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

Hello, everyone. Thank you for joining us, and welcome to Essential's Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Brian Dingerdissen, Vice President, Investor Relations, and Treasurer. Brian, please go ahead.

Good morning, everyone, and thank you for joining us for our second quarter 2026 earnings call. If you did not receive a copy of the press release, it can be found on our Investor Relations website. The slides can also be found on our website, along with a webcast of the event. 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 on our website in the Investor Relations section. 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.

Thanks, Brian, and good morning, everyone. Let's begin with Slide 5, and we'll talk about some corporate updates. First, on the merger. As you've probably seen from our press releases, we've now received three regulatory approvals for the merger from Kentucky, Ohio and Virginia. In other states, the merger cases have been proceeding as planned, including in Texas, where we've reached a settlement in principle. In New Jersey, public input hearings are scheduled for August. And in North Carolina, the process, which does not have a statutory time line, continues to proceed as planned, and testimony was filed at the end of last week. The merger case in Illinois is now with the ALJ, and that process does have a statutory time line and it finishes by November of this year. Finally, in Pennsylvania, negotiations continue with the parties, even though we are in the evidentiary hearings this week. We continue to expect the merger to be finalized during the first quarter of 2027. Now significant planning work is ongoing as we consider the many factors involved in integrating the two companies. We are intent on hitting the ground running as a world-class organization the day after we close this transaction. All right. Now for the quarter, we reported GAAP earnings per share of $0.37, which includes about $0.01 of merger-related costs and puts us at non-GAAP earnings per share of $0.38. When we look at 2026 overall, we're confident that we'll meet our 5% to 7% earnings growth guidance anchored to the non-GAAP 2024 earnings per share of $1.97. And Dan will go into the details in much more detail in a moment. This has been a very busy construction year. We continue to invest capital in the improvement of our regulated water and natural gas systems, which, of course, results in enhanced service to our customers. Year-to-date, we've invested $662 million, and we're on track to invest a record $1.7 billion in needed infrastructure improvements and upgrades. Turning now to the regulatory environment. Let's start in Pennsylvania. As you're aware, on April 29, Governor Shapiro issued a letter to utilities operating within the Commonwealth. The letter instructed companies to prioritize the most cost-effective forms of capital and to explicitly demonstrate the necessity of proposed investments when seeking rate adjustments. Now following his communication, the Special Counsel for the Governor's Office on Energy Affordability called into one of our public input hearings for the pending Peoples rate case. The Special Counsel is not an intervener in the Peoples rate case and acknowledged that our rate case was filed prior to the issuance of the Governor's letter. Now our company has always been a national leader in appropriately replacing aging underground infrastructure, and we are fully committed to sustaining strong levels of capital investment. These investments are critical to ensuring compliance with evolving federal and state regulations, enhancing system reliability and upgrading safety for both our workforce and the communities we serve. And as always, we carefully balance these critical infrastructure needs with consumer affordability to ensure the delivery of safe, resilient and reliable service. We continue to engage constructively with the Pennsylvania Public Utility Commission, the Governor's office and the other stakeholders regarding both our current gas rate case and our upcoming Pennsylvania water rate case, which we anticipate filing around the end of the year. As usual, we remain dedicated to absolute transparency in our rate filings, and we'll continue to operate strictly within Pennsylvania's established statutory framework. Finally, reinforcing our long-standing commitment to shareholder value, we're proud to continue our 80-year track record of consecutive quarterly cash dividends. Last week, the Essential Board of Directors approved a 5.25% increase in our quarterly cash dividend, consistent with last year's increase. And this dividend is payable on September 1, 2026, to shareholders of record on August 11, 2026. Now if you turn to Slide 6. This is a snapshot of the regulatory approval process across our states. The slide provides dockets and next steps so you can follow the approval process. Now a quick note on the integration work that is underway with the merger. It's really been gratifying to watch the teams at Essential and American work together to shape the consolidated company. I knew that our similar mission-based employees would work diligently to make certain the combination went well. But I got to tell you, the collaboration and cooperation among the teams has exceeded my expectations, and I am more confident than ever that this combination will be a top-performing utility and a must-own investment in the market. And with that, Dan, let me turn it to you for a deeper dive into the quarter.

Thank you, Chris, and good morning, everyone. Today, my remarks will focus on our financial performance and the primary drivers of our results. Let's turn to Slide 8 to review the year-over-year EPS bridge, beginning with our 2025 Q2 earnings of $0.38 per share. In terms of positive drivers, earnings per share this quarter benefited from a $0.06 increase in regulatory recoveries and surcharges, $0.02 from higher water volumes and $0.01 from customer growth in the water segment, reflecting both our acquisition strategy and organic expansion. These gains were partially offset by $0.02 in higher operating expenses, a $0.02 impact from lower gas volumes this quarter and $0.06 from Other, which includes $0.03 from increased depreciation and $0.03 from higher interest and lower AFUDC. This brings us to GAAP earnings per share of $0.37 for the quarter. You'll see the details of our O&M expenses in our Q and the MD&A, but let me give you some color here. [indiscernible] increase by approximately $5.1 million or 3.5%. This variance was primarily driven by a $5.9 million increase in employee-related costs, including annual merit increases and higher medical claims alongside a $2.3 million increase in production costs for our water and wastewater operations and about $800,000 to account for serving newly acquired customers. These increases then were partially offset by a $4.9 million reduction in insurance expenses, largely due to an insurance recovery, a $2.4 million decrease in gas segment bad debt expense and a $1.5 million decrease in customer assistance surcharge costs, which has an equivalent revenue offset. We also increased our sales and use tax accrual and incurred $1.2 million in merger-related expenses. Excluding these nonrecurring merger costs, O&M expenses increased by 2.6%, which aligns with our historical norms. Also, if we adjust our GAAP earnings per share of $0.37 to exclude the nonrecurring merger-related costs, our adjusted non-GAAP earnings per share were $0.38 for the quarter. A full reconciliation is available on our website and in the appendix of this presentation. As Chris noted, our long-term outlook remains unchanged. We remain fully committed to our long-term target of 5% to 7% normalized earnings per share growth using our non-GAAP 2024 results of $1.97 per share as our baseline. Turning to Slide 9. Let me provide an update on our regulatory activity. Thus far in 2026, we have finalized rate cases or surcharges representing $56.6 million in annualized revenue. Approximately 78% of this total is derived from our water and wastewater operations, with the remainder coming from our gas business. Looking ahead, our regulatory pipeline remains on track. Our water and wastewater segment currently has 5 cases and a surcharge proceeding pending represent approximately $79.7 million in requested annualized increases. As Chris mentioned, we expect to file the next Aqua Pennsylvania rate case around year-end. Our natural gas subsidiary has a base rate case pending here in Pennsylvania for $163.2 million. This filing is essential to supporting our Long-Term Infrastructure Improvement Plan, which enhances system safety and reliability while continuing to drive emissions reductions. As always, we remain disciplined in balancing our strategic priorities. As Chris emphasized, we manage these filings carefully to ensure we continue delivering safe, reliable service and earn a fair return on our invested capital while remaining highly sensitive to customer affordability. With that, I'll turn the call back over to Chris. Chris?

All right. Thanks, Dan. Let's move to Slide 11, and we'll recap our growth through acquisition strategy. We show here a selection of our business development opportunities. We recently completed our acquisition of Integra Water LLC for a purchase price of $4.9 million, and we welcome the 1,100 customers to our Texas customer base. We signed purchase agreements for several small systems in Pennsylvania, Texas, North Carolina, Virginia and New Jersey, some of which we expect to close in 2026. Now including the signed purchase agreements, in total, we are adding about 200,000 customers with a purchase price of approximately $282 million. Now this does include our DELCORA transaction. But I'll remind you that progress on our DELCORA transaction continues to be stalled by a stay put in place by a federal bankruptcy court judge. And that was related to the bankruptcy of the city of Chester. Now we do not anticipate any negative impact to our pursuit of this transaction related to our merger with American Water. The fully enforceable agreement of sale with DELCORA is assumable by American Water. The pipeline of potential water and wastewater municipal acquisitions for the company stands at approximately 400,000 customers. So a nice strong pipeline, and we remain 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. Now I'll wrap up our prepared remarks on Slide 12. 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 will continue growing EPS by 5% to 7% annually using our adjusted 2024 EPS of $1.97 as the base. Just as a reminder, this outlook includes the acquisitions we expect to close this year, but does not include DELCORA. Now 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 just 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 Julien Dumoulin-Smith from Jefferies.

This is Andrew on for Julien. And thank you for the time. I guess, maybe two questions on my front. Just one, I think you talked about the timing for your future Aqua case filing. Can you kind of maybe give a bit more details as to kind of how you're planning the case? What are you guys doing differently in light of kind of the focus that we're seeing from the Governor's office on ROE as well as the capital structure front?

Sure, Andrew. Thanks for the question. So yes, as you're aware, in Pennsylvania, we've got a lot of activity going on, right? We've got the merger case, which is the largest case. We've got in that combination consideration, the American Water case, which was just completed. And we have the Peoples Natural Gas case going on as well, which is coming towards conclusion there as well. And we made a strategic decision with everything going on that we would be thoughtful and deliberate here, and we would delay the filing of our Aqua Pennsylvania case. And in terms of how we think about filing that case, listen, the case is largely a capital case. So there's not -- there's no complication to the case. And so we follow all the rules, we're a very compliant company as we always are. And we would expect that we would file that case very similar to how we would in the past. But very respectful to the Governor's position. Listen, there's a lot of positions in every rate case, right? There's always interveners of all sorts. So we'll be very respectful to the Governor's position. Frankly, we think that the company shareholders and customers deserve a return [ of and on ] the capital and a fair return. We'll let the commission determine what fairness actually is. And we think that where the commissioners adjudicated American's case, they anchored that around the [ disc ] ROE at somewhere around [ 9.7% ] is a pretty good start. Obviously, there is a debate always around capital structure and everything else. So we'll file the case as we normally would have with all due respect to all the parties, and we'll adjudicate it as such.

That's very clear. And maybe as a follow-up. We appreciate that some of the water-specific expenses like PFAS are not actually recoverable under the [ disk ]. I guess maybe just more of a housekeeping question. Can you kind of speak to how much of your CapEx qualifies for the [ DSC ] versus kind of like what's being recovered under the GRC?

Yes. Let me look and answer that combination. What I will say, though, we will continue to press for an expansion of the [ DSC ] to include some of these items. We believe that at this point, the [ DSC ] mechanism should be expanded so that we get more capital items included, which has the effect of lengthening the period between cases. But in terms of what's included today, our percentages, Dan, let me turn to you.

Yes, Andrew. So today, for 2026, it's about 55% of the Pennsylvania capital is [ DSC ] eligible. In the past, in years where we had more pipe work and less plant work, that number would have been higher, but that's where we are today.

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