Good day, and welcome to today's Essential Utilities Third Quarter 2023 Earnings Call. This meeting is being recorded. At this time, I'd like to hand the call over to Brian Dingerdissen. Please go ahead sir.

Thank you, Serge. Good morning, everyone, and thank you for joining us for Essential Utilities Third Quarter 2023 Earnings Call. I'm Brian Dingerdissen, Vice President of Investor Relations and Treasurer at Essential. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website. The slides that we will be referencing and the webcast of this event can also be found on the site. Here is our forward-looking statement. As a reminder some of the matters discussed on 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 any non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website. We'll begin the call with Chris Franklin, our Chairman and CEO, who will provide an update on the company. With that I will turn the call over to Chris.

Hey, thanks Brian and good morning, everyone. Thanks for joining us today. I want to start to call out by acknowledging an unfortunate event that some of you may have heard about our read about back in August. In a suburb of Pittsburgh, a home exploded, destroying and damaging multiple homes in the neighborhood. Unfortunately there were six fatalities, including one of our off-duty employees and his young son. The Fire Marshal has indicated that based on the investigation, the incident occurred inside of the home and was not a result of an issue with the gas utility. And we continue to, of course, fully cooperate with investigators. We really need to recognize our team for their response to this tragic event, their professionalism, their expertise and especially the way they performed under extremely difficult conditions just having lost one of their colleagues that day, very difficult day for the team. All right. Let me shift gears a little bit here and start off by expressing my appreciation to those of you who participated in our off-season governance meetings and our IR perception study. While they are still compiling and synthesizing your comments, you know that we appreciate your time and your feedback. And most certainly we'll take the insights gain very seriously. Operating a public company, we're always glancing at the stock price throughout every given day. And as sizable shareholders ourselves, our management team and the Board are well aware of the current performance of our stock. We acknowledge the sector has been trading off. Much of the industry performance over the past few months, we believe has largely been driven by the macro environment and the recent sell-off of utilities due to the Fed's comments and actions on interest rates. We know that dividend paying stocks are…

Thanks Chris. Good morning, everyone. I'll start off with the third quarter highlights. You'll recall that GAAP EPS revenues include purchased gas costs and that natural gas commodity prices have decreased significantly year-over-year. So, on a GAAP basis we had revenues for the quarter of $411.3 million compared to $434.6 million in the third quarter of last year. Similar to last quarter, the largest contributor to the decrease in revenues for the third quarter was the recovery of lower purchased gas commodity prices with purchased gas costs decreasing by $35.5 million from the same period last year. Our Regulated Water segment contributed $310.6 million our Regulated Natural Gas segment contributed $94.8 million. Incremental revenues from regulatory recoveries and water and wastewater customer growth contributed positively, offsetting lower purchased gas costs and lower volume in water segment for the quarter. O&M expenses decreased 2.9% to $147 million for the quarter, down from $151.4 million in the same quarter of last year. Lower employee related costs and lower recoverable costs related to our natural gas segment customer rider were the primary drivers of the decrease and were offset by higher water production costs and operating expenses related to acquired systems. Net income was up year-over-year from $68.6 million to $80.1 million and GAAP EPS was up approximately 15% from $0.26 in the third quarter last year to $0.30 for the quarter this year. Next, let's look at the waterfall slides starting with revenue. In the third quarter of 2023, revenues decreased $23.4 million or 5.4% on a GAAP basis. Starting on the left-hand side of the waterfall, regulatory recoveries added $14.1 million in revenues year-over-year. This includes impacts of base rate cases and other regulatory proceedings across all nine states in our current footprint. Next, organic and acquisition growth from our regulated…

Thanks, Dan. Let's take a moment to talk about our water and wastewater acquisition program. As a reminder, with the closing of four transactions early in the third quarter, we've acquired seven systems so far this year, adding over 11,000 customer equivalents to our current water and wastewater footprint. Remind you again that these acquisitions don't necessarily come at full earnings. In August of 2022, that acquired the East Whiteland wastewater assets in Pennsylvania, which was then subsequently appealed by the office of the Consumer Advocate to the Pennsylvania Commonwealth Court. And then in July of 2023, the Commonwealth Court issued a decision to overturn the PUC order approving the acquisition. Now just last month, the company, the PUC and the East Whiteland team then appealed the Commonwealth Court's July order to the Pennsylvania Supreme Court and we're currently awaiting to hear if the Pennsylvania Supreme Court will hear the case. Now, we'll continue to own and operate the East Whiteland system until we hear from the Supreme Court. In the meantime, we'll continue to work with regulators and stakeholders to attempt to make improvements to the fair market value process to bring more clarity to the rules and to ensure it brings value to all of those impacted by the process. All right. On to the next slide here. Let's take a minute to review our pending transactions and our acquisition pipeline. As of this call, we have five signed asset purchase agreements in two states; Pennsylvania and Illinois where we currently have existing water operations. You may recall in the second quarter we announced the agreement for the Greenville Wastewater System in Pennsylvania. And then more recently we announced the agreement to acquire the Green Water System, which has 3,000 customer connections. Collectively, these five acquisitions are expected…

Thank you. [Operator Instructions] The first question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Hey, Julien.

Good morning, Julien

Hey, good morning, Chris and team. Pleasure guys. Maybe just to come back to where you started this call, right? I mean obviously a certain degree of frustration. Obviously, you've got multiyear guidance out there. How do you think about responding to the current environment? Again I just -- I hear your frustration in your voice same time providing perhaps even further extended our guidance and a refresh could be still pending for a bit here considering the upcoming case. But I wanted to put it back on you as far as incremental day points that could help derisk or provide a longer-term refresh on the outlook if you will.

Yeah. Listen, I think, we provided our thoughts pretty thoroughly. I guess, I would just add my optimism, we're all going through -- I mean, when I say we are in the utility industry are going through a rocky time for our investments in utilities and we all acknowledge that. And then we further acknowledge that we've got some headwinds we've been dealing with. We're going to work on some of this regulatory process in Pennsylvania and see if weak some improvements there. Listen litigation is always frustrating. And if you sense that my voice you'd be right. It is frustrating. Having said that though, these are adders, our base earnings generated from our capital program are solid as can be and we continue to perform and are highly -- and are good states where regulatory climate states. And so we feel good about the base business and our continued ability to produce nice earnings growth especially in what is a generally tough environment for utilities. So listen I'll just conclude that thought with my optimism. Dan, do you have anything to add?

The only thing I add Julien is, I think like all utilities we're, obviously, facing interest rates and inflation and I think as utilities in general, we'll respond to that by having more frequent regulatory filings.

Yeah. No, indeed. All right a couple of follow-ups there on a more specific basis. The $165 million pending for the non-utility projects, energy projects, can you talk a little bit about the timing element here and how that fits in your financing plan on the expense to, which that does or does not close here in the near-term or what have you? Just again maybe that's more of a Dan than the Chris question here.

Yeah, Julien, I think to either close late 2023 or early 2024. So either side of the end of the calendar year here would not really change, how we think about it from a financing perspective.

Yeah, and you're excluding the gain anyway from your core earnings numbers anyway. All right, fair enough. And then just coming back on this Pennsylvania case, I mean, obviously it's been a minute since you all filed here and obviously it's a new owner et cetera. I mean, how are you thinking about the rate increase and the impact on customers as it stands right now? I mean, you've done a lot of investment obviously there are potentially some degree of benefits that could go back to customers as well to mitigate it. Any updated thoughts?

Yeah, Julien, I guess I'd say we're still in the process now. It's clearly an important case for us. We've been out for five years. It's the first case since we bought the gas business. This case combines both the Peoples Gas business and the Peoples Natural Gas business as we did a filing to combine those entities. And it will have significant rate base addition in the case, so invested a lot of capital here. So as we think about the fully projected future test year in this case that we're going to file versus last case, the increase in rate base is about $1.9 billion. Now that includes about $300 million that came across from the Peoples Gas business into Peoples Natural Gas, but it's still a very significant capital investment that we'll be filing for here. Now this is the case too Julien as a reminder that really incorporates the benefits of tax repair. So we've had this tax repair scenario for the last few years. We're going to continue to invest capital that's repair eligible going forward, which lowers the effective tax rate and that low effective tax rate will be incorporated into the rate, so it will benefit the customers and help to mitigate what would otherwise be the anticipated increase here tied to the capital. But of course, I'm not -- I don't want to say there is not an increase here, but that repair benefit will help to moderate that increase. We're still kind of working through the specifics here. We'd expect the equity layer in this case to be consistent with our cases we filed for water in Pennsylvania as well as what Peoples had filed previously for gas. And in terms of sort of the ROE ask and the revenue requirement increase that's something we're still working through in this case process. So standby, as we file that and we have to file it by the end of the year, you'll see the details of that in the filing.

Dan, just maybe one adder to that affordability. When you think about rates, fortunately where we sit on Marcellus Shale, our commodity price is better than most, right? And as we know, if you look at the spot market, natural gas is in a pretty good place right now in terms of pricing. And so, Julien when you look even a decade ago before directional drilling, rates were higher than they are today. And if you look at a year or so ago, when rates spiked, our rate rates are better today as well. And so we're in a pretty good position with our customers. Having said that, we also have significant safety net programs in place. In fact, our safety net last year I think was in the range of $35 million that we helped customers who couldn't afford our bills. So I think we're in a really good place and this is a capital case, capital case largely. I mean, there's an inflation element no doubt, but this is largely a capital case. And I think our rates are in a pretty good place.

Got it. Excellent. Sorry, last quick one just maybe to bring it home. Year-to-date obviously, employee is trending well here in terms of cost benefits? And then also tax. I mean how are you tracking against full year here just to flag the big deltas there that are favorable for you, especially tax?

Yeah. Well, certainly, we've had -- and as you know we had a warm winter. So the first quarter was tough in terms of the gas business. We've had some nice pick up since then some things are broken in our direction in terms of operating expenses, in terms of weather later in the call it the second quarter for the gas business, a little bit of a pickup there. We had a purchase water pass-through pickup in Texas that I think I talked about on the last call. And then, certainly, this natural gas safe harbor has been beneficial because what it's done is really increased the eligibility of the pipe that we put into the ground. So the more of that pipe is eligible for the tax repair benefit and that's certainly been helpful here as well in terms of making up for what we saw in the first quarter, and helping us to get into that guidance range for full year. Presuming again, as Chris said that we've got normal weather here in November and December.

Really appreciate it. Appreciate the time guys.

Thanks, Julien.

Thanks, Julien.

Durgesh Chopra from Evercore. Please go ahead. Your line is open.

Hey, Durgesh.

Hey, good morning, team. Thanks for taking my questions. Just can you give us maybe a bit more clarity on as you file this rate case, how should we think about disclosures, whether it's long-term earnings growth guidance, when to expect that -- will that be in December or on the Q4 call? Just anything that you can share there in terms of timing?

Yeah. I think what we'll do on that Durgesh is provide guidance consistent with what we've done over the past few years which is sort of a January February timing there.

Yes. As I mentioned, Durgesh, our Board meets in the next couple of weeks actually mid-December and we don't approve the budget until then. So we'll provide guidance as Dan said on our normal schedule.

Okay. Got you. I just want to make sure there was no changes there, given the rate filing. It sounds like even if you're going to follow basically what you've done in past years. Okay.

Yes.

Okay. Perfect. And then just – can you talk about the PFOS, PFAS? I think the – in the last call you might have highlighted $350 million in incremental capital opportunity, if I captured that correctly. How has that view evolved or changed? Do you see that as potentially raising your capital like your $1.1 billion run rate capital going forward? Just any color that you can share there, please?

Yes, sure. I mentioned that we've now upped our estimate from $350 million to $450 million. And so it will increase our spend. However, what we've also said we continue to look at our capital budget and opportunities to displace other projects that maybe don't have the same level of urgency as the PFAS mitigation does, and so we don't see it as a material change to our capital guidance and spend over the next few years. Having said that, listen $450 million to mitigate PFAS is a big deal. And it's several sets of projects right as you do it across the company. So it will be time energy and cost but we just don't see it as a major adder to the capital budget.

That’s perfectly clear. Thanks, guys. I appreciate you giving me time.

Take care, Durgesh.

Gregg Orrill from UBS. Please go ahead. Your line is open.

Hey, Gregg.

Good morning, Gregg.

Hey, good morning. Yes. Following up there on PFAS just has anything changed about the timing of potentially getting proceeds from the legal arena to offset the PFAS investments that I guess the consequence of that would be that you're thinking about PFAS as more of a rate base eligible investment at this point?

Yes. So as we think about the recoveries from lawsuits again call it the 3Ms and so forth, we have some key decisions to be made. The whole industry actually does early in December here. And those decisions are you stay in with the group, with the class action or do you separate and assuming you can do better on your own. Those decisions are currently under discussion in all other companies we're no exception. And then I think the prevailing thought is that should we stay in and get our piece of some of those settlements, it would be paid out over a 10-year period. And so the capital that we would spend Gregg, would be largely done and invested and recovered before the main portion of the proceeds of a settlement would come through. And so whether that would be – end up being an offset to operating costs or how we would account for it I think yet to be decided but I think that's generally how we think about it.

And how does the PFAS capital investment relate to your capital budgeting plan and guidance...

Yes, it's embedded and will course, we'll update it. But we don't see a material change to our overall capital budget. We're always measuring ourselves against affordability. And so, we may spread some of the projects that are in our current plan out, a little bit further not bad for investors, but short term focus more on PFAS in that capital budget. I'm not saying there won't be any increase, but it won't be material.

Okay. Thanks for your update.

Jonathan Reeder from Wells Fargo. Please go ahead with your question.

Hi, Jonathan

Good morning, Jonathan. Q – Jonathan Reeder: Hi. Good morning, team. Thanks for squeezing me in. A lot of my questions have already been asked. But just kind of curious was the Q3 2023, weather was that below normal? Or was Q3 2022, just above normal making the Q over -- quarter-over-quarter comps tougher on the water side?

I guess, I would think about it on a state-by-state basis. So, we certainly had in our northern states, a little bit certainly rainier weather. And so I would attribute less water usage to that. In our southern states though, we had higher consumption in both Texas and in North Carolina indicating that weather there was a little better, if you will than normal. So, it's geographically specific. Q – Jonathan Reeder: Okay. But overall, I mean with the North being a lot bigger it was…

Yes Q – Jonathan Reeder: Normal weather in Q3.

Yes. That's why you saw that consumption-related impact, if you will, in the revenue waterfall. Q – Jonathan Reeder: Yes. Okay. Did you guys -- I mean have to do more on the kind of the O&M expense mitigation side then in Q3 to kind of offset that weather headwind or just the measures you already had in place kind of put you in spot.

Well, I think as we've been talking about in these calls since the beginning of the year, we are really trying to have a laser focus on our operating expenses this year and it's always been part of our culture, but ensuring that it's a daily focus for our operating team. So I would say, we've just continued more of the same in that regard. Q – Jonathan Reeder: Okay. And then in terms of the East Whiteland proceeding. Does the fact that the case has now appealed to the Supreme Court mean, that the lower court denied I guess the request for rehearing. And then, what happens at the Supreme Court doesn't hear the case or uphold the lower courts order?

Yes. So, yes. Yes, to your first answer -- the first question. So that's why it's going to Supreme Court and we've asked for an audience there. The Supreme Court were to not take it or rule against us, I think same effect the lower court ruling would stand. Q – Jonathan Reeder: And then the DLS to get on round somehow but like who owns it if East Whiteland doesn't want to own it.

Yes. So here's -- I think pragmatically, how to think about it we would probably need to just refile and we have to articulate the affirmative benefits if you will, what the office of the consumer advocate is really picking apart in the case is the fact that, in their mind the commission didn't articulate those affirmative benefits in the case. They really referred to the fact that we're a large capable utility, that we could handle this and that was the benefit. So the OCA just felt that they didn't go far enough in articulating or didn't articulate to the satisfaction of the OCA, the benefit. We -- I believe we did in our filing articulate those well. Now, so it would probably be a refiling and whether there'd be a negotiation or some kind of a settlement discussion with the OCA. I don't want to put words in the OCA's mouth, but when a township doesn't want the utility back, we found plenty of opportunity to make improvements. We've obviously -- if it had to go back it would have to be refinanced at higher rates bad for the township. An unwind is not a favorable thing for anybody. So I do think, there is opportunity for settlement. But I think some of that Jonathan could be tied up also in hopefully what's a further discussion with the commission on how do we make fair market value a process that is feels fair to everybody, including the office of the consumer advocate, including to various customers who have strong feelings about this as well. So I see it as a sort of an intertwined effort here. Does that makes sense?

Yes. No, it does. But how long does it take for the Supreme Court to kind of let you know if you're taking up the case and then ruling like would it be easier just to almost go down that re-filing or re-approval path instead? Or would that be more -- ?

Well, it might be. But I think just letting the court decisions stand as it currently sits is not ideal for the industry. And so not to say we couldn't figure -- listen what it does it says, we got to be more sharply focused on impacts to customers, more sharply focused on facility and more sharply focused on the various issues that we articulate as affirmative public benefit of the transaction. And so that's really what the net effect is. And so I would leave you with this Jonathan. We're not going to just sit and let the court play out. We are going to actively work with the commission the OCA and other parties to see, if we can really come to some terms here that makes sense going forward because it has general effects on the industry and ability to do these transactions in an efficient way.

Yeah. That make sense. Okay. I appreciate your taking the time and looking forward to catching up next week.

Yeah, yes. Looking forward to it.

Thank you. And Ryan Corners from Northcoast Research. Please go ahead.

Hey, Ryan.

Thanks for fitting me in. Hey, guys. So yes just -- most of my stuff has been answered as well but I did want to get your take on -- I guess, there was a new DSIC ROE set in Pennsylvania with water set below gas and electric. And I guess there was a four to one vote in the scenting Commissioner, did have some pretty strong words about that being a negative for water utilities in terms of competing with other states capital and that sort of thing. Any take on that decision and both the tactical impact on earnings and the bigger picture thoughts there?

Yeah a couple of thoughts. Maybe Dan, may have some others as well. But number one, let's remember that at least right now we're still under our last rate case ROE. So it really that ROE does not impact Aqua at this point. So it will in the future, but it doesn't at this point. Secondly, the -- as you know the decision that was recently made on the DSIC is they let it flat. They did not increase it. And I think Commissioner Younora you thought it should be increased like electric, which is we share that thought as well. But the commission is looking at, there are various measures and they'll make those decisions. I think we're -- we still feel good about the overall ROE that we could get in the case. But these are decisions that the commission weighs and looks at the numbers after each decision -- or before each decision. So Dan, I don't know if you have anything to add to that?

I think you generally covered it Chris, but I would add and maybe just to clarify the reason that we're still under our prior ROE or rate case ROE, if you will is because we had a litigated outcome in that case. So then that trumps the DSIC ROE that's been stated here by the commission. But as you know, it's a bit of a tail of two cities on these DSIC ROEs, because on the gas side, the ROE is nicely above 10%. I think it's 10.15% whereas that water ROE has been dropped. So as we go into the gas rate case for a DSIC ROE of 10.15%, I think we feel pretty good about our ability to achieve a nice outcome in terms of ROE in this upcoming case.

Yes. Okay. That's very helpful color. And then, sticking with the gas side Dan, so West Virginia divested, what about Kentucky? Is that any shift in the thinking there? Or is that Kentucky piece big enough where you consider that to be core?

Yes. The Kentucky piece is -- it's a nice subsidiary. It's like any of our water subsidiaries and we view that to be core to the business that we have.

And I was just in Kentucky last week Ryan, and we think the commission is a constructive commission down there. We met with all the commissioners and we would actually like to grow in the water business down there. And so, it's a relatively new state for us, but I think there's opportunity for some growth down there as well.

Yes. Okay. And then finally, just -- I appreciate your comments Chris on the strategic incident. It must be very tough for everybody involved. But -- in terms of what that says about the big picture for gas, I know -- it's one of the ironies is you mentioned earlier, the gas trade at a discount to water in terms of the stock price but rate base growth is actually faster than water. I mean I would imagine that even though that's -- the company is not culpable that that really heightens the focus on many investments that need to be made and the type of thing that can happen if those investments aren't made. So I mean does that kind of just reinforce the rate base growth outlook that's above -- it's above water? And just what are your thoughts on that in terms of just that rate base growth in gas relative to electric?

Yes. Listen, as a general theme, I think that's right. This specific case as determined by the fire marshal was -- work being done inside a home and not our equipment or our pipe. So, I just want to make that clarification. But generally, yes, the safer the system and the more environmentally friendly the system is, the better off we all are as a society, better off we are as a company and the better off our customers are as well. That's why we continue to be laser-focused on meeting our LTIP work as outlined by the PUC and implementing the miles and miles of pipeline replacement that we've already accomplished and that we plan to do in our upcoming three to five years. That work coupled with some other work we're trying to do around hydrogen and other innovative ideas. I think will come together and hopefully make it even more environmentally friendly in the future and safer.

Got it. Thanks for your time today.

You got it. Thank you.

Take care.

Thank you. With this I'd like to hand the call back over to Chris Franklin for any additional or closing remarks. Over to you, sir.

As always we're available for follow-up. I really appreciate your time and questions today. But Brian, Renee, Dan and myself are all available for follow-up questions that you're convenience. Have a great day.

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.