Good day, and welcome to the Essential Utilities, Inc. Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Kathy. Good morning, everyone, and thank you for joining us for Essential Utilities Second Quarter 2021 Earnings Call. I am Brian Dingerdissen, Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our website. Here is our forward-looking statement. As a reminder, some of the matters discussed during 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 a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the website. After the presentation, we will open the call up for questions. Here's our agenda for the call today. We'll start with Chris Franklin, our Chairman and CEO, who will discuss highlights and provide a company update. Next, Dan Schuller, our CFO, will discuss our financial results. Chris will then provide an update on our municipal acquisition program and conclude the presentation portion before opening the call for questions. With that, I will turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Thanks for joining us. Let's start the call with a look at the second quarter highlights. We had another strong quarter with net income growth of 8.4%, Dan is going to discuss that in detail in just a moment. We invested over $404 million in infrastructure improvements throughout all of our systems in the first half of the year as compared to $346.6 million in the second quarter of 2020. You might recall that in May, our long-term Board member and former CEO, Nick Benedictis stepped down, creating a vacancy on the Board. Then in July, the Board appointed Dave Ciesinski to join the Board of Directors. Dave currently serves as President, CEO and Director of Lancaster Colony Corporation, and serves as President of T Marzetti Company, it's a food company based in Ohio. At Essential, Dave serve on our Audit and Corporate Governance Committees, where he brings extensive experience, developing and implementing plans for growth and with a very successful leadership team. The addition of Dave Ciesinski, along with Edwina Kelly, who was appointed earlier in the year has brought our Board back now to 9 members. Also last month, the Board approved a 7% increase to the quarterly dividend, which is now nearly $0.27, marking 3 decades of dividend increases. Our municipal acquisition strategy remains strong as we announced the closing of our first fair market value transaction in Texas, and we have 7 pending acquisitions, totaling about $458.5 million in purchase price. And finally, we published our 2020 ESG report that fully incorporates our natural gas segment, and I'll talk a little bit more of that about that in just a moment. But first, the 7% dividend increase we announced in July marks the 31st increase in 30 years and a…

Yes. Thanks, Chris. Good morning, everyone. We ended the second quarter with revenues of $397 million, up about 3.3% from last year. Our regulated water segment contributed $248.2 million, and our regulated natural gas segment contributed $141.6 million. O&M expenses remained relatively flat for the quarter, decreasing to $127.5 million in the second quarter, down from $128.6 million in the second quarter of last year. Net income was up 8.42% year-over-year from $74.6 to $80.9 million, and GAAP earnings per share increased by $0.03 from $0.29 to $0.32. Next, we'll walk through the waterfall slide, starting with revenue. In the second quarter of 2021, revenues increased $12.6 million or 3.27% on a GAAP basis. You'll see that rates and surcharges were the largest contributors at $9.2 million, with the primary driver being the regulated water segment. Increased volume and growth from our regulated water segment provided an additional $5.7 million towards the revenue increase, while the price of purchased gas added approximately $1.5 million and other added $1.2 million.These revenue increases were offset by decreased volume from the regulated natural gas segment of $4.9 million due to the warmer weather than last year. Next, let's look at the water consumption by customer class. We had favorable conditions in the second quarter and water consumption increased in every state, except Texas. In aggregate, water usage was up 4.2% in the second quarter. However, it's worth noting that for the first time since COVID started, residential usage declined. As you'll recall, commercial water consumption has consistently been down since COVID began, but with many businesses reopening and customers returning to the workplace, commercial usage increased 20% for the quarter, and our other segments were favorable versus last year as well. When compared to the first 6 months of 2020, overall usage was…

Thank you, Dan. Let's take a few minutes and review our municipal transaction activity. Matt Rose and his team, along with our state presidents and their teams have been busy at work on our growth projects. Earlier this week, we announced the closing of the Commons Water in Texas. You may recall this water system serves about 1,000 customers in the Houston suburbs, and is our first fair market value acquisition in Texas. We've signed -- we have 7 signed asset purchase agreements pending closing, including the recent addition of an agreement to purchase the wastewater -- I'm sorry, yes, the wastewater assets in the Borough of Shenandoah, Pennsylvania for $12 million. The system serves approximately 3,000 customers. These 7 pending transactions plus the 1 closed transaction will add close to 234,000 customers or customer equivalents and approximately $462.5 million of rate base when closed. We remain confident that we will close the DELCORA transaction. I want to make that clear. This is one of the most frequent questions we get. While we continue to wait for the state court to decide on the case, we want to reiterate that we continue to have positive and productive conversations, both internally and externally. We remain focused on closing this transaction and continue to believe that we are the best solution for the operation of the DELCORA system, its customers and our investors. I think it's also important to note and mention to you that our valid and enforceable contract with DELCORA includes a provision that makes the contract valid until 60 days after all litigation is concluded. I think that's an important factor to remember as we continue to pursue the closing of that transaction. Now in addition to the signed municipal transactions mentioned on the previous slide, we have a…

[Operator Instructions] And we will take our first question from Ryan Connors with Boenning and Scattergood.

Chris, I wanted to get your take on the noise out there on fair market value, FMB. Obviously, there are some detractors, which include some of your peers, your smaller peers, it's pretty public debate going on there. So my question is twofold. Number one, do you see any of that having any tangible impact legislatively or regulatory-wise in terms of any kind of a rollback of FMV? And then number two, more tactically on discrete deals, do you think that could complicate things if people sort of hold those peer arguments and comments in your face as you try to move deals forward.

It's a good question. I think there is some noise from some of the smaller companies who maybe have less ability to use fair market value. Having said that, there was a very interesting op-ed in today's one of the New Jersey publications. Happy to share that around. But it was authored by 3 former public utility commissioners, one from Illinois, one from Pennsylvania and one from New Jersey, indicating how favorable they view fair market value and how they think it's been a nice step forward for the consolidation of an industry that is, as we all know, balkanized and very fragmented across the country. So I think that although there are different views, I would say the prevailing thought among regulators and legislators for that matter, is a very positive view of fair market value. So I don't see any rollback either on the regulatory side or on the legislative side. I actually see it picking up momentum as more and more municipals are looking for options to deal with their capital constraints and also the ongoing and probably growing environmental constraints.

And what about the second part was just on -- so understood. You don't see any real impact legislatively or real tangibly on the regulatory side. But how could that -- or could not -- or maybe not impact your individual deals? I mean is that something you're hearing that stuff come up as you try to move things forward? Or is that sort of to -- not on the radar of those constituencies in individual deals?

Yes. I haven't seen it come up in any of the discussions we've had. Most people don't know that there might be an industry leader out there who's not in favor of a fair market value. So it hasn't come up in our discussions. And I think given what I mentioned before with corresponding very positive op-eds and pieces out there, I think we could easily match some of the detractors with probably the more favorable and majority of the people who are saving favorable things in writing.

Understood. Now my second one was just staying on the legislative side, the water quality accountability legislation in Pennsylvania, SB 597. We had thought that maybe we would get some movement on that by now, but it looks like that's been pulled back and some of the municipal interest groups are out there sort of claiming victory on that, saying that they're lobbying had a desired effect and got that pulled. Is that -- what's your response to that? Is that still moving forward? Should we see that move ahead this year, do you think?

Yes. I've seen no pullback. In fact, as you're probably aware, it was moved out of the Senate Committee. I think there's only one dissenting vote as it moved out of the Senate Committee. I think it will continue to be negotiated. This one has enforcement provisions, right? And that's where it all comes down. What we're asking in the Water Quality Accountability Act in Pennsylvania is unbelievably fair, right, create your replacement cycle, put cybersecurity plans in place. These are all things that if -- even if they were never to sell their systems, these are things that people should expect of their water systems anywhere in the country, especially anywhere in this country. And so I think the municipals, as you mentioned, or some municipals, as you mentioned, Ryan, will continue to oppose and try to negotiate this. But ultimately, this bill will be a difficult bill for them to stop. And I do think something moves through the legislature before the year is out.

We'll take our next question from Travis Miller with Morningstar.

Wondering on the Texas deal, I know it's small, but I wonder if you could elaborate a little bit on the process you went through? Was it smooth? Was it timely? Any points of friction as you went through that thinking mostly about the first one under the FMV? Any thoughts there and how that went?

Yes. I think it took 1 year. So I would call that relatively smooth in the scheme of things. As you know, the Texas Commission is distracted a bit at this point dealing with the events of last winter. And so I would say, relatively smooth process.

Okay. Does that -- I guess, so there's -- in terms of your pipeline, how much in Texas is in your pipeline? Or alternatively, how much opportunity do you see in Texas given that this went smoothly and perhaps give support to doing more deals?

Yes. We don't typically break our pipeline down by state. But I will say that there are a number of opportunities, and I would suggest that even sizable opportunities in Texas that we see and have on our radar there. So it's developing. So I'll concede that it's not galloping at this point. But -- and there -- certainly, there is competition in Texas. But I think there's also opportunity that -- as you know, once you get 1 or 2 of these deals done, others start to take note, especially if the prices are considered to be fair, which I think this one was very fair. And by the way -- yes. And Travis, you should think about this, too, in Texas, fair market value applies also to investor owned utilities, not just municipals. So it's an interesting twist to the legislation that we've seen in other states.

We'll take our next question from Jonathan Reeder with Wells Fargo.

Just wondering what the latest is on the Pennsylvania commissioner appointments. I thought, last we spoke, you said that there might have been some sort of kind of 2 for 1 deal between the governor and the Senate Republican. Anything more on that front or --

Yes. I guess it would be more informal than anything. I guess the -- what we know as a fact, right? There are 4 seated commissioners currently, commissioner Sweet term ended on April 1 this year. And then he's required to vacate the seat on October 1. So if nothing else changes between now and the 1st of October, which we don't anticipate the legislature doesn’t even go back until the second week in September. So we would anticipate then on October 1, Commissioner Sweet would step down and then the commission would be 2 Republicans, that's Commissioner Yanora and Commissioner Coleman and 1 Democrat, the Chairman. And so you would be a 2:1 Republican majority, which is really unheard of to be down to 3 commissioners and have a majority flip. And listen, this is informal now, the rest of this, but the debate appears to be framed around the regional greenhouse gas initiative, right, the RGGI. And the governor is intent on staying as a part of RGGI and the Pennsylvania Senate has said we're not going to appoint any new commissioners as long as that's the case. And so that's a bit of a stalemate, how that gets ends up being negotiated out. I don't know. But the -- certainly, the chatter in the state capital is that we could end up finishing this year with that 2:1 Republican majority. But time will tell.

Okay. And if there is that 2:1, I mean do you think they're prepared to still act on your pending DELCORA application in some form or fashion, whether it's conditioned on the appellate court process or whatever.

Well, I can't say for certain what they're going to act on, but what I can say is they are empowered to continue to do the business of the commission. In other words, they don't need a full commission, ceded commission in order to continue to complete the business of the PUC. So whatever comes before them, they do have the power to act on.

Got it. Any updated thoughts on the timing of the solution of the public court appeal?

Yes. I mean we're saying 2022 -- now, Jonathan, the Pennsylvania State Court or Commonwealth Court, that just takes time as we grind through the process. And so I would think that, that would be the case. I mean, just a little bit of color on this. There is an election in Delaware County, 2 of the ceded commissioners or counsel minute they call them in Delaware County are up for election. One of them is not running again. He was the Chairman, Mr. Zidich, and so he'll be replaced absolutely. And then there's another commissioner or counselman named [Amadon], who's also up. So there could be a change in the makeup of Delaware County Council. There will absolutely be a makeup at least a change in 1 seat, maybe to when we come into January, and they're seated immediately in January. It's like January 3 or something. So we will see some changes there. Might there be an opportunity with a new look and a new set of counsel people to find a settlement, you never know.

Okay. But if the court has to fully play out, I mean it's somewhere in mid-2022 or kind of earlier in the year?

It's really hard to put a gauge on how quickly the Commonwealth Court will move. We said maybe in that 6-month time frame. So could that be by midyear. I just -- I have a -- I don't want anybody to put numbers on it because it's just hard to tell how quickly the court will move.

Okay. Got you. No, that's fair enough. And then Dan, I think you said you still -- you haven't filed the PA in water rate case. Did you indicate how soon that's going to be filed? Or like what kind of timing we should think of?

Yes. Jon, I think of that just in the coming weeks, it will be filed. That will be filed later this month, and which keeps us on that 3-year cadence that we've talked about.

Perfect. Okay. So weeks, yes?

Yes.

We'll take our next question from Verity Mitchell with HSBC.

I've just got 2 questions. One is about the gas customer count being stable for 2021. I mean, is that in line with your expectations? Or if you want to give us a bit more color on that? And then the second question is, as I'm not local, if you want to give us a feel for what the weather has been like in July and August. Because clearly, I wouldn't know from where I'm calling from.

Yes. So gas customer count will be relatively stable year-on-year. It's interesting, we tend to pick up a few customers with new connections, but we lose a few customers as well. So that business is pretty close to stable, whereas in several of the water states, we continue to add. On the organic side, growth tends to be in Pennsylvania, North Carolina, Texas, the places that you would imagine that there's building going on. In terms of the weather, I would say, kind of differs by part of the country, generally, it's been pretty nice, but we have seen spots with some more rain. Texas had kind of a rainy start of the summer, and it started in the kind of mid-July time frame to warm up, and we're seeing the hot weather again in Texas. Yes. We may -- we've had a bit of rain here in Pennsylvania on and off. So kind of we're just getting the July numbers in here and kind of taking a look at it. But that's probably the color I can give at this point, Chris, any further…

I think that's right. Verity, and particularly in this area where we have a lot of water customers in Pennsylvania, you want the summer to be dry, but not too dry that people give up on their grass. And so I think that's where we are right now. People continue to water. We're thinking it's looking pretty normal. But we'll see what the next couple of weeks bring there. They're predicting here in Philadelphia on the morning news today that we could get our fifth heat wave of the season. I guess that's 5 days in the 90s coming up this week. So maybe we'll sell some water.

[Operator Instructions] We will take our next question from Ben Kallo with R.W. Baird.

Maybe just on the biz dev front, there was a flurry of military bases, and I haven't seen one, maybe I've missed it lately. Can you talk to that? And then just maybe more on -- I saw the Texas announcement and I've seen some other movement there. Could you just talk about the Texas market and how appealing that is to you versus other stuff on your plate?

Yes. On the military front, as you know, we haven't played there. That really hasn't been -- we've been largely focused on municipal market, which is very open in the states where we are. So -- And I haven't seen much on military of late, although I do know that there are -- continue to be some opportunities moving forward. But we've just not played there. So I guess then focusing on Texas, listen, we're always high on Texas. When you look at the population numbers alone in Texas, you say, boy, the growth in population should then show some growth in housing starts and then, obviously, be more water sales and on and on. We've been very active there. We've got a very active state team and very active in the legislative front, as you know, on the fair market value. And so we're optimistic about taxes, but I think we're at the opening stages for municipal. But as we just reminded everyone a minute ago, the new fair market value legislation in Texas applies not only to municipals but also to investor owned. So the market is pretty wide open there, and it's a matter of continuing to the soil and really opening that market now that we have the legislation that we need.

Great. And then on the ESG front, could you just talk about maybe if there is an interaction between your ESG profile and your local utility commissions yet or -- and how that works, how they look at that or if it hasn't evolved to that yet?

Sure. I think there are aspects of ESG, call it, diversity, equity and inclusion, certainly greenhouse gas emissions, environmental. They don't always call it ESG, but certainly, the elements are there, and those are widely discussed as we talk with regulators. But I do think that the overall ESG platform is here to stay, and I think it will continue to be a topic with not only investors but regulators. The interest level, as I said, though, seems to be forming up more around individual issues as opposed to the overall ESG. I'll point to renewable natural gas and how those -- if we were to go there, how those costs might be recovered. Other utilities have already begun to test mechanisms, and we're watching those very carefully. So as we think about environmental -- the environmental aspect of ESG, I think that's where we form up for us, at least on the gas side.

And then, Chris, maybe the other place would just be customer assistance programs.

Yes. Good point.

Something overlap there.

Yes. Yes. And we're doing a lot of work around customer systems, particularly in Pennsylvania right now.

Congrats on the quarter.

It appears there are no further questions at this time. I would like to turn the conference back to Mr. Chris Franklin for any additional or closing remarks.

Great. Thank you. Dan, Brian and I are always available for follow-up questions if there are any. But in the meantime, thank you for joining us, and I appreciate the questions and your attention. Be well.

That concludes today's presentation. Thank you for your participation. You may now disconnect.