Essential Utilities, Inc. (WTRG) Earnings Call Transcript & Summary

Good morning. And welcome to the Essential Utilities Annual Meeting of Shareholders. I would now like to introduce the first presenter, Christopher Franklin.

Good morning, and welcome to Essential Utilities 2021 Annual Meeting of Shareholders. I'm Chris Franklin, Chairman and CEO of Essential Utilities. Thank you for joining us today. You may recall that last year, we were planning to hold our shareholder meeting in Pittsburgh, Pennsylvania at the headquarters of Peoples Natural Gas, who we acquired last year. But due to the COVID-19 pandemic, we shifted the meeting to be completely virtual so shareholders could safely attend our annual meeting. As we planned last year, we're physically in Pittsburgh today, but to support the health and safety of our shareholders and employees, we thought it was best to hold the meeting virtually again this year. I appreciate your participation. Hope you find the virtual experience to be useful. Now a couple of administrative issues before we begin. I'll remind you that today's meeting is being recorded and will be available on our website. Copies of the meeting minutes from our 2020 annual shareholder meeting are available on the virtual meeting platform. I will conduct the formal business portion of the meeting. And after the formal meeting is adjourned, I'll review the results from 2020 and discuss our corporate strategy. [Operator Instructions] All right. In accordance with the company's bylaws, the notice of today's meeting and Internet availability of the proxy and materials were mailed on March 26, 2021, by Broadridge Corporation to all shareholders of record as of March 8, 2021, which was the date fixed by the Board of Directors as the record date for shareholders entitled to vote at this meeting. This notice will be included with the records of today's meeting. A copy of the shareholders entitled to vote at today's meeting is also available for review. Mr. Peter Descovich, who has been appointed judge of election has taken his oath of office. Mr. Descovich has confirmed that approximately 83% of the 245,614,099 votes -- sorry, shares of common stock outstanding on the record date are entitled to be voted at the meeting are presented -- are represented either in person or by proxy. Therefore, a quorum is present and the meeting will now come to order. I will act as Chairman of the meeting; and Christopher Luning, Essential's General Counsel and Corporate Secretary, will act as Secretary of the meeting. Outlined in the proxy are 4 proposals to be voted on by the shareholders this morning. The first proposal is the election of 8 directors to serve until the 2022 annual meeting of shareholders and until their successors shall have been duly elected and qualified. As set forth in the proxy statement, the following nominees have been proposed for election: Ms. Elizabeth Amato, Ms. Edwina Kelly, Mr. Daniel Hilferty, Mr. Francis Idehen, Ms. Ellen Ruff, Mr. Lee Stewart, Mr. Christopher Womack and me, Christopher Franklin. The directors' backgrounds and qualifications are explained in the proxy. I will introduce each of the candidates who are here with me later in the meeting. The second proposal is the ratification of the appointment by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the company for the 2021 fiscal year. The Board recommends approval of this proposal. The third proposal is the approval on an advisory basis of the company's executive compensation for 2020 as disclosed in the proxy statement. The compensation program you are voting on was updated for 2021 based on feedback from many of our shareholders. The Board recommends the approval of this proposal as well. The fourth proposal, the approval of the amendment to the amended and restated bylaws to permit shareholder access to future proxy statements. The Board also recommends approval of this proposal. These 4 proposals are the only matters to be voted on by the shareholders at this meeting. We're declaring the polls open for balloting on these matters. We'll take a moment to respond to any submitted questions or comments specifically concerning these 4 proposals.

At this time, there are no questions specifically about these proposals.

Thank you, Brian. Now I declare the polls open for voting on these proposals. If you have already voted your -- by proxy and do not wish to change your vote, your vote would be cast as previously instructed and no further action is required. To submit your vote or change your previously filed responses, please click on the vote here towards the bottom right-hand side of the screen. Please follow the instructions for the proxy ballot that will pop up and appear in the upper right-hand side of the screen. [Voting]

Now while we wait for the votes to be tabulated, let me introduce you to the candidates for the Board of Directors. Before I do that, though, I want to acknowledge the retirement of the company's former Chairman and CEO, Nick De Benedictis, from the Board. Nick served as Chairman and CEO from 1992 to 2015 and remained as a valuable member of the Board until his retirement today. I want to thank him for his vast contributions to the company over his many years of service. All right. Here are the candidates: Ms. Elizabeth Amato is former Executive Vice President and Chief Human Resources Officer from United Technologies. She joined UTC at Pratt & Whitney in 1985, has held a variety of the most senior human resource leadership positions across the corporation. Ms. Amato has served as a Board member since 2018, and is a member of the Executive Compensation Committee and chairs the Corporate Governance Committee. Ms. Edwina Kelly has served as a senior principal of the Canada Pension Plan Investment Board, CPPIB, since 2019. She's been nominated to the Board by CPPIB, who invested $750 million in the company in a private placement transaction associated with the Peoples acquisition. If elected, Ms. Kelly will be a member of the Audit Committee and the Risk Mitigation and Investment Policy Committee. Mr. Daniel Hilferty recently retired from the Independence Health Group, one of the nation's leading health insurers, where he was most recently serving as President and Chief Executive Officer since 2010. He became a Director at Essential in 2017, and he's our lead Independent Director. Mr. Hilferty is also a member of the Executive Committee and Corporate Governance Committee and President and chairs the Executive Compensation Committee. Mr. Francis Idehen is the Chief Operating Officer at GCM Grosvenor, a global alternative asset management firm. He's been in the position since May of 2017. Prior to this, he held senior roles with Exelon Corporation. Mr. Idehen has served as a Board member since 2019. He is a member of the Audit Committee and will chair the Risk Mitigation and Investment Policy Committee. Ms. Ellen Ruff is a former President of Duke Energy. Ms. Ruff has served as a Board member since 2006. She's a member of the Executive Compensation Committee and the Corporate Governance Committee. Mr. Lee Stewart is a private financial consultant with over 25 years of experience as an investment banker. He was CFO of Foamex International and Vice President at Union Carbide Corporation. Mr. Stewart has served as a Director of numerous public companies, including ITC, Glatfelter Paper Company, AEP and the Momentive Performance Materials. He has served as a Board member since 2018 and presently chairs the Audit Committee and is a member of the Risk Mitigation and Investment Policy Committee. Mr. Christopher Womack was named President of Georgia Power, a leading electric and gas utility holding company in 2020. He previously served as President, External Affairs and Southern Company since 2008. He worked in various executive leadership positions at Southern Company since 1988. Mr. Womack has served as a Board member since 2019 and is a member of the Corporate Governance Committee and the Risk Mitigation and Investment Policy Committee. And finally, for reelection to the Board, I'm Christopher Franklin, Chairman of the Board and Chief Executive Officer and a member of the Risk Mitigation and Investment Policy Committee and the Chair of the Executive Committee. Now if you want additional information on each of the Board members, please refer to the Board of Directors web page in the Corporate Governance section of the Investors page on our website. That concludes the presentation of the items of business you've been asked to vote on at today's meeting. At this point, the polls are now closed. I ask for the report of voting results as received from the judge of elections. And I now ask Mr. Luning, Corporate Secretary, to report those results.

Thank you, Mr. Chairman. I received the preliminary voting results from the judge of election based on the proxies received as of the opening of the polls at today's meeting. The preliminary votes are as follows: For proposal number one, each of the 8 nominees listed in the proxy statement has received at least 94% votes cast in their favor of their election, and therefore have been elected to a 1-year term expiring at the annual meeting in 2022. For proposal number two, the Board proposal to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accountants for the 2021 fiscal year, it has also been adopted with at least 97% of the votes cast in favor. For proposal number three, the Board proposal for an advisory vote approving the company's named executive officers compensation has been adopted with at least 96% of the votes cast in its favor. And finally, for proposal number four, the Board proposal for an amendment to the amended and restated bylaws to establish a standard for proxy access to shareholders for the power to nominate a number of director candidates for inclusion in the company's proxy statement. That has been adopted with at least 99% of the votes cast in its favor. All votes are subject to find count certification by the judge of election, and we will report the final vote results on Form 8-K that will be filed with the SEC within 4 business days of today's meeting. Thank you, Mr. Chairman. That's my report.

Thank you, Mr. Luning. Is there any other business to properly come before the Board today?

There is not.

Okay. If not, I will adjourn the formal part of today's meeting. Now as the formal part of the meeting is adjourned, I'll move into an update on the corporation. All right. First, let's go through the forward-looking statement. As a reminder, some of the matters discussed during this meeting -- over this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for description of such risks and uncertainties. During the course of this presentation, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. All right. I'll start off with a reminder of the 3 primary themes we set for ourselves in 2020; integration, growth and operational excellence. And I'm happy to tell you that even despite the many challenges of 2020, we were able to deliver on all 3 of these objectives. We surpassed our 1-year anniversary of the closing of the Peoples transaction, and I'm pleased to report that we successfully integrated our leadership teams, our employees and our customers. Obviously, we'll continue to work to adopt the best practices from both utilities to support water and natural gas businesses. Our focus on integration in 2021 will shift the preparation for the onboarding of our customers, employees in the future of DELCORA, the largest municipal acquisition in our company's history. Maintaining our standards of operational excellence is part of our everyday operations at Essential. Last year, we invested approximately $900 million to upgrade the infrastructure in the communities where we serve. Included in that $900 million was $53.5 million that the Peoples invested in the first quarter last year prior to the closing of the transaction. Once again, this was a record amount of capital spending for the company and was executed very well. We also met the financial targets we set for ourselves in 2020. And on a non-GAAP basis, adjusted income per share was $1.58 for the year, up 7.5%. Our growth continues to be a core component of our company's strategy. In 2020, we closed 6 transactions, adding almost $70 million in rate base. And finally, coupled with organic growth, the company increased its water and wastewater customer base by 2% and increased its rate base by 9.6%, ending the year with nearly 1.8 million customers and $8 billion in rate base across our regulated segments. Throughout the year, we adapted our new combined water and gas business to overcome the effects of the pandemic. And through the dedication and resiliency of our people, we remain focused on our mission of providing essential natural resources to our customers. In 2020, we increased the dividend by 7%. We've increased the dividend 30 times in 29 years. And as of March 1, we have a 76-year history of paying quarterly cash dividends. On this side -- slide, you can see the municipal acquisitions that we closed in 2020 for our regulated water segment. The 6 acquisitions include the Campbell Water System in Ohio, the East Norriton wastewater system in Pennsylvania, Rockwell Utilities water and wastewater systems in Illinois, New Garden water -- I'm sorry, wastewater system in Chester County, Pennsylvania, and Dogwood Knolls, a small water asset acquisition in North Carolina. Together, these acquisitions added over 12,000 customers and about $70 million in new rate base. Combined with organic growth, the company increased its customer base by over 20,500 customers last year. Now this next slide shows the 6 municipal transactions we announced on earnings call -- on our earnings call in February. It was signed and are pending closing. In April, we signed an asset purchase agreement for $12.5 million for a municipal system in Illinois with approximately 4,000 equivalent dwelling units. These 7 transactions in total will add close to 231,000 customers or customer equivalents and approximately $450 million of rate base when closed. If we look at the municipal opportunities in our regulated water space, our pipeline is as strong as ever. As illustrated on this slide, we are actively pursuing acquisition opportunities totaling approximately 395,000 customers. We continue to believe that the fair market value legislation now passed in 8 states, where we have water utilities, is the main driver of our healthy pipeline of opportunities. Now let's take a look at our combined company. As illustrated here, with operations in 10 states, 8 water and 3 gas, with both businesses operating in Pennsylvania, which is our largest state, with $8 billion in rate base, the overall mix of the business is approximately 70% water and 30% gas. We'll continue to look at opportunity to expand our regulated water operations beyond the nearly 5 million people we currently serve across both segments of utilities. Now let's talk about our ESG or environmental, social and governance initiatives. This is something I'm particularly excited to share with you. Sustainability has always been a core part of our corporate culture, and a personal priority of mine. On the water side, we made some important announcements over the last year. The water utility business, as you probably imagine, is pretty energy intense. We need to pump water up and down hills, and that consumes a lot of energy. Importantly, we announced that we would purchase 100% of our electricity to run our water and wastewater business in New Jersey, Pennsylvania, Ohio and Illinois, all through renewable sources by 2022. Hopefully, most of us have heard now about PFAS, what they call a forever chemical. These are chemicals found in the water supply across our country and around the world, and they have been calling the forever chemical because they just don't break down even in human body. You may recall that the 2019 movie, Dark Waters, focused on these chemicals. Now the federal government has set a health advisory level for these contaminants at 70 parts per trillion. Individual states have been calling on the EPA to set a maximum contaminant level or MCL, and the EPA has not yet acted. So many states have begun to set their own standards or MCLs because they don't consider the federal HAL or health advisory level to be safe enough guideline. So we made a couple of important commitments regarding PFAS. We made the unprecedented commitment to test every source of water that enters every one of our water systems in all 8 states and tested each one for these contaminants. You can imagine, this is literally thousands of points of entry, wells and rivers and streams and reservoirs. Together with our scientists, we determined that we believe that the 13 parts per trillion is the best science-based standard for help of our customers. We then committed to treat any source of water in our 8 states that exceeds the 13 parts per trillion to a level of non-detect. We're spending tens of millions to meet this new standard that we set for ourselves, 13 parts per trillion, and have joined with other water utilities across the country to take legal action against the polluters. As a company that provides drinking water to millions of people, we believe that it is our responsibility to lead in these efforts. All right. Now let's talk about some of our commitments on the gas side. The U.S. Energy Information Administration and most leading energy experts would indicate that natural gas will continue to be at least 36% of the energy supply mix for the next 30 years. With this in mind, we need to make sure that natural gas is as environmentally friendly as possible. This is why we pledged to achieve a 60% reduction in our carbon footprint by 2035 using 2019 as our baseline. You may recall that we have significant pipe to replace at Peoples. And each mile of pipe that we replace is expected to reduce fugitive methane emissions by 50 metric tons of CO2. Now finally, to ensure that we provide transparent and comprehensive reporting on our work, we hired a full-time in-house ESG manager and launched our ESG website. This would be the home for all of our related news and disclosures. If you haven't seen it yet, please check out our award-winning ESG site to go to essential -- I'm sorry, go to esg.essential.co; I think you'll enjoy what you see. All right. Let's dive a little deeper into our commitment to substantially reduce our Scope 1 and Scope 2 greenhouse gas emissions. Our pledge to achieve the 60% reduction by 2035 over the 2019 baseline is what we've just talked about. This is a strong step forward in an ultimate goal of net 0 emissions. However, I want to assure you that our 60% emissions reduction comes from projects and initiatives that we already have planned or are already in place. To put this ambitious commitment into perspective, our target is consistent with the rate of reduction necessary over the next 15 years to keep on track with the Paris Agreement, which claims to limit -- I'm sorry, which aims to limit the global temperature rise to well below 2 degrees Celsius. We remain optimistic that even given the pace of external change, we can further dramatically reduce or even materially eliminate Scope 1 and Scope 2 emissions for our water and wastewater utilities in the coming years while ensuring affordability for our customers. I'll quickly touch on a couple of other ESG commitments that we've recently announced. We're making some significant multiyear commitments relating to our employee and supplier diversity. We believe that supplier diversity is critical for our communities as well as for our business. We want to source from and partner with businesses owned by those who represent the diverse communities and neighborhoods where we live, work and operate our company. This also enriches and strengthens local economies, increases sourcing options and fosters collaboration and innovation. We put a multiyear plan, in fact, to increase our work with diversifiers across the company to 15% of our controllable spending. Additionally, we see great opportunity to strengthen our diversity, equity and inclusion in our employee base as a company. We set diversity targets -- employee diversity targets based on local customer demographics. And that data, we look deeply into and determine that our employee diversity reflects -- so that our employee diversity reflects the communities that we serve and drives us to achieve our multiyear plan of 17% employees of color. These diverse targets will be factored into short-term incentive compensation plans in 2021 in addition to metrics on water and wastewater compliance, gas leaks and infrastructure improvements, customer satisfaction, employee safety. We believe this type of incentive program builds on already strong corporate culture and enhances Board oversight of ESG. All right. Now you can see on this slide, our priorities for 2021 are very similar to our priorities we had in 2020. We intend to remain focused on integration, growth and operational excellence. The emphasis on operational excellence and ensuring quality is ingrained in our culture, and we work to instill the same values with each acquisition as it is integrated. We remain focused on a capital program that continuously improves our customer experience. We'll continue to build on the strong ESG commitments that we've already announced. All right. This is a reminder of our 2021 guidance that we previously published. Income for 2021 is expected to be $1.64 to $1.69 per share with a 3-year a EPS CAGR of 5% to 7%. Our capital plans include spending of approximately $1 billion on regulated infrastructure this year across our Essential platform. We plan to spend nearly $3 billion on capital improvements by 2023. Rate based growth is expected to be 6% to 7% for water, not including acquisitions and 8% to 10% for gas. Customer growth is expected to be 2% to 3% on average for our regulated water segment. And lastly, we set achievable, yet aggressive, ESG targets, including the 60% reduction in our greenhouse gas emissions by 2035. We'll continue to work to ensure our water throughout our footprint never exceeds 13 parts per trillion of PFAS. And finally, as we just passed our 1-year anniversary as Essential Utilities, reminded of our 135-year-old company, which includes being listed on the New York Stock Exchange now for 50 years, 2 important anniversaries this year. Our company remains strong and dedicated to our mission of providing essential natural resources to our water, wastewater and natural gas customers. And we have positioned ourselves to play a critical role in solving the country's infrastructure challenges while recognizing our corporate responsibility to be an industry leader on ESG issues, including the protection of our environment. That concludes our formal remarks, and I'm happy to take questions if you have them.

We have a couple of questions in the queue related to the Biden infrastructure plan. Can you talk about how we think the Biden infrastructure plan may impact Essential?

Yes. So the Biden infrastructure plan, I think when it's all said and done, will largely be focused on things that the private industry or private capital has a tough time with. Hopefully, things like roads and bridges and the combined sewer system to try to separate sanitary from rainwater or storm water. Some will come to private water and public water and wastewater systems. But the need is so vast in that area that it will barely touch the total need. And so I think there is still a tremendous opportunity for companies like ours to play a critical role in solving the infrastructure needs of the country and bring private capital to bear.

The next question relates to the municipal acquisition program. One, is there an opportunity for Essential to pursue military based opportunities in 2021? And secondly, is there more of an opportunity in the water space or in the water -- or in the wastewater space related to municipal acquisition?

Two questions. Some of our peer companies have spent time developing the market in a military bases. I believe that's fairly saturated at this point. And frankly, we've had so much success in the municipal acquisitions that I think we would prefer to stay the course on our municipal acquisition strategy. And if other markets seem to open up around military, it might be something to look at. But at this point, we'll stay the course on municipal and stay clear of the military bases for now. In terms of water versus wastewater, as you know, we're agnostic. We can buy water or wastewater businesses. They both operate the same way on an economic basis. The market seems to be, at this point, a little bit more open to selling wastewater facilities. However, we continue to buy water as well. I think generally, though, as you think about how leadership on -- and how they think about their utilities, often, there's much less affinity to the wastewater operations than there is to the natural resource of water. And so I think people are generally more open to selling their wastewater business than their water business. But as you know from our record and our strategy, we've been very successful in purchasing both in various states where we do business today.

At this time, there are no further questions in the queue. If any shareholders at any time have any questions for the company, please feel free to reach out to the Investor Relations department through the company's website. At this time, I would like to conclude today's presentation.