Q2 2024 Essential Utilities Inc Earnings Call

Jeannie: Thank you for standing by. My name is Jeanne, 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.

Operator: 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.

Jeannie: All lines have been placed on mute to prevent any background noise.

Jeannie: After the speaker's remarks, there will be a question and answer session.

Jeannie: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.

Jeannie: If you would like to withdraw your question, press star 1 again.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Jeannie: Thank you. I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Brian Dingerdissen: 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.

Brian Dingerdissen: 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.

Brian Dingerdissen: 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.

Brian Dingerdissen: Here is 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 actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risk and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures.

Brian Dingerdissen: Here is 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.

Brian Dingerdissen: Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risk and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures.

Brian Dingerdissen: A reconciliation of any non-gap-to- GAAP financial measures is posted in the Investor Relations section of the company's website.

Brian Dingerdissen: 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.

Chris Franklin: 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. Hey, thanks, Brian , and good morning, everyone. Thanks for joining us.

Chris Franklin: Hey, thanks, Brian. And good morning, everyone.

Chris Franklin: Thanks for joining us. Let's start with some highlights from the quarter. We posted GAAP earnings of $0.28 per share, which really was a strong result when you consider that weather in Pittsburgh, which is our largest natural gas service area, was about 45% warmer than normal. This, of course, resulted in significantly lower gas usage and marks the second year in a row that weather has been warmer than normal. You'll recall that weather normalization is a key element of our current people's rate case in Pennsylvania.

Chris Franklin: Let's start with some highlights from the quarter.

Dan Schuller: First, we pushed a gap earnings of $0.28 per share, which really was a strong result when you consider that weather in Pittsburgh, which is our largest natural gas service area, was about 45% warmer than normal.

Dan Schuller: This, of course, resulted in significant lower gas usage and marks the second year in a row weather has been warmer than normal.

Dan Schuller: You'll recall that weather normalization is a key element of our current people's rate case in Pennsylvania.

Chris Franklin: 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 increase is an expression of our continued commitment to delivering shareholder value both through the dividend and long-term stock appreciation.

Dan Schuller: In an expression of its confidence in our business plan, our board voted last week to increase the dividend by 6%.

Dan Schuller: which continues our 33-year track record of annual increases in the dividend.

Dan Schuller: The increase is an expression of our continued commitment to delivering shareholder value both through the dividend and long-term stock appreciation.

Chris Franklin: 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. It's a fair ballot.

Speaker Change: Let me touch on a couple of regulatory developments in Pennsylvania that have occupied our time.

Speaker Change: 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.

Speaker Change: We see this as a positive step that should moderate purchase prices and rate impacts associated with municipal acquisitions.

Speaker Change: We also believe the new formula provides a guideline for how much purchase price will be allowed in rates, and we think it still promotes consolidation in the industry to fair balance.

Chris Franklin: We appreciate the Commissioner's work on this important statute that helps consolidate a fragmented industry, and I believe it will provide much greater certainty in the closing of transactions. Now, secondly, and importantly, we reached a non-unanimous settlement on our people's rate case in Pennsylvania. And then recently, the administrative law judge issued a strong recommended decision in line with that settlement, which includes the important weather normalization. The Commission is expected to consider the matter and finalize an order in September.

Speaker Change: We appreciate the Commissioner's 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.

Speaker Change: Now, secondly, and importantly, we reached a non-unanimous settlement on our people's rate case in Pennsylvania.

Speaker Change: And then recently, the Administrative Law Judge issued a strong recommended decision in line with that settlement, which includes the important weather normalization.

Speaker Change: The Commission is expected to consider the matter and finalize an order in September .

Chris Franklin: And the third matter on the regulatory side is our filing back in May in the Pennsylvania water rate case. Our filing is nearly three years after the prior case, and we're requesting an overall rate increase of $126.7 million for water and wastewater. Dan will have a little more detail on that in just a moment. Now, before I talk about operations... I want to mention that the Commonwealth Court, which is a state court in Pennsylvania, did render a decision on Delcoura in early June, and our legal interpretation of that decision indicates continued support of the legally binding asset purchase agreement between ACWA and Delcoura. All right, let's talk about operations for a moment.

Speaker Change: And the third matter on the regulatory side is our filing back in May of the Pennsylvania water rate case.

Speaker Change: Our filing is nearly three years after the prior case, and we're requesting an overall rate increase of $126.7 million for water and wastewater. Dan will have a little more detail on that in just a moment.

Speaker Change: Now, before I talk about operations,

Speaker Change: I want to mention that the Commonwealth Court, which is a state court in Pennsylvania,

Speaker Change: did render a decision on Del Cora in early June .

Dan Schuller: And our legal interpretation of that decision indicates continued support of the legally binding asset purchase agreement between ACWA and Delcoura.

Dan Schuller: All right, let's talk about operations for a moment.

Chris Franklin: You may have followed the events around Hurricane Beryl. This is the large hurricane that hit Houston, Texas, back on July 8. We initially had nearly 90 water and wastewater systems without service, largely due to power outages. With considerable help from mobile generators, we had many customers restored very quickly, and all customers restored within three days. I have to congratulate our team; they did an outstanding job in restoring service after the storm, and they were well prepared for the next storm should it come this year as well.

Speaker Change: You may have followed the events around Hurricane Beryl. This is the large hurricane that hit Houston, Texas back on July 8th.

Speaker Change: We initially had nearly 90 water and wastewater systems without service, largely due to power outages.

Speaker Change: With considerable help from mobile generators, we had many customers restored very quickly, and all customers restored within three days.

Speaker Change: I have to congratulate our team. They did an outstanding job in restoring service after the storm, and they were well prepared for the next storm should it come this year as well.

Chris Franklin: By the way, our new outage map is available to customers and proved very helpful during the storm in Texas. Now, shifting to capital, we're on track to invest $1.3 to $1.4 billion this year to improve critical infrastructure across the company's water and natural gas platform. To help fund those improvements, we continue to seek low-interest loans to help keep our rates affordable.

Speaker Change: By the way, our new outage map is available to customers and proved very helpful during the storm in Texas.

Speaker Change: Now shifting to capital, we're on track to invest $1.3 to $1.4 billion this year to improve critical infrastructure across the company's water and natural gas platform.

Speaker Change: To help fund those improvements, we continue to seek low-interest loans to help keep our rates affordable.

Chris Franklin: In the last three years, Essential has received approval for approximately $133 million in the form of 0% or low-interest loans and approximately $59 million in the form of grants to fund projects like the PFAS mitigation that's required by the U.S. EPA. But we recognize that neither the company nor our customers put PFAS in the water, and we continue to focus on opportunities to mitigate the cost impact for our customers. This is all in addition to the work we've done in suing the polluters. We still expect to recover about $100 million from the settlement of those lawsuits.

Speaker Change: In the last three years,

Speaker Change: Essential has received approval for approximately a hundred and thirty three million dollars in the form of 0% or low interest loans

Speaker Change: approximately $59 million in the form of grants to fund projects like the PFAS mitigation that's required by the US EPA.

Speaker Change: But we recognize that it's neither the company or our customers.

Chris Franklin: You might recall that we have over 280 water systems that need PFAS mitigation, and we've provided an estimate of approximately $450 million to complete this work. We remain on schedule to complete that mitigation by the deadline set by the federal government. Take a look at the next slide here.

Speaker Change: You might recall that we have over 280 water systems that need PFAS mitigation, and we provided an estimate of approximately $450 million to complete this work.

Speaker Change: We remain on schedule to complete that mitigation by the deadline set by the federal government.

Chris Franklin: You may have heard that Infrastructure Week took place back in mid-May. We took time that week to celebrate our construction and field teams for the great work they do every day. I'll remind you that we've invested over $4 billion in infrastructure since 2020, and it's having a real impact on the communities we serve. In 2024 alone, we expect to replace over 300 miles of aged water and gas pipelines, providing even more reliability and resilient service to our customers. And, of course, the plant work we do is to ensure our water is clean and safe from contaminants like PFAS and lead, among many others. We were fortunate this year again to be included.

Speaker Change: Take a look at the next slide here. You may have heard that Infrastructure Week took place back in mid-May.

Speaker Change: We took time that week to celebrate our construction and field teams for the great work they do every day.

Speaker Change: I'll remind you that we've invested over $4 billion in infrastructure since 2020 and it's having a real impact on the communities we serve.

Speaker Change: In 2024 alone, we expect to replace over 300 miles of aged water and gas pipelines, providing even more reliability and resilient service to our customers.

Speaker Change: And of course, the plant work we do is to ensure our water is clean and safe from contaminants like PFAS and lead, among many others.

Chris Franklin: This is the second consecutive year on USA Today's prestigious list of America's climate leaders. The list identifies U.S. companies demonstrating the most substantial reductions in greenhouse gas emissions over a two-year period. This recognition highlights Essential's significant progress in reductions achieved between 2020 and 2022. Speaking of environmental impact, our gas team continues to pursue opportunities to further reduce the company's carbon footprint. We recently announced an exciting hydrogen partnership with Hquest, an energy technology startup, and the University of Pittsburgh.

Speaker Change: We were fortunate this year again to be included, this is the second consecutive year on USA Today's prestigious list of America's climate leaders.

Speaker Change: The list identifies U.S. companies demonstrating the most substantial reductions in greenhouse gas emissions over a two-year period.

Speaker Change: This recognition highlights Essential's significant progress in reductions achieved between 2020 and 2022.

Speaker Change: Speaking of environmental impact, our gas team continues to pursue opportunities to further reduce the company's carbon footprint.

Speaker Change: We recently announced an exciting hydrogen partnership with H Quest, an energy technology startup, and the University of Pittsburgh.

Chris Franklin: The demonstration project creates zero-emission hydrogen energy directly from natural gas. Peoples then blends the hydrogen with natural gas to assess impacts on pipeline operations and various home appliances. Again, this is a demonstration project, and we do not currently inject hydrogen into the distribution lines that serve our customers.

Speaker Change: The demonstration project creates zero-emission hydrogen energy directly from natural gas.

Speaker Change: Peoples then blends the hydrogen with natural gas to assess impacts on pipeline operations and various home appliances.

Speaker Change: Again, this is a demonstration project, and we do not currently inject hydrogen into the distribution lines that serve our customers.

Chris Franklin: All right. With that, let me turn it over to Dan to discuss the financials and regulatory matters. Dan?

Speaker Change: Alright, with that, let me turn it over to Dan to discuss the financials and regulatory matters.

Dan Schuller: Thanks, Chris. And good morning, everyone.

Dan Schuller: In this first slide, let's talk high-level, and then we'll get into the details on water. 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.

Dan Schuller: Thanks, Chris, and good morning, everyone.

Dan Schuller: In this first slide, let's talk high level, and then we'll get into the details on the waterfalls.

Dan Schuller: 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.

Dan Schuller: 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.

Dan Schuller: 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 one-time factors, which I will cover on the waterfront. In conclusion, the story of the quarter includes unfavorable weather-related impacts for both water and gas, and difficult O&M comparisons to last year. But the story for the year remains unchanged, and we continue to see the merits of our long-term strategy of providing service to our customers across our platform, investing in needed capital improvements, managing our day-to-day O&M expenses, and maintaining our regulatory relations to deliver long-term shareholder value. We have significant water segment rate cases or surcharges pending in Illinois, New Jersey, Pennsylvania, Texas, and Virginia for a total of $169.9 million.

Chris Franklin: We also experienced lower water consumption in the second quarter than we did last year.

Speaker Change: While we continue our focus on managing O&M expenses, the quarterly O&M shows an increase due to a few one-time 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%.

Speaker Change: We achieved EPS of $0.28 for the quarter.

Speaker Change: Last year's second quarter was especially strong, given higher-than-budgeted water volumes, some one-time credits in O&M, and the impact of the natural gas safe harbor rule.

Speaker Change: 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.

Speaker Change: Next, let's walk through the second quarter waterfalls.

Speaker Change: On slide 9, we have the revenue waterfall for the quarter.

Speaker Change: Moving left to right, we have rate increases and surcharges of over $18 million.

Speaker Change: with about 15 million of that coming from water and 3 million from gas.

Speaker Change: Acquisitions and organic growth in the water business contributed $3 million, and then decreases due to lower volumes of both water and gas, as well as the impact of the purchased gas costs.

Speaker Change: You may have experienced or noticed the excessively warm weather in June in the Mid-Atlantic, including here in Pennsylvania.

Speaker Change: This generally means higher water volumes due to irrigation.

Speaker Change: Given the meter read cycle, however, we didn't see the impact of this in our second quarter results, but we do expect to see this impact on our aqua Pennsylvania results in July , and thus in the third quarter.

Speaker Change: A few other states, Texas, Ohio, and Illinois also had lower water consumption compared to a particularly strong quarter last year.

Speaker Change: Let's talk about the natural gas business for a moment.

Speaker Change: Through May, each of the months this year has been warmer than normal, and this has had a real impact on our financial results.

Speaker Change: This is exactly why we ask for a weather normalization adjustment in our ongoing People's Rate Case, and why we're encouraged that it's included in the recommended decision that will be considered by the PUC commissioners.

Speaker Change: Next, let's take a look at O&M on slide 10.

Speaker Change: O&M increased $9 million year-over-year for the second quarter.

Speaker Change: We saw approximately a million dollars in increases in production costs and employee-related expenses combined, which I believe shows that we're through the extraordinary inflation period that everyone's experienced over the past few years.

Speaker Change: Next, we had an expected increase of $1.3 million in operating expenses from newly acquired systems in our regulated water segment.

Speaker Change: The larger increases include additional costs from the gas segment universal services rider, which is recoverable through a revenue surcharge, as well as higher other expenses.

Speaker Change: The customer service rider was actually a credit last year due to over-collection that occurred as gas costs fell more quickly than rates could be adjusted.

Speaker Change: Thus, the difference between that credit last year and the expense this year is reflected in the $2.6 million increase on the O&M waterfall.

Speaker Change: The $5.1 million other includes a number of items, but last year we had some lower maintenance and insurance expenses in the regulated water segment, and this year was more normal.

Speaker Change: Additionally, we experienced lower capitalization in the regulated gas segment this quarter due to lower capital and direct spend, most of which should reverse later in the year.

Speaker Change: This resulted in O&M that was up from last year, but for the year we expect a positive story here.

Speaker Change: As noted earlier, O&M is up 2.9% year-to-date, which is in line with our historic norms.

Speaker Change: Next, let's look at the EPS waterfall on slide 11.

Speaker Change: Starting on the left of the EPS waterfall with $0.34 from last year, the next thing we see is the nearly $0.05 increase from regulatory recoveries and a half a cent from growth in the water business.

Speaker Change: The other category here includes increases in depreciation, interest, taxes other than income taxes, and income taxes due to the lower repair benefits.

Speaker Change: The lower repair benefits are the result of the timing of the natural gas safe harbor release last year, which resulted in recording both the Q1 and Q2 benefits in the second quarter.

Speaker Change: The $0.28 EPS outcome depicted here would be more than $0.02 higher if we had the weather normalization as included in the recommended decision.

Speaker Change: When we provided guidance in February , we indicated that, presuming normal weather, we would have 2024 EPS of $1.96 to $2.00, excluding the gain on sale of the energy project.

Speaker Change: Unfortunately, warmer than normal weather has significantly impacted the regulated natural gas operating results in both Q1 and Q2.

Speaker Change: So, to better clarify our expected earnings versus guidance, if we take our anticipated full-year reported GAAP EPS,

Speaker Change: And we remove the 24 cent gain from the energy project sale, and then we add back about 8 cents due to warmer than normal weather to date, we would meet that target range.

Speaker Change: Of course, this presumes normal weather from here forward through 2024.

Speaker Change: In conclusion, the story of the quarter includes unfavorable weather-related impacts for both water and gas.

Speaker Change: and difficult O&M comparisons to last year.

Speaker Change: But the story for the year remains unchanged, and we continue to see the merits of our long-term strategy of providing service to our customers across our platform.

Speaker Change: investing in needed capital improvements, managing our day-to-day O&M expenses, and maintaining our regulatory relations to deliver long-term shareholder value.

Speaker Change: Before moving to regulatory recoveries, I do want to mention that we still intend to issue $250 million of equity this year through our ATM program.

Speaker Change: Next, let's move to slide 12 to provide an update on regulatory activity.

Speaker Change: This slide highlights our regulatory activity during this busy year so far.

Speaker Change: We continue to manage our regulatory activity to maintain safe and reliable service, earn a fair return on the capital we invest, and minimize regulatory lag, while always considering affordability for our customers.

Speaker Change: As Chris mentioned, part of this is pursuing low-interest loans and grants wherever possible across our footprint.

Chris Franklin: Thus far, we've received authorization to increase water segment revenues by $25.8 million annually in Illinois, North Carolina, Ohio, and Pennsylvania.

Chris Franklin: And the Kentucky and Pennsylvania gas businesses have surcharges that will increase revenues by $2 million annually.

Chris Franklin: We have significant water segment rate cases or surcharges pending in Illinois, New Jersey, Pennsylvania, Texas, and Virginia to total $169.9 million.

Chris Franklin: A detail of these can be found in the appendix.

Chris Franklin: This includes the Pennsylvania water rate case, which we filed on May 23rd, nearly three years since we last filed.

Chris Franklin: This case, while significant, is largely a capital case and is proceeding as we would expect. We're in the discovery phase now. We've got evidentiary hearings that are slated for October , and we expect a commission order in February .

Chris Franklin: As Chris mentioned, we're optimistic about the progress of our P&G rate case.

Chris Franklin: With the ALJ issuing a strong recommended decision in line with the non-unanimous settlement that was previously reached.

Chris Franklin: We expect this case to be on the PUC agenda in September with rates effective September 27th.

Speaker Change: And as noted, the recommended decision includes the weather normalization mechanism that would greatly reduce weather-related volatility going forward.

Speaker Change: And with that, I'll hand the mic back to Chris. Chris? Thanks, Dan. Let's touch on the Municipal Acquisition Program for just a couple of minutes.

Chris Franklin: As of this call, we have six signed asset purchase agreements in two states.

Chris Franklin: And we have existing water and wastewater operations in both of those states.

Speaker Change: 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 Delcoura.

Speaker Change: We continue to see a strong and healthy pipeline of opportunities for additional growth.

Speaker Change: All right, so in closing, let's review the guidance we provided in February and then update it in May, and we'll reaffirm it today.

Speaker Change: In February , we provided guidance for 2024 net income per share to be $1.96 to $2.

Speaker Change: And the combined utility rate base will grow at a compounded annual growth rate of over 8%.

Speaker Change: With that, I'll conclude my formal remarks and we'll open it up for questions.

Speaker Change: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.

Operator: If you would like to withdraw your question, simply press star 1 again.

Speaker Change: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when answering your question.

Speaker Change: Again, press star 1 to join the question queue.

Speaker Change: Your first question comes from the line of Ryan Connors with North Coast Research. Please go ahead.

Ryan Connors: Good morning. Thanks for taking my question. Good morning.

Speaker Change: Yes, I want to start on, Chris, you mentioned the, you know, the sea motion and the...

Speaker Change: The PUC reform on Act 12, and the separate parallel track of that, which I know there's some legislation out there that would actually make some legislative change and including, I guess, there's talk of even a repeal of Act 12.

Speaker Change: Does the PUC reform process kind of stall that for now, or are those efforts still ongoing legislatively?

Speaker Change: Yeah, Ryan, it's a great question, and I think...

Speaker Change: We've made tremendous progress with the C motion. Chairman DeFrank really showed real leadership in the commission.

Speaker Change: in getting that through. But I don't think it deters the legislative action. I, you know, just given the schedule in Pennsylvania, the election and the short schedule in the fall, I'm not even sure that the House...

Speaker Change: We'll come back in session.

Speaker Change: in the fall. I'm not overly optimistic that something could pass this fall.

Speaker Change: What I would say is there's not an appetite when you look at the full House and Senate.

Speaker Change: to pass a repeal of Act 12.

Speaker Change: And so I would say there's probably an opportunity to get a compromise bill.

Speaker Change: that has some of the things that you see in the SeamOcean 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.

Speaker Change: And I think if we could 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.

Speaker Change: But I remain confident that we don't have the votes, particularly in the Senate, to repeal Act 12 at this point in time.

Speaker Change: Yep, okay, that's fair. Now, on the Pennsylvania rate case,

Speaker Change: You know, I know that there's not a whole lot you can say, it's a pending matter, but in other recent cases in Pennsylvania, we've seen where

Speaker Change: you know, very significant.

Speaker Change: Dingerdissen, Daniel Schuller, Christopher Franklin

Speaker Change: 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?

Speaker Change: Yes, so far We've not seen anything that would surprise us or particularly come to concern Let's not I'm always empathetic to customers who are concerned about rising bills

Speaker Change: Continued discussion.

Speaker Change: internally here on affordability, and so I have great empathy for folks, and we're going to do everything we can to try to

Speaker Change: accomplish the mission.

Speaker Change: and do it at the most affordable levels and I know I saw you at one of the hearings too, Ryan.

Speaker Change: You know, I try to get out personally, I want to hear from people personally, so I sat in the back of the room.

Speaker Change: 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.

Speaker Change: So, we'll continue to listen and react appropriately, but nothing has been surprising to this point.

Speaker Change: 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, the timing of the repair benefits. Anything, any directional help you can give us for the balance of the year modeling on the income tax line?

Dan Schuller: Yeah, a little bit for Brian . So we still anticipate that we'll have a slightly negative ETR at the end of the year. So think like single digit negative ETR for 2024.

Speaker Change: And as we think ahead to 2025, I think that's probably getting a little more toward break-even.

Unidentified Speaker: Got it. Okay, that's helpful. Thanks for your time.

Speaker Change: Got it. Okay, that's helpful. Thanks for your time.

Ryan Connors: Thanks Ryan, take care.

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

Durgesh Chopra: Hey team, good morning. Thank you for giving me time. Just, Chris, wanted to get your thoughts

Durgesh Chopra: on the PFAS program that you have in place. It's just a Supreme Court decision since the last time we spoke. How does that change things, if any?

Chris Franklin: It's a good question, Durgesh, 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

Speaker Change: We'll get this thing done and focus on the PFAS mitigation, focus on the current levels.

Speaker Change: 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, 280 systems, as I said in the former remarks.

Speaker Change: But I think

Speaker Change: 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 and rates once the work is done. So we're full speed ahead.

Speaker Change: God, it sounds like the commissions in different states are driving this.

Dan Schuller: and so no changes there. Thank you. A couple modeling questions for Dan. Just Dan, can you remind us or tell us if you have issued any equity?

Dan Schuller: So far, versus the $250 million target, that's one. And then just second...

Speaker Change: 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.

Speaker Change: We're 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

Speaker Change: 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.

Speaker Change: from weather as we anticipated for July .

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: And, you know, 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.

Speaker Change: 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 to the balance of the year.

Speaker Change: Perfect, that's really all I had. Thank you guys again.

Gragas: Take care, guys.

Speaker Change: Your next question comes from the line of Michael Gaugler with Jenny Montgomery Scott. Please go ahead.

Speaker Change: Good morning, Mike. Good morning, everyone.

Michael Gawler: 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?

Unidentified Speaker: for you if any might be, or are we kind of still in just a waiting mode?

Speaker Change: Well, you know, 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 to raise taxes about 5%.

Speaker Change: Certainly the sale of Delcoura would raise them more than they would need coming from tax increases.

Speaker Change: And, our modeling continues to show that, even despite some reduced capital spending they planned, we would still have lower rates. And, you know, in our model, we're showing a 2% annual increase over a decade.

Speaker Change: 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.

Michael Gawler: So, you have that aspect of it, Michael, 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 a stay on all progress at this point, so we continue to wait for an appeal there.

Michael Gawler: And we're hopeful that that stay is lifted sometime.

Michael Gawler: 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.

Speaker Change: And, you know, I'm optimistic about proceeding there. So I can't put a timeline to it, but we, you know, our guidance has been, you know, estimated by mid-year 2025, we're mid-year 2024 here. So.

Speaker Change: We still think we have a shot at that, you know, should something break loose here soon.

Speaker Change: That's good. And then in terms of the second half of the year, I noticed here in 2Q, estimates were

Speaker Change: 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 you know positive weather impacts.

Speaker Change: here in the third quarter.

Unidentified Speaker: When we think about our forecast versus the consensus, we would say that the consensus for the third quarter is high, and the consensus for the fourth quarter is low.

Speaker Change: Yeah, happy to do that Michael. So, when we think about our forecast versus consensus, we would say that consensus for the third quarter is high and consensus for the fourth quarter is low.

Speaker Change: So as you think about refinement to your model, let me give you a couple pointers here.

Speaker Change: For Q3 2023, that included an extra $0.085 of earnings from the Gas Repair Safe Harbor rules.

Michael Gawler: So that's, if you're building off the 2023 reported 30 cents for the third quarter, you'd be too high.

Michael Gawler: So keep in mind that this quarter will not yet have the impact of the pending gas rate case.

Speaker Change: 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.

Speaker Change: Understood. Let me touch on Q4 if I could, Michael, real quick.

Speaker Change: Bye.

Michael Gawler: 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, date, and gas.

Speaker Change: And also, if you're building off the Q4 for 2023, you want to keep in mind that last year the report is 50 cents.

Speaker Change: was weakened by warmer than normal weather in December and a one-time tax charge that had an impact of about 6.8 cents in the fourth quarter last year.

Speaker Change: 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 $2.00 range on a weather-normalized basis once we exclude the impact of the energy project sale.

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

Speaker Change: Today or tomorrow? I think that's it. Let's think about it that way, Michael.

Speaker Change: All right. Thank you. You'll see it soon.

Speaker Change: Thank you.

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

Jonathan Reeder: Good morning, Chris and Dan. How are y'all?

Jonathan Reeder: Well, thanks. Good. I wanted to get your thoughts or, you know, 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%, you know, going back to, like, 2017.

Speaker Change: Yeah, so you know our dividend payout ratio as you've seen has been slowly 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 to moderate the increase in that payout ratio.

Speaker Change: It's really that simple.

Speaker Change: Okay, so now the payout ratio is kind of where it needs to be or where you're targeting and then, you know.

Speaker Change: 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?

Speaker Change: Yeah, I mean, as you know, we make this decision one year at a time, but, you know,

Speaker Change: You know, we'll continue to think in those terms.

Speaker Change: Okay, and then just kind of...

Unidentified Speaker: No. Oh, okay. I didn't want to cut you off.

Speaker Change: Sorry, were you going to say something, Chris, or?

Speaker Change: No.

Chris Franklin: Oh, okay. I didn't want to cut you off. So, just clarifying something to estimate an 8-cent weather headwind year to date.

Unidentified Speaker: So, just clarifying something, the estimated eight cent weather headwind year to date, is that also including the lower volumes of the water segment, or is that just purely gas? No, that's not it.

Speaker Change: 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 can be more clear on in the future. But we haven't talked much about weather impacts on the water side.

Speaker Change: On the water side, if we thought just about the quarter, water consumption probably is about a half a cent impact for the quarter.

Speaker Change: Whereas, on the gas side, I think $0.08 year-to-date for an impact and about $0.03 for the quarter.

Speaker Change: 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 read cycle, or is there something else?

Unidentified Speaker: I think it's, you know, 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 that the back half of the month ends up being primarily estimated, so you pick up that revenue in the subsequent months, so in July.

Speaker Change: I think it's, you know, we just had lower water sales through the first part of the year in a number of our states.

Unidentified Speaker: That makes sense. And yes, it's super early.

Speaker Change: 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.

Speaker Change: 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...

Speaker Change: Numbers for July for Pennsylvania, they do reflect that pickup from the back half of June .

Speaker Change: Okay, so then that like two and a half cents difference between Q2 2023 and Q2 2024 should reverse.

Speaker Change: Yeah, I hate to speak that specifically on it, but I would say, if we look at our comparison to last year, as you saw,

Speaker Change: We had a pretty stark comparison of water revenue.

Speaker Change: 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, you know, we've been a bit below.

Speaker Change: I'm trying to get if that's because of this.

Speaker Change: you know, the meter cycle.

Speaker Change: or if it's, you know, actually underlying usage, because, you know, I know you and American Water Works are on sort of the same territories, but they were kind of talking the opposite direction, saying, you know, the anticipated declines in usage.

Speaker Change: From those elevated levels in 2023, the anticipated decline in usage weren't as great as they were thinking they would be in 2024.

Speaker Change: Yeah, and that sounds like that is the result for them, but in our case, you know, I'd say we had...

Speaker Change: Significantly higher water sales last year relative to budget and somewhat lower sales this year relative to budget.

Speaker Change: 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 states that

Speaker Change: including states they're not in, like Texas, for example. Yeah, OK. All right, thanks for bearing with me there and giving me the additional detail. No problem. Thank you.

Speaker Change: Again, if you would like to ask a question, press star followed by the number one on your telephone keypad.

Speaker Change: And your next question comes from the line of Davis Sunderland with Baird. Please go ahead.

Speaker Change: Morning, Davis. Hey, Davis.

Davis Sunderland: Good morning, Chris. Good morning, Dan. Thanks for taking the time, guys. I appreciate it. Two from me, both on the M&A pipeline. And actually, first one, just a quick one. Chris,

Davis Sunderland: 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?

Speaker Change: 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.

Speaker Change: with Municipals, trying to understand the new rules.

Speaker Change: and and so

Speaker Change: What I would expect to see is once this RRR, which is this guideline that they're going to issue in the coming days here, once that's issued, I would expect municipals to start doing the math and say, okay, if I take depreciated original cost

Speaker Change: and I look at the multiple, you know, 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 some were before.

Speaker Change: But I think they'll see it as fair, and I think that will begin to initiate even more conversations once that's issued. That's coming in the coming days here.

Unidentified Speaker: 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 PFAS 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 jurisdictions?

Speaker Change: That makes sense. And yeah, 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

Speaker Change: softening of sellers' expectations as it relates to valuations for their systems, and maybe some of this is due to realizing PFAS 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?

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

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

Speaker Change: Yeah, I do think that that's also...

Speaker Change: And, of course, those are conversations that we're having directly with municipals.

Speaker Change: 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.

Speaker Change: 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.

Unidentified Speaker: That makes sense, and that's all. Thanks for the time, guys. I appreciate it.

Speaker Change: That makes sense and that's helpful. Thanks for the time guys, appreciate it.

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

Chris Franklin: Thank you. 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.

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

Speaker Change: This concludes today's call. You may now disconnect.