod will serve on the corporate governance and risk mitigation committees when he joined US in December.
I also want to take a minute to discuss our recently published biannual environmental social and governance report, which covers our performance in 2022. The updated ESG report tracks key progress on our commitments to the environment, our employees and the communities we serve.
And while we made these commitments just a few years ago I'm really proud to say that we've achieved our diverse supplier and employee commitments already sharing that the companys team and business reflects the communities we serve.
We've reduced our scope, one and scope two greenhouse gas emissions already by 25%.
Our 2019 baseline and are well on our way to our overall goal of reduction of 60% by 2035.
As a reminder, this is the equivalent of removing 80000 cars from the road each year. This is significant.
We were able to achieve this strong progress by successfully shifting to nearly 100% renewable electricity for our water segment in Pennsylvania, New Jersey, Ohio, and Illinois, and by reducing stray methane emissions in our gas segment through our pipe replacement program.
The report also highlights that the water segment outperformed the national average for water quality by nearly five times.
I think this is a test to our technical and operational expertise as an industry, leading utility and supports our proactive commitment to P fast treatment.
We continue to refine our numbers so youll notice that we have updated our capital investment estimates estimates.
Related to <unk> from approximately $350 million to now $450 million.
Additionally, we estimate annual operating expenses will be in the 5% range of the capital overall capital expenditures.
Encourage you to visit our ESG microsite, where you can do a deep dive into the full report or just take a look at the supplemental reports for a brief overview with that let me hand, it over to Dan to talk about our financial results. Thanks, Chris Good morning, everyone.
I'll start off with the third quarter highlights.
You'll recall that GAAP EPS revenues include purchased gas costs and that natural gas commodity prices have decreased significantly year over year.
So on a GAAP basis, we had revenues for the quarter of $411 3 million compared to $434 6 million in the third quarter of last year.
Similar to last quarter, the largest contributor to the decrease in revenues for the third quarter was the recovery of lower purchased gas commodity prices with purchased gas costs decreasing by $35 5 million from the same period last year.
Our regulated water segment contributed $310 6 million and our regulated natural gas segment contributed $94 8 million incremental revenues from regulatory recoveries and water and wastewater customer growth contributed positively offsetting lower purchase gas cost and lower volume in the water segment.
For the quarter.
O&M expenses decreased two 9% to $147 million for the quarter down from $151 4 million in the same quarter of last year.
Lower employee related costs, and lower recoverable costs related to our natural gas segment customer rider were the primary drivers of the decrease and were offset by higher water production costs and operating expenses related to acquired systems.
Okay.
Net income was up year over year from $68 6 million to $80 1 million and GAAP EPS was up approximately 15% from 26 in the third quarter last year to 30 for the quarter. This year.
Next let's walk through the waterfall slides starting with revenue.
In the third quarter of 2023 revenues decreased $23 4 million or five 4% on a GAAP basis.
Starting on the left hand side of the waterfall regulatory recoveries added $14 1 million in revenues year over year. This includes the impacts of base rate cases, and other regulatory proceedings across all nine states in our current footprint.
Next organic and acquisition growth from our regulated water segment provided an additional $3 2 million and other items combined with increased volumes from our regulated natural gas segment added an additional <unk> 4 million towards the third quarter revenues.
Natural gas commodity prices have continued to decline from the significantly elevated prices in 2020, and therefore, when compared to the third quarter prices in 2022, and therefore, when compared to the third quarter in 2022 Youll notice. The primary driver of the decrease in revenues for the quarter was the recovery.
<unk> of $35 5 million less and purchase gas cost.
And lastly decreased water volumes of $5 7 million from our regulated water segment also contributed to the reduction in revenues.
Now, let's walk through the operations and maintenance expenses.
Operations and maintenance expenses were $147 million for the third quarter, a decrease of two 9% compared to $151 4 million for the same period in 2022 increased production costs related to chemicals purchased water and purchased power contributed $3 $2 million increment.
<unk> cost for the quarter and operating expenses from newly acquired systems in our regulated water segment added another $1 7 million.
These were offset by lower employee related costs of $6 3 million, which were related to the incremental pension contributions and an accrual for one time incentive compensation for non officer level employees in the third quarter of last year.
The gap customer rider, which is recoverable through our revenue surcharge decreased $2 million due to lower commodity prices in our regulated natural gas segment and finally other items, which include depreciation interest and taxes.
And lower bad debt combined decreased O&M expenses for the quarter by another 900000.
Next let's spend a minute on the earnings per share waterfall.
Beginning on the left side of the slide GAAP EPS for the third quarter of 2022 was 26.
Regulatory recoveries contributed $3 eight.
Lower O&M expenses contributed another one three.
In organic and acquisition growth from our regulated segment regulated water segment added.
0.4.
These were offset by decreased volume from our regulated water segment of one five.
And other items of <unk>.
The result is GAAP EPS of <unk> 30 for the third quarter of 2023 at 15, 4% increase over last year.
We continue to expect to meet our annual earnings per share guidance for the year and remain confident in our ability to deliver on the 5% to 7% earnings growth per share.
Before moving on you May also recall that in August and September we agreed to issuances of common stock at market pricing to raise approximately $300 million.
So with this in addition to the equity raised earlier in the year through our ATM program. We've satisfied our 2023 common equity needs that were previously announced.
Additionally in August of 2023, the company's regulated water segment subsidiary Aqua, Pennsylvania issued $225 million of first mortgage bonds.
It consisted of $175 million of 548% first mortgage bonds due in 2053 and $50 million of five 5%, 6% first mortgage bonds due in 2061.
The proceeds from these offerings, both the equity and debt offerings.
Great to repay existing indebtedness and for general corporate purposes, which include capital expenditures and acquisitions.
As Chris mentioned earlier, we announced two portfolio rationalization efforts to further simplify the business.
First we completed the sale of the West, Virginia, natural gas utility assets, which allow us to better focus on our core operations.
And second we had the more recent news good really good news here of $165 million million.
Binding agreement to sell three non utility energy projects in Pittsburgh.
This transaction is subject to various closing conditions. So we would expect it to close in late 2023 or early 2024, we plan to use the proceeds to finance our capital program and acquisitions in lieu of external funding from equity and debt issuances.
I am pleased to report that while there'll be a nearly $100 million gain we expect to meet our current stated earnings guidance without factoring that in presuming normal weather and resulting gas usage.
Under regulatory activity and other matters so.
So far in 2023, we completed rate cases or surcharge filings in all nine states in our current footprint with total annualized revenue increase of $42 4 million for our regulated water states and $21 3 million in our regulated natural gas segment.
Also we currently have base rate cases underway in Ohio, and Virginia for our regulated water segment.
As previously announced we plan to file a base rate case for our Pennsylvania natural gas utility by the end of the year.
As a reminder, this is the first Pennsylvania natural gas rate case filed our under our ownership. The first rate case since the adoption of tax repair in the gas business.
And also the first case in which there'll be a request for weather normalization mechanism that our number of our peers have today.
Given that we've replaced over 450 miles of pipe in Pennsylvania across our gas footprint rate base at peoples has grown significantly while our system has become safer and more reliable and our greenhouse gas emissions have meaningfully declined.
And lastly, I want to remind everyone that Pennsylvania allows base rate cases to be filed using a fully projected future test year, and therefore, we anticipate recovering the impacts of rising interest rates and inflation through much of 2025.
And with that I'll hand, it back over to Chris and Thanks, Dan.
Let's take a moment and talk about our water and wastewater acquisition program.
As a reminder, with the closing of four transactions early in the third quarter. We've acquired seven system. So far this year, adding over 11000 customer equivalents to our current water and wastewater footprint.
Randy you again that these acquisitions don't necessarily come at full earnings.
In August of 2022 that could quired, the east Weiland wastewater assets in Pennsylvania.
Which was then subsequently appealed by the office of the consumer advocate to the Pennsylvania Commonwealth Court MIM in July of 'twenty three the Commonwealth Court issued a decision to overturn the PUC order approving the acquisition.
Now just last month the company the PUC and the East White Linde team then appeal the Commonwealth Court's July order to the Pennsylvania Supreme Court and we are currently awaiting to hear of the Pennsylvania Supreme Court will hear the case.
Now, we will continue to own and operate the east Whitesands system until we hear from the Supreme Court and the <unk>.
Time will continue to work with regulators and stakeholders to attempt to make improvements to the fair market value process to bring more clarity to the rules and to ensure it brings value to all of those impacted by the process.
Alright onto the next slide here, let's take a minute to review, our pending transactions and our acquisition pipeline.
As of this call we have five signed asset purchase agreements in two states, Pennsylvania, and Illinois, where we currently have existing water operations.
You may recall in the second quarter, we announced the agreement for the Greenville wastewater system in Pennsylvania, and then more recently, we announced the agreement to acquire the Green water system, which has 3000 customer collect connections.
Secondly, these five acquisitions are expected to add over 211000 customers, where customer equivalents and totaled nearly $354 million in purchase price.
We continue to see a strong and healthy pipeline of opportunities for additional growth and we're currently engaged in active discussions with municipalities, which have over 400000 water and wastewater customers now.
Now before moving on I just wanted to note that the Dell core regulatory process continues to be under a stay by the federal bankruptcy Court and we remain confident that we will ultimately close the <unk> transaction. Despite the lack of a clear timeline.
As we stated on our last quarter's call we've removed any impact.
Two our guidance from Dell Cora prior to the second half of 2025.
Alright.
Let's wrap up with reaffirming the guidance for 2023, we continue to expect earnings to be between $1 85, and $1 90 per share and remain confident that our three year earnings per share growth will be 5% to 7% through 2025.
And think of this excluding any gain associated with the sale of the energy projects and assuming of course normal weather.
Our capital plans remain on track for the year as we expect to invest approximately $1 1 billion or maybe even a little bit better than that.
We continue to expect rate base growth to be between 6% and 7% for water and between 8% to 10% for natural gas with customer growth between 2% and 3% on an average for water and stable for natural gas, excluding the sale of West Virginia.
Finally, we remain committed to our ESG targets commitments and initiatives and we welcome you to take a look at the recently published 2022, ESG report and updated ESG website.
We are currently discussing our plans for providing 2020 for guidance and our approach and timing. Please.
Similar to past years, our board doesn't meet until mid December where they approved the budget.
And that concludes our formal remarks with that I would like to open up the line questions back to you Sergey. Thank you. Thank you ladies and gentlemen, if you wish to ask a question at this time. Please signal by pressing star one on your telephone keypad. If you wish to cancel your request. Please press star two again it is star one to ask a question.
So the first question comes from Julien Dumoulin Smith from Bank of America. Please go ahead, Hey, Julien good morning Julien.
Hey, Good morning, Chris came pleasure guys, maybe just come back to that where you started the call right I mean, obviously, a certain degree of frustration.
Obviously, you've got multiyear guidance out there how do you think about responding to the current environment again.
I hear your frustration in your voice.
Time, providing perhaps even further extended our guidance and a refreshed could be still pending for a bit here considering the upcoming case, but I wanted to put it back on you as far as incremental data points that could help derisk will provide a longer term refresh on the outlook. If you will.
Yes.
I think.
We provided our thoughts pretty thoroughly I guess I would just add my optimism.
All going through immune when I say, we are in the utility industry are going through a.
Rocky time for our investments in utilities, and we all acknowledge that and then we further acknowledged that we've got some headwinds we've been dealing with.
We're going to we're going to work on some of this regulatory process in Pennsylvania and see if we can we get some improvements there.
Listen litigation is always frustrating in the sense that in my voice.
You're right. It is frustrating having said that though.
These are adders or base earnings generated from our capital program are solid as can be and and we continue to perform in and are highly.
And our good states, where the regulatory climate states and so we feel good about the base business and our continued ability to produce nice earnings growth, especially in what is a generally tough environment for utilities. So lasalle.
I'll just conclude that thought with my optimism Dan do you have anything that it's the only thing I'd add Julien I think like all utilities, we're obviously facing higher interest rates and inflation and I think as utilities in general will respond to that by having more frequent regulatory filings.