Q2 2025 Essential Utilities Inc Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator. Today at this time I would like to welcome everyone to the essential Q2 2025 earnings conference. Call all lines have been placed on mute to prevent

Any background noise 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 1 on your telephone keypad. If you would like to be draw a question, again, press the star 1,

I would now like to turn the conference over to Brian. Dinger disen. You may begin.

Thank you. Good morning everyone. And thank you for joining us for the second quarter 2025 earnings call. If you did not receive a copy of the press release, you can find it by visiting our website. The slides are also found on the website as a reminder some of the matters discussed during this call, may include 4 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 4 looking statements. Please refer to our most recent 10q 10K and other SEC filings for description of such risk and uncertainties.

During the course of this call references, may be made to certain non-gaap Financial measures reconciliation of any non-gaap to gaap financial. Measures is posted on our website, we will begin the call with Chris Franklin, our chairman and CEO will provide an update on the company, then calling Arnold the president of our Aqua business, will provide an update on the

Water Business, Dan Schuler, our Chief Financial Officer will then provide an overview of the financial results before Chris closest the call and opens it up for questions with that. I will turn the call over to Chris Franklin.

Hey, thanks Brian. Good morning, everyone.

Let's Just Jump Right In on slide 5. There with some highlights from the quarter.

We delivered another strong quarter, reporting GAAP earnings per share of $0.38. That's a 35% increase over the same quarter last year.

Both our water and gas businesses performed very well, and in line with our expectations. Simply put, both divisions are firing on all cylinders.

Our gas business continued its impressive trajectory with net income for the quarter of 17 and a half million dollars. I'm not going to steal any Thunder from Colleen. She's going to share a little bit more about the water business in a few minutes, but as you come to expect,

We are executing nearly flawlessly in both our water, and our natural gas segments.

Based on our strong year-to-date performance, we expect to achieve Gap, earnings per share above. Our guidance range of $2.07 to $2.11 largely due to several non-recurring benefits.

We're also reaffirming our capital investment plans.

With a target of approximately 1.4 billion in infrastructure, investment for 2025.

As of June 30th, we've already deployed 613 million in critical infrastructure improvements across our footprint.

Now, let me take a moment to highlight some exciting developments happening in our home state of Pennsylvania.

Earlier this month, we participated in the Pennsylvania Energy and Innovation Summit.

which was hosted by our new United States Senator Dave McCormack.

Gathered to share thoughts, breakthroughs in energy and technology.

And our guests division, president Mike cure, showcased our ongoing hydrogen pilot project. This is a Cutting Edge technology developed in partnership with h Quest and the University of Pittsburgh

Now, the comparatively low price of energy in Pennsylvania makes it such a logical choice for hyperscalers looking to locate data centers.

And we continue to have active discussions with some of those hyperscalers as we speak.

Now moving from Pennsylvania to Texas, we serve customers in the Kerrville area of Texas. You'll recall the terrible flood that took place just several weeks ago.

Fortunately, all of our employees and their families made it through the storm.

And 1 of our employees and his family had 9 feet of water in their home and had some absolutely harrowing moments, but thank God, they're a healing from their injuries and working to reestablish their home.

During the height of the event, we had some customer outages.

But restored service to most customers within 24 hours, and all customers within 48 hours are really exemplary job done by our Texas team.

Speaking of employees.

Last month, we wrapped up our most recent Employee Engagement survey under the theme "Better Together." I know Employee Engagement is becoming a common topic for investors.

Now, our results reflected the impact of our focused efforts to enhance our work environment.

In fact, participation in the survey increased 23%, which was fantastic.

Satisfaction scores Rose by 6%. And on average surveys scores improved by 7 points.

These results reflect our continued focus on creating an engaging, inclusive, and supportive workplace.

Each year, we take great pride in reminding shareholders that for more than 30 years in a row, we've increased our dividend.

and as an expression of continued confidence yesterday, the board of directors approved a 5.25% increase in the dividend,

We remain committed to delivering long-term shareholder value through dividends and share price appreciation.

So let's take a look at slide 6. We'll touch on a couple of the community engagement issues.

In April, we successfully concluded, our fourth, annual essential Earth day, and this is a 30-day campaign dedicated to environmental, stewardship and Community engagement.

The slide showcases, our efforts in recent years which include volunteer events environmental programs, and a significant investment from our essential Foundation.

I was recognition for our community engagement and Leadership. We were recently honored as 1 of Greater Philadelphia's, most community-minded businesses. This is a recognition that we really appreciate and take to heart.

Modeled, after the points of light National program, the award recognizes companies that set the standard for civic engagement through using their time talent and resources.

This commitment to community engagement is something we do in all of our states where we have businesses.

And finally, on a personal note, I am thrilled and honored to be named the chairman elect of the Philadelphia Chamber of Commerce.

I look forward to partnering with leaders from around the region to promote economic growth and Regional priorities, which hopefully end up with more utility customers.

Moving to slide 7. Let's talk about the shareholder value.

We continue to deliver steady reliable growth and earnings and dividends.

2025 is shaping up to be another strong year with core earnings per share, expected to grow this year between 5 and 7%.

Most of this growth is driven by investments in water and natural gas infrastructure.

Of note, since we started providing annual guidance back in 2016, we have consistently met or exceeded market expectations.

This consistency has enabled strong dividend growth, underpinned by the outstanding execution of our operations team and their commitment to communities. We serve.

I have to tell you I I continue to be impressed by what our team has achieved and I'm honored to continue to be Steward of this great company with its 140 year history.

This is a segment leaders. You know, last quarter you heard from my QR president of our natural gas division. And today we welcome Colleen Arnold president of our Water Division. We'll share some thoughts on our water business calling. Thanks Chris.

I'm happy to be here today and especially appreciate the opportunity to highlight the important work that the team at Aqua is doing.

As a reminder for our investors Aqua is Chris just mentioned has a strong 140 year history and has grown from a small water company in Suburban Philadelphia to serving more than a million customers. With over 7 billion dollars of rate base in 8 States,

Notably as shown on slide 9, we are expecting annual rate, based growth of 6% through 2029 not, including acquisitions.

And the need for infrastructure Investments has never been greater.

Vpa, estimating, 1 trillion dollars of need and water and wastewater infrastructure that growth rate could easily grow with acquisitions.

Now, I've worked in the water industry for over 30 years, including as a consultant for municipalities and for a large city itself.

Between the increasing complexity of Pas, cyber security Wastewater and declining funding, the conditions have never been more opportune.

Now highlighting our operational excellence on slide 10.

As you see on the left, our O&M efficiency performs in the top quartile and has done so for over a decade.

we take pride in ensuring that we are spending our customers dollars efficiently.

But equally important is that it is not at the expense of safe, reliable service.

The top right-hand side chart shows that we outperform water systems nationally by 5 to 9 times, with fewer health-based and aesthetic violations.

The bottom chart also shows our strong safety record, the top quartile performance with respect to severe safety incidents.

Also, as we move to slide 11, we are tremendously proud of our industry-leading PAS commitment.

We have been working on this for our customers since 2016, well before the EPA and state MCLs, because it was the right thing to do for our customers.

Our laboratory in Pennsylvania was one of the first certified.

And we sampled all of our sources proactively.

Enabling us to be where we are today.

At this point, we have over 50 of our 300 plus sites, mitigated, an approximately, another 50 under construction

This level of execution was made possible by the Ingenuity of our engineering team designed a proprietary modular system. With applicability for groundwater systems.

We've recently signed a distribution agreement with Chart Water to sell this patent-pending solution called PIFAS Guard for Community Water Systems.

It is generating a lot of interest.

While we expect increased regulation to enhance acquisition opportunities.

Municipal systems, speaking from my experience and having worked with one, are slow to meet regulatory requirements.

And many are just beginning to do the initial monitoring for Pas now,

The extension of regulatory deadlines may enable them to delay longer.

However, we remain optimistic that as the monitoring results come in, with our strong leadership, proven track record and Partnerships. This will be a strong Avenue for acquisition growth.

Lastly, speaking of growth, I wanted to spend a little bit of time on AA, Texas.

where we have grown by nearly 25,000 connections to over a 100,000 connections over the last 10 years, currently have another 90,000 under contract or negotiation

This is in line with the impressive growth the state has seen, including a 16% population increase and corresponding 30% GDP growth or economic expansion.

Our three core operational areas outside of spring, often in Fort Worth, Texas, grew from 20% to 40%.

Most notably Austin Metro our area of highest developer growth through 40%.

Based on customer growth and infrastructure needs. We expect to nearly double refeed to 1.1 billion dollars in Texas by year end 2029.

Future, test your legislation.

This will enable us to recover that capital investment and minimise Regulatory lag.

I would like to thank our amazing employees, who really made that possible.

We are excited about our future in Texas.

And with that, I will turn it over to Dan for a review of the financials.

Thanks Colleen. Let's begin on, slide 15 with a high level view of the first quarter results and then we'll get into the details on the waterfall.

Our quarterly performance was strong with revenues up 18.5% to primarily the favorable rate case outcomes in.

Pennsylvania.

Look for our gas and water subsidiaries.

Higher purchase gas costs and increase gas volume.

Corresponding earnings per share are up 35.7% on a year-over-year basis, due to those drivers, partially offset by higher depreciation, interest, and taxes.

I cite 16, we have the revenue waterfall for the first quarter.

Revenues increased.

$8.5 million from $434.4 million a year ago to $514.9 million this year.

Approximately $44 million of that increase is a result of rates and search charges, with $31 million attributed to water and $13 million from natural gas.

Purchase gas, which represents the cost of the gas sold by the company increased, 23 million year-over-year. Due to an increase in gas, commodity prices and higher natural, gas usage.

The other category of 9.8 million includes 4.6 million in weather normalization and 4.1 million in reduced tax, reverse store credits to customers as a result of last year's People's Rate Order.

Increased gas volumes provided 4.3 million increased Revenue while growth in the Water Business. Contributed 2.1 million.

These were offset by 2.6 million from lower water volume.

Due to wet weather, we saw decreased consumption in the number of our state.

Next on site 17 our onm slide we see onm expenses up about 6 million or 4.2% year-over-year.

Mean drivers include an increase in employee-related costs of $6.1 million compared to prior periods, an increase in bad debt expense of $2.2 million, and increases in legal expenses, partially offset by favorability in other expenses, primarily as a result of capitalization.

The increase in employee related costs includes about 650,000 of increased Insurance reserves. As we move the people's employees from a fully insured, health plan to its self-insured Health Plan,

we normalize out the growth, the Universal Services Rider increase and the higher the normal employee expenses such as the insurance Reserve, we get to a year-over-year increase of less than 3%, which is in line with our historic norms,

And slide 18, our earnings slide. We can see the previously mentioned effect at 11 Cent positive impact from rate and search charges a 1% increase due to higher natural, gas, volume and a 2-cent negative impact, due to lower water, volume, and increased expenses.

Then turning to slide 19. As you remember, this is a slide we introduced last quarter. That provides more insight into how our annual EPS breaks out by quarter.

We've now added the 2 quarters as reported with both at the high end of the Shaded ranges.

For the third quarter of 2025, we expect our EPS to be between 10% and 20% of our annual guidance.

So, expect our fourth quarter to be between 20% and 30% of our yearly guidance.

we have some non-recurring items this year that benefit earnings,

So, on a normalized basis, we continue to target $2.07 to $2.11.

and as Chris mentioned, we currently expect gaap EPS to exceed, $2.11

Lastly, let's move to slide 20 to provide an update on regulatory activity.

On July 1, 2025, our natural gas operating subsidiary in Kentucky received an order from the Kentucky Public Service Commission.

This order approved, the settlement agreement that allows dates rate increases designed to increase total annual operating Revenue by 7.7 million dollars or 11.2%.

New rate in Kentucky went into effect on July 1st.

So, it's a busy year on the regulatory front.

We continue to manage our regulatory activity to maintain safe and reliable service, earn an appropriate return on the capital that we invest, and minimize regulatory lag, all while considering affordability for our customers.

Before I conclude, we wanted to take a moment to recognize Bob Rubin.

Bobson has been with the company for 36 years. He's been our Chief Accounting Officer for 20 years.

During this time, Bob said, ultimate responsibility for our financials and SEC filings, and he's played a critical role in our earnings. Call Press

Thanks for your contributions to the company Bob, and for your friendship, you will be missed.

Fortunately, over the past few quarters, Bob has worked to transition his role to Brad Palmer, our new Chief Accounting Officer, so we won't miss a beat. Welcome to that new role, Brad.

And with that, I'll turn it back over to Chris. Chris? All right. Thanks, Dan. Now let's move to slide 23, where we touch on our long-term growth through acquisition strategy, which for many years has really been focused on growing our water and wastewater business.

Last week, we finalized our 37.75 million purchase of the city of Beaver Falls Wastewater system in Beaver, County Pennsylvania, serving about 7,000 customers that's out near Pittsburgh.

We plan to invest $10 million in the system, focused primarily on improving both operational efficiency and environmental compliance. We're very excited to welcome our new customers and bring their system up to our standards.

Now, for 2025 in total, the company has acquired systems, which serve approximately 10,300 customers for approximately 58 million.

We also have another four signs purchase agreements for relatively small systems in Pennsylvania and Texas. I'll remind you that progress on Delora continues to be stalled by a stay put in place by a federal bankruptcy court judge related to the bankruptcy of the city of Chester. Now, there's really nothing new to report on Delora, but I'll remind you that Delora is not included in our current guidance numbers.

Now, turning to slide 24, I'll close by reiterating some of our goals and aspirations, both short term, and long term.

We continue to see strong growth potential in both our water and gas platforms. And expect our combined utility rate base to grow at a compounded annual growth rate of about 8%,

Breaking this down a little further. The regulated water segment is expected to grow about 6% and our regulated natural gas segment rate base will grow about 11%

we are reaffirming our 5 to 7% multi-year earnings per share guidance through 2027.

This includes acquisitions expected to close in 2025 and 2026. But, as we've said before, it excludes Delcora.

This projection includes the crucial work that we're doing to remediate POS across our water platform, as well as our work to replace aging water and natural gas pipes.

We remain committed to maintaining a strong balance sheet, improving our cash flow and debt metrics and delivering consistent dividend growth while keeping, our payout ratio between 60 and 65%.

All in all, we see a bright future for our company. As we continue to invest in our nation's infrastructure and continue to deliver long-term value to our shareholders. And with that, I'm going to conclude the formal remarks for today, and we'll open it up for questions. Let me send it back to you, operator.

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press *1 on your telephone keypad to raise your hand and join the queue. If you would like to enjoy your questions, simply press *1 again.

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And our first question comes from the line of Julian Dolan Smith with Jefferies. Your line is open.

Uh, in terms of quarterly, uh earnings if you take the midpoints um from those and and kind of look what's implied kind of implies maybe high-end or better. If you look at implied, third quarter and fourth quarter here again, I I don't mean to nitpick too much but if you have any comment there, I'd love to to kind of read between the lines there. If there's anything you'd say. Yeah. For sure.

You know what? We've said on the call here, both Chris made the point and I did as well, that we're going to come out on a gap basis above our guidance range. So above that 2 dollars.

Got you in?

Yeah, yeah, that, that, that. So, yeah, yeah. No, no, no. All of a sudden, we had some strange music going on. So, you know, let me, let me watch. Let me give you a little bit of detail there. So, as I said, we're going to, we're going to come out above the GAAP guidance range.

And we had strong revenue and gas this winter with more gas usage than whether alone would have predicted. And then this year as well, we've benefited from some tax items and the reversal of a regulatory Reserve, or as a result of the acupuncture Pennsylvania rate order. We had some insurance proceeds, as well. So those are on the positive side. We've also set had some headwinds this year. We've had uh, wet summer, and several of our states, which is impacted Us in Q2. It's currently continuing to impact Us in the early part of the third quarter.

Interest rates, of course, remain higher than expected. Inflation is still impacting some areas, like chemicals, and we're still in the investing stage on our lean initiative.

so,

And we, of course, you know, it's still early in the year relative to the gas business. We've had one happen, you know, we've had half of last year's heating season, and we still have...

November and December are left in this year, so things can still move around. Thus, we're not being overly specific on where we'll land, but we're saying that on a gap basis, it'll be above the guidance range.

Yeah, got it. Thank you very much. Just want to elaborate a little bit there and then just on the cash flow front. I mean, just, you know, where are you trending on FFO through the year here? And then specifically within that, how are you thinking about PFAS here? And some of the tales from the settlements here and the timing for the collection of those, if you will.

Yeah, so you'll see, uh, let me touch on those in pieces. So, um, our focus really for this year is to be above that 12% downgrade threshold. Ideally, you know, put some distance in there, call it like a 12.2% target area. Um, because we've obviously been in close conversations with Moody's, and we'd like to see that negative outlook removed in early 2026 once they see full year 2025 results.

And then, in terms of PFAS settlement dollars coming in and being helpful from a cash perspective, you'll see when we file the Q2 on Monday next week, you'll see that we received just about $7.1 million in PFAS proceeds from those lawsuits already. We expect a number this year that's kind of in the $45 to $46 million range in total.

Got it. All right. Excellent, thank you. I appreciate that. You know what? I'll leave it there. I'll let others have questions, but thank you, and I see Don. Good luck in Texas here.

Thank you, l.

Our next question comes from the line of Ryan Connors with North Coast Research. Your line is open.

Hey Ryan. Good morning. Good morning. Ryan

So a couple big picture questions on Pennsylvania. And then, and then a, uh, a housekeeping for you, Dan. Um, sure. So I know you're, I know you're out of rates in Pennsylvania at the moment, but but obviously, we have the new consumer Advocate there, so and I assume your team watches other matters going on, really closely so curious. Whether you've gotten been able to get any, um, feel for the approach that that he's going to take and and how that will differ from from the prior, um, consumer Advocate. And then, secondly, been hearing some chatter about the office of small business Advocate being tougher to get to the settlement table on on various matters. And, you know, maybe being the next, uh,

Flying the ointment, if you will. So I wondered if you had any perspective on that as well.

Yeah, listen.

So I I I do expect a more constructive relationship there at the OCA, and that's been our observation so far.

You know, listen, uh, the small business Advocate, she has a role as well and and uh, you know, these are statutory parties and they've got um, they've got their priorities. I, I would say this. Um, The Advocate has been very open to conversation. She's visited us here at the company in brinmar, and, uh, she has been open to conversation on all the topics. So, listen, I'm I'm hopeful that we can have constructive relationships with all the Advocates and um, and uh, you know, that's been our our experience so far.

Great. This is very helpful caller. Thank you, Chris. Um, and then, secondly, on on the fair market value front, I've been hearing that. There are some Municipal sellers out there, Holding Out for a price above, the reasonable review ratio, that was set in the, um, in the reform to FMV in Pennsylvania. And I guess the reasoning is that that the puc does have the ability to approve, something above that level on a Case by case basis, um, is that is that something you've seen and and would you be willing to go take that risk over the cap? Um or would you want? Just be staying kind of at, or below the the rrr?

Yeah, you know. Um, I, I can't say that we've seen that yet, um, but I, I, I will say that on occasion. We might pay more than the RR if we thought that, for example, there was huge rate based growth and we could grow into it. Um, I I'd like to think that, um, uh, the RR is a target for both seller and buyer given impact on rates, right? And that, I think that was

The chairman and the commission's primary goal here was to, uh, the minimize impact on rage from from transactions and and, you know, we're, we're, we're big Believers that that's important. And so, uh, I'm not saying it would never happen, but but we'd like to see both buyer and seller, be closer to uh, that RR than, than, than above it.

Got it. Okay. Very helpful. And then, uh, and then then then, yeah, just on the tax rate, it really, really continues to kind of jump around and, at least for us, found it very difficult to model. So any perspective you can give us on where, how actually we should think about the landing zone there, not only for the balance of '25, but even into next year? Like, what’s your, what’s your, um, your advice here on trying to model that tax line? Because it really seems to be, you know, kind of a random spin.

Yeah. So, by the way, I think of that as a low single-digit benefit for the full year of 2025.

And then for the whole of 2026 at this point, and of course, we haven't finished our budget or plan, but I think of that as a low single digit expense. So think of a crossover, you know, from that year end from small benefits this year to small expense next year.

Got it. That's exactly what we were looking for. Thank you very much. Thanks, guys. Yeah, for sure you.

And again, if you would like to ask a question, press star, then the number 1 on your telephone keypad,

And we have a question comes from the line of Davis. Sunderland with beard, your line is open.

Hey David. Good morning, David.

Good morning Chris, good morning dag, good morning Colleen. Thank you for the time, I happy Friday. Um, 2 questions from Me. Maybe first just jumping back. Chris to your comments about the hyperscalers, and obviously a lot of activity going on in Pennsylvania right now. Could you maybe just talk a bit more about the potential opportunity here and specifically, the timeline for ultimately folding some of these into rate base? Um, I just, I guess I'm trying to square the stable, customer account through 27 makes me think maybe beyond that would be the opportunity. But just wanted to clarify some of the thoughts there and then I have a 1 more

Yeah, I I I think listen, most of the hyperscalers that are that are taught in are are talking about really short-term turnaround. They want, they want to build and get in service. And, as I said, I think Pennsylvania a prime location for that, particularly Western Pennsylvania where there is low cost energy. Um, I I I have to be careful, um, in in what I say. Uh, there are some ndas in place and, and I and I, I can't really talk much about the opportunities we're engaged with right now, but um, I will say, quick turnaround and, and I and I, I would also just maybe position it to think about as you as you think about these things. Maybe not all rate based or all regulated but um but some um uh unregulated opportunities as well.

For that. Um and then maybe second 1 Colleen, I appreciate the comments on Pas and thank you for that. Maybe just wanted to ask about this potential EPA push out and the rule may be coming out later this fall. I would assume no change to how you guys are thinking about it. And plowing ahead with the upgrades, but maybe just more about what you're thinking, the munis might do, is this any change in maybe the acquisition pipeline, if there's, maybe a push out in some opportunities related to that or or any thoughts? Thanks, guys.

yeah, thanks for the question and

As I said in my comments, um, there's no change to our program at all. Um, you know, we're full steam ahead. I do think really, in terms of the acquisition and the growth opportunities, there's no change there either. Most municipalities, um,

You know, they are going to wait until the last possible minute. They're just starting to monitor. Um, and so this gives them a little bit more time to keep their head in the sand, but the opportunities are going to be there. And like I said, with our position and the amount of experience we have with systems operating well, we're going to be really well positioned to help them.

Colleen, I, you know, just think about it. Um, yeah. They might have a couple more years to comply, but given the fact that we have a resource solution, maybe we can help accelerate some of those solutions with our filtration system. And who knows? Maybe that starts some conversation, would you agree? Yes. And, um, when I was at, you know, the American Water Works annual conference this year, you know, generating a lot of interest— a lot coming up to me, the engineers coming up to me, um, asking about it. And, uh, as they, like I said, get their heads out of the sand and know they have to comply, um, I know our solution is going to be a great fit.

That's great. Thank you. Both appreciate the time, guys.

Take care.

That concludes the question and answer session. I would like to turn the call back over.

Its Franklin for closing remarks.

Thanks folks, appreciate you, joining us today as always uh, the team is ready to answer questions or follow-ups if you have them, thanks so much have a great weekend.

ladies and gentlemen, that

concludes today's call. Thank you all for joining in. You may now disconnect