Essential Utilities (WTRG) Q2 2026 earnings call transcript

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 the webcast of the event. As a reminder some of the matters discussed today may include forward looking statements that involve risk uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward looking statements. Please refer to our most recent 10Q, 10K and other SEC filings for a description of such risk and uncertainties. References may be made to certain non-gapped financial measures.

Reconciliation of any non-gapped to gapped 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.

Hey 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 North Carolina the process which does not have a statutory timeline 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 timeline 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 gap earnings per share of 37 cents which includes about a penny of merger-related costs and puts us at non-gap earnings per share of 38 cents. When we look at 2026 overall we're confident that we'll meet our five to seven percent earnings growth guidance angered to the non-gap 2024 earnings per share of $1.97 and down 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 dollars and we're on track to invest our record $1.7 billion dollars in needed infrastructure improvements and upgrades.

Turning now to the regulatory environment let's start in Pennsylvania. As you're aware on April 29th 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 people's rate case. The special counsel is not an intervener in the people's 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 a 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 gauge 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 will 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 1st 2026 to shareholders of record on August 11th 2026. Now if you turn to slide six 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 utilities 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 eight to review the year over year EPS bridge beginning with our 2025 Q2 earnings of 38 cents per share.

In terms of positive drivers earnings per share this quarter benefited from a six cent increase in regulatory recoveries and surcharges two cents from higher water volumes and one cent from customer growth in the water segment reflecting both our acquisition strategy and organic expansion. These gains were partially offset by two cents in higher operating expenses a two cent impact from lower gas volumes this quarter and six cents from other which includes three cents from increased depreciation and three cents from higher interest and lower AFUDC. This brings us to gap earnings for share of 37 cents for the quarter. You'll see the details of our ONM expenses in our Q in the MDNA but let me give you some color here.

ONM increased by approximately 5.1 million or three and a half percent. This variance was primarily driven by a five point nine million dollar increase in employee related costs including annual merit increases and higher medical claims alongside a two point three million dollar increase in production costs for a water and wastewater operations and about eight hundred thousand to account for serving newly acquired customers. These increases then were partially offset by a four point nine million dollar reduction in insurance expenses largely due to an insurance recovery a two point four million dollar decrease in gas segment bad debt expense and a one point five million dollar decrease in customer assistance surcharge costs which has an equivalent revenue offset.

We also increased our sales and use tax accrual and incurred one point two million in merger related expenses. Exuding these virtual lines with our historical norms. Also if we adjust our gap earnings per share of 37 cents to exclude the non-recurring merger related costs our adjusted non-gap earnings per share were 38 cents 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 five to seven percent normalized earnings for share growth using our non-gaff twenty twenty four results of a dollar ninety seven per share as our baseline.

Turning to slide nine let me provide an update on our regulatory activity. Best of our in twenty twenty six we have finalized rate cases or surcharges representing fifty six point six million in annualized revenue. Approximately 78 percent 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 five cases and a surcharge proceeding pending representing approximately 79.7 million in requested annualized increases. As Chris mentioned we expect to file the next aquaponylvania 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 and 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 eleven 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 Integral Water LLC for purchase price of four point nine million and we welcome the eleven hundred customers to our Texas customer base. We signed and 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 these signed purchase agreements in total we are adding about 200,000 customers with a purchase price of approximately two hundred and eighty two 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 in 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 assumed by American water.

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 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 five to seven percent multi-year earnings per share guidance through 2027. Upon announcement of the transaction with American water we informed investors that we would continue growing EPS by five to seven percent annual using our adjusted 2024 EPS of a dollar 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 percent. As part of our strong focus on customers we're investing 1.7 billion dollars in regulated infrastructure just this year.

That I'll wrap things up and hand it back to the operators so we can take your questions.

Sure good morning Andrew thanks for the question. So yeah as you're aware in Pennsylvania we've got a lot of activity going on right we've got you know the merger case which is the largest case we've got you know in that combination consideration the American water case which was just completed and we had the we have the peoples national gas case going on as well which is coming toward conclusion there as well and we made a strategic decision with everything going on that we would be thoughtful and deliver here and we would delay the filing of our aqua Pennsylvania case 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 very compliant companies 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 we think that the company shareholders and customers deserve a return of and on the capitol in a fair return we'll let the commission determine what fairness actually is and you know we think that where the commissioners adjudicated Americans case they they anchored that around the disc are away at it you know it's around nine seven you know is a is a pretty good start obviously there's a debate always around capitol structure and everything else so we'll we'll we'll file the cases we as we normally would have with all the respect to all the parties and and we'll we'll adjudicate as such no thank you that's very clear and maybe as a follow-up you know we appreciate that you know some of the water specific expenses like you know PFAS are not actually recoverable under the disc I guess maybe just more of a housekeeping question can you kind of speak to how much of your capex qualifies for the DC versus kind of like you know but what's being recover under the GRC thank you you know let me look Danny answer there that that combination what I will say though we will continue to press for an expansion of the disc to include some of these items you know what we believe that you know at this point that the the disc 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 and percentages then let me turn to you yeah Andrew so today for 2026 it's about 55% of the Pennsylvania capital is discountable in the past you know in years where we had more pipework and less plant work that number would have been higher but that's where we are today no that's very helpful thank you guys again thanks Andrew good your next question comes from the line of Davis Sunderland with Baird your line is open good morning gentlemen thank you very much for the update and thank you for taking our questions I appreciate all the details on the merger related activities and it sounds like everything was going very smoothly especially on the integration front maybe just at a high level I wonder if you could just talk through some of the items that could potentially be called out as having the ability to move the merger closed at either earlier or later anything that hasn't gone according to plan just I guess open things up yeah I would say the things have gone largely according to plan listen there's always bumps and you know it's a negotiation process in many ways with various parties in various states but the states that have statutory timelines seen beyond track the last one was statutory timeline would be Illinois record is closed there it's proceeding going to plan in Pennsylvania the conversations have been constructive thoughtful and I'm pleased with that you know we don't necessarily agree on all the issues but that's okay too and then I think that we now have a schedule as we said in New Jersey things are proceeding you know with good discussions in North Carolina so I feel good about things you know things that could affect timeline I'll take Pennsylvania for starters the administrative law judge in Pennsylvania is allowed 90 days to make their decision and come out with their recommendation to the to the commissioners so should that take 30 45 50 60 days obviously that could that could move the timeline up a bit but as it looks today you would think if you just run the timelines out again be bumps they come in the road but we're not aware of but as it looks today it looks to be comfortably in that first quarter range for closing with what we know today that is super helpful thank you for the details there maybe one for you Dan just questioned about shaping of the year any one-timer to consider and especially anything on tax rate just as we more modeling than I think but just think about the balance of the year and earning trajectory so the in terms of tax rate you know you've seen low single digit effective tax rates thus far in the year what for this quarter and year to date and we'd expect to see that for the full of the year so you know think low single digits less than 5% or around that area and there you know you it was in the in the F4 that there's a one-timer this year you know that remains on track we'd expect to get that later this year that would be beneficial to our earnings as we think about landing inside that target zone with that guidance that's based back 2024 adjusted earnings also super helpful thank you and maybe if I could just be greedy of thinking one more housekeeping I guess for both of you but anything to call out as far as inflationary costs from the war abroad raising fuel costs or other inflationary inputs tariff refunds as a benefit or just any other unusual items that you guys have seen year to date or expect in the balance of the year and thank you again very much yeah absolutely Davis I think the one you mentioned first they're really fuel price increases you know we've seen that across the platform and of course you know we have somewhere on the order of 3000 total vehicles and pieces of equipment so in what we've seen in the Middle East that is driving higher fuel costs this year that you know so far you've seen that incorporated into our numbers and you'll you'll see that continued to be in our numbers until things really calmed down there in the Middle East yeah but no no thanks guys if you would like to ask a question please press star one to raise your hand right there are no further questions at this time I will now turn the call back to Chris Franklin for closing remarks all right thanks everyone for joining us as always Brian Dan myself we're all open for follow-up questions and meantime we'll enjoy the rest of your summer thanks for joining us this concludes today's call thank you for attending you may now disconnect