Essential Utilities, Inc. ($WTRG)

Hello, everyone. Thank you for joining us, and welcome to Essential Utilities, Inc. Q1 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Brian Dingerdissen. Brian, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings call. If you did not receive a copy of the press release, you can find it on our Investor Relations website. The slides can also be found on the website along with the webcast. As a reminder, some of the matters discussed today may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. References may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted in the Investor Relations section of our website. We will begin with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Then Dan Schuller, our Chief Financial Officer, will provide an overview of the financial results. With that, I will turn it over to Chris Franklin.

All right. Thanks, Brian, and good morning, everyone. Let's begin with a few updates on Slide 5. First, on the merger. As you likely saw in a press release we put out 2 weeks ago, we accomplished our first milestone regarding regulatory approval. The Kentucky Public Service Commission officially approved our merger request. This is our first regulatory green light, and it's a big step toward bringing our two companies together. Now this momentum follows the clear yes we received from both sets of shareholders back in February where the transaction was approved by an overwhelming margin, 95%. Now for the quarter. We reported GAAP earnings per share of $0.79, which includes about $0.04 of merger-related costs. While the quarter itself was up against a difficult comp with the previously discussed nonrecurring items from the first quarter of last year and merger-related costs this year. Now when we look at the 2026 overall, we're very confident that we will meet our 5% to 7% annual growth in earnings per share compared to the non-GAAP 2024 earnings per share of $1.97. And Dan is going to cover this in a lot more detail in a few moments. While the quarter was a bit challenging, largely due to extreme weather we faced in some parts of our service territory, we're continuing to invest capital prudently and where it matters most. This quarter, we invested $269 million in our water, wastewater and natural gas infrastructure. These investments help us to meet federal and state regulations, things like PFAS and lead and boost reliability and safety for our employees and our communities. Our current trajectory indicates that we'll meet our plan this year to make $1.7 billion in critical improvements by year's end. Our customer rates remain affordable and our planned investments and associated financing are built to meet our affordability goals. I have to tell you, I'm really proud of the team in both gas and water for maintaining service for our customers during what were pretty challenging winter weather conditions this year, especially in January and February. Lastly, in March, we closed the Greenville Water acquisition. You may recall that we closed Greenville wastewater in 2025. I'll provide an update on our overall acquisition program in a few moments. If you turn to Slide 6, you'll see a road map of what's ahead for completing our merger with American Water, which, by the way, is still on track to close by the end of the first quarter of 2027. Once we cross the finish line, the combined company will serve more than 4.7 million water and wastewater customers and more than 740,000 natural gas customers. It really is an exciting path forward, and we're moving full steam ahead. Slide 7 shows the heavy lifting behind the scenes. Integration planning efforts are continuing with both Essential and American Water employees involved as part of the integration management office, the core integration teams as well as subject matter experts. The focus is simple: ensuring we're ready to hit the ground running as a world-class organization the day after we close this transaction. These work streams and the partnership between leaders and subject matter experts from both companies are meant to ensure that the best practices of both companies are melded together in the combined company. We'll have a lot more to say on this as we make progress. Now let's shift to the next slide, Slide 8, to provide an update on our utility operations this year. Our continued mantra internally here is to employees and everyone else is that we will conclude our time as an independent company with the same level of operational excellence we've enjoyed for nearly 1.5 century. If you reviewed our proxy statement, you've seen the strength of our operating metrics, meeting and exceeding our targets and achieving many first and second quartile rankings versus our peers. I'll mention that extreme cold causes challenges for both natural gas and water utilities. For gas utilities, it can cause increased leaks and more difficulty completing capital projects. And in the water business, it can cause treatment issues, especially in wastewater, increased main breaks, and then across the board, there is the added cost of things like snow removal. But despite all of these challenges, our year-to-date water quality, safety, gas leaks, among other metrics are all on track for another strong year. Through the first quarter of 2026, 5 more PFAS projects have been completed and another 45 PFAS projects are under construction. We are on track for 106 PFAS project completions this year. A company-wide, in our water division, the 15 operational metrics we track, which include things like construction, safety, main breaks, leaks and average time to address unplanned disruptions, 12 have a green status and only 3 are in yellow. The team is, of course, focused on moving the 3 that are yellow over to green. On the gas side, we're installing Intelis gas meters, which are advanced meters designed for enhanced safety. Last year, we installed 71,000 Intelis meters, and this year, we have a target to install at least 80,000 more. Our gas division is focused on metrics associated with safety, construction, responsiveness, leaks and damages. Of the 16 metrics we focus on, all but 3 are green, and we'd expect them all to be green by year-end. Now despite winter weather and potential distractions associated with the merger with American Water, I remain very proud of our team's continued focus on operational excellence. And with that, Dan will now take us on a deeper dive into the results for the quarter.

Thanks, Chris, and good morning, everyone. Today, I'm going to focus our conversation on our earnings performance and its drivers. There's some complexity due to nonrecurring items, both in Q1 last year and in Q1 this year, so I'll discuss those items to provide clarity. Let's turn to Slide 10 to walk through the bridge from last year. We're starting with our Q1 2025 earnings of $1.03 per share, which includes some positive onetime items. In terms of revenue drivers, earnings per share this quarter were positively impacted by $0.07 in regulatory recoveries and surcharges, $0.01 from higher water volume and $0.01 due to a larger customer base, thanks to both our recent acquisitions and organic growth. This was partially offset by a $0.01 impact from lower gas volumes, but overall, the top line drivers remain solid. Now looking at the $0.10 decrease in earnings per share due to expenses, O&M increased by about $38 million, with the largest driver being $16.3 million in merger-related expenses. Also, last year, we had $5.6 million of insurance proceeds that positively impacted earnings for the quarter, which did not recur this year. In terms of operational expenses, due to the extremely cold weather early in the year, we incurred about $2 million in incremental outside services costs and an additional $1 million in overtime related to water main breaks, snow removal and call-outs in our gas business. Cold weather also resulted in a slower start in our capital work, which resulted in less capitalization in Q1 of this year versus Q1 of last year. For the full year, though, we expect to achieve our capital targets for both water and gas totaling $1.7 billion. And when adjusting for nonrecurring items and abnormal weather, we expect our year-over-year O&M expense increase to be in line with historic norms. Finally, we have the other bar with a $0.22 negative impact on earnings per share. This bar reflects the impact of a $22.6 million favorable tax reserve adjustment in the first quarter of last year due to the conclusion of the Aqua Pennsylvania rate case as well as increases in depreciation and amortization due to additional rate base and some higher depreciation rates, increases in interest expenses due to higher borrowings and some weather normalization and tax impact. Together, this takes us to $0.79 for the quarter on a GAAP basis. If you back out the nonrecurring merger-related costs for financial advisory, legal and other fees, our adjusted non-GAAP earnings come out to $0.83. And you can find the full reconciliation on our website or in the appendix of this deck. As Chris mentioned earlier, the big picture hasn't changed. We're fully committed to our long-term goal of 5% to 7% EPS growth from our non-GAAP 2024 base of $1.97 through 2026 and 2027. I'll wrap up on Slide 11, touching on our regulatory activity. So far this year, we've completed regulatory recoveries totaling $15.1 million in annualized revenue with about 1/3 of that coming from water and wastewater and the rest from our gas business. Looking forward, the pipeline is active. Our water and wastewater segment has 5 cases pending for roughly $102 million in annualized increases. A few of these cases are nearing completion, and we'll have updates on those in August if you're not watching the state regulatory dockets directly. Meanwhile, our gas subsidiary has a base rate case pending here in Pennsylvania for $163.2 million, which is critical for supporting our Long-Term Infrastructure Improvement Plan, thereby enhancing the safety and reliability of our system and further reducing emissions. As always, our focus is on balance. We're maintaining these filings to ensure we're providing safe, reliable service and earning a fair return on our capital, all while keeping a very close eye on affordability for our customers. And with that, I'll turn the call back over to Chris. Chris?

Thanks, Dan. Let's move to Slide 13 to recap our growth through acquisition program. On March 4, we closed on our $18 million purchase of the Greenville Municipal Water Authority in Mercer County, Pennsylvania. The system serves 3,000 customers in Greenville Borough as well as Hempfield Township and West Salem Township right here in Pennsylvania. We remain excited about our continued growth in Pennsylvania and welcome our new customers in Greenville. Now aside from the selected opportunities on the slide, looking forward, we have signed purchase agreements for several small systems in Pennsylvania, Texas, North Carolina and New Jersey, many of which we expect to close in 2026. Including these signed purchase agreements, in total, we are adding about 201,000 customers with a purchase price of approximately $285 million. This includes our DELCORA transaction. I'll remind you again that the progress on our DELCORA transaction 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. The pipeline of potential water and wastewater municipal acquisitions stands at approximately 400,000 customers, and we remain very optimistic about the consolidation of water and wastewater systems in the United States and look forward to leveraging the combined resources of Essential and American Water to accelerate our business development work. And I'll wrap up our prepared remarks here on Slide 14. As we've discussed before, we are reaffirming our 5% to 7% multiyear earnings per share guidance through 2027. Upon announcement of the transaction with American Water, we informed investors that we would continue growing EPS by 5% to 7% annually using our adjusted 2024 earnings per share of $1.97 as the base. As a reminder, this outlook includes the acquisitions we expect to close this year, but does not include DELCORA. Beyond the numbers, our priorities have not changed. We're focused on keeping the balance sheet strong, improving our cash position and growing the dividend while keeping our payout ratio between 60% and 65%. As part of our strong focus on customers, we're investing $1.7 billion in regulated infrastructure this year. With that, I'll wrap things up and hand it back to the operator so we can take your questions.

[Operator Instructions] Your first question comes from the line of Paul Zimbardo with Jefferies.

First, I just wanted to check in, Pennsylvania has been very topical and you guys sit locally. So curious if you have any thoughts on the latest kind of affordability headlines and feedback on the Pennsylvania Governor's letter. Do you think that impacts your pending rate case? And just overall thoughts would be useful.

Yes. So first of all, I think we probably all agree, we're aligned with the Governor on the issue of affordability. Clearly, every utility is trying to accomplish pretty significant capital improvements while figuring out strategies to keep rates affordable for our customers. So noble work, and we're aligned on that. Now in terms of the Governor's specific initiatives in his letter, I would say, Paul, we're in ongoing conversations with the Governor's team. Dan and I were on the phone with them as recently as yesterday. The conversation continues. We're trying to get, I would say, real direction on how they're thinking about these issues. We know the issues. We outlined them pretty specifically in the letter, but how they'll be applied and how they'll actually materialize in terms of the Public Utility Commission, I think, is still being worked out. And so I would say, in terms of our filed case at Peoples, so far, we're proceeding as though there's no change given we are already filed. We have a water case yet to file this year. And so we're working through that case -- preparation of that case as we digest this new information from the Governor.

And then the other one, just again, smaller detail, but with the adjusted EPS to exclude the merger charges, prospectively, should we think about the adjusted EPS just adjusting out the merger items or like anything else that you'd think about adjusting like gains and things of that nature?

So at this point, when we look at the $0.79 going to $0.83, the only thing in there, Paul, is merger-related expenses. And you'll see that non-GAAP table. But so think of that as like bank fees, legal fees, filing fees, things of that nature.

Okay. So prospectively, just got those type of items adjusted out?

Yes.

Your next question comes from the line of Travis Miller with Morningstar Inc.

Just following up here real quick on the Pennsylvania thing. I understand that in terms of your rate cases. What about the merger approval? Have you had conversations with the Governor's office, or does that come up? How do you think that might impact the review of the merger?

Yes. I mean I would say ongoing dialogue, I can't say we're in the specifics on the merger. I would expect the Governor would let the commission adjudicate that case as they see fit. But I would say, Travis, we just got through -- well, today is the last day of 14 hearings throughout Pennsylvania. And I would position those as very positive. Very few people actually had anything to say and the several that came, a number of them were positive. So I would say, very successful hearings in Pennsylvania, and for that matter, in North Carolina, where we've largely completed the hearings there, too. So I wouldn't expect the Governor to give specific thoughts on the merger at this point. But generally, I think people seem to think it makes sense, but I don't want to pigeonhole anybody into a position because nobody has actually staked out a position at this point.

Sure. Okay. I understand. And then also more generally, how is the pending merger discussions around that impacting the discussions you're having with municipalities? And perhaps, are you having discussions with municipalities along with the American Water Works colleagues?

No. Unfortunately, there's legal rules that would prohibit us from doing that. As a matter of fact, interestingly, Travis, at least in two places, we are still competing with American, which is sort of a strange thing given the circumstances. But until the transaction is completed, we both have to do business as usual. I think just from general discussions, sellers, municipals in large case, understand that we will be one within about a year. And so they recognize that, and I think it's in the considerations. But we're business as usual out there knocking on doors and trying to do as many transactions as possible. I can't say that the transaction has inhibited our ability to turn over those rocks and look for opportunities in any way. And I haven't sensed any negativity at all from potential sellers. So I think it's generally business as usual.

And Travis, to recall, we're in some states that American is not in. And then certainly, in some states, we're in different geographies. So as Chris said, we're doing everything we can to continue to drive this acquisition growth.

Your next question comes from the line of Davis Sunderland with Baird.

Maybe if I could just ask kind of a follow-up, I guess, to Travis' first question, just about the merger and the backdrop in Pennsylvania. I'm sure as far as states go, this will obviously be the heaviest lift. But wondering, Chris, if you could just expand a bit more on what there is still to be done in the back half of this year, and if it's just time or if there are any other potential road bumps or things that we should just consider as the process moves forward.

Yes. I would say, Davis, the regulatory process is generally one that we have to kind of address as we go. And so we know who the parties to the case are at this point. We've seen filings already, and we'll work through those through this summer. We've got -- as we conclude the public hearings today and then move to a more formal commission process over the summer, we'll get a good sense of where we can settle. And I think we're still optimistic that we'll be able to settle with most of the parties. We'll see how people come to the table. But so far, I would say there has been nothing that we would put in the unexpected category. It seems to be proceeding as normal, plenty of interrogatories and questions that are being asked and answered by the company and by the intervenors. But I don't want to paint an overly rosy picture, but I would say there's nothing that has come up that we would thought this is unexpected.

That's super helpful. Maybe just as a second question, I guess it's a two-parter for you, Dan. But just I appreciate the details on the earnings bridge as per usual. I'm just wondering if you could talk a bit through the shaping for Q2, I guess, really through the rest of the year, just how we think about that? And then any considerations for equity issuance or other source of capital through the year?

Yes, for sure. And you probably saw it, we did do a debt offering earlier in the year, $500 million debt offering. And then we'll look to continue to raise equity when it's opportune using our ATM program. As we think about earnings for the year, in terms of that, as we said on the call, in our prepared remarks, both Chris and myself, we do expect to hit our target level of earnings per share. And the way we've determined that is based on that 2024 adjusted baseline of $1.97 with 5% to 7% growth off of that. In terms of the quarters, probably difficult to give you a lot on that. I would look to the same sort of quarterly percentages that we provided in the past. Last year, we had a chart that had kind of the 4 quarters with a percentage of annual earnings sort of a range for each of the 4 quarters. I'd really go back to use that as your guide here.

We have reached the end of the Q&A session. I will now turn the call back to Chris Franklin, CEO, for closing remarks.

Thanks, everyone, for joining us today. And as always, Dan, Brian and I are available for questions and follow-up afterwards. Thanks for joining us today.

This concludes today's call. Thank you for attending. You may now disconnect.