Hello, and welcome to the Essential Utilities Full Year 2023 Earnings Call. Please note, this conference is being recorded. [Operator Instructions]. I will now hand you over to your host, Brian Dingerdissen, to begin today's conference.

Thank you, Francois. Good morning, everyone, and thank you for joining us. 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 be found on the website. 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 any non-GAAP to GAAP financial measures is posted in the Investor Relations section of the website. We will begin the call today with Chris Franklin, our Chairman and CEO, who will provide an update on the company. And then Dan Schuller, our CFO, will provide an overview of the financial results before Chris closes the call with an update on our guidance and overall company priorities. 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 some highlights from 2023 and some company updates. Despite the unusually warm winter weather in much of 2023, we remain focused on operational excellence and improving our Water and Natural Gas systems, by investing capital and continuous improvement measures. As a result of this good work, we're happy to report earnings per share of $1.86, which is in line with our 5% to 7% guidance. As Dan will discuss in a few moments in more detail, our team was able to make -- really make up for the $43 million of weather-related net revenue shortfall versus budget and still meet our guidance range, which was quite an accomplishment in 2023. Now last year, we invested nearly $1.2 billion in infrastructure improvements, as compared to $1.06 billion in 2022. Our commitment to investing in critical infrastructure across our footprint has led to the replacement, retirement and installation of over 300 miles of pipe in 2023 alone. This improved service and reliability for our customers throughout the water, wastewater and natural gas part of the platform. As I've mentioned in the past, this investment spans thousands of projects and takes significant expertise to achieve. Excluding West Virginia, we reported year-over-year rate base growth of more than 10% from organic capital investment alone. We also took 2 divestiture actions last year, that will really allow us to place more focus on our core utilities with fewer distractions. You may recall, in Q4, we closed the sale of our West Virginia Gas utility, very small unit with less than 15,000 customers. And we announced the sale of our 3 nonutility microgrid and district energy projects in Pittsburgh. We recently closed on the $165 million sale of those energy projects,…

Thanks, Chris, and good morning, everyone. On Slide 9, let's take a few minutes to review the fourth quarter highlights, before moving into the full year. Well, many of you focus on the company over a longer period of time, which we believe is appropriate, we did want to provide a quick update on how the fourth quarter of 2023 concluded. On a GAAP basis, we had revenues for the quarter of $479.4 million, compared to $705.4 million in the fourth quarter last year. As we experienced in prior quarters, the largest contributor to the decrease in revenues for the fourth quarter was the recovery of lower natural gas commodity prices, with purchased gas costs decreasing by $209.6 million, from the same period last year. Additionally, the weather in Q4 was warmer than normal and therefore, contributed to reduced gas usage by our customers. Our Regulated Water Segment contributed $281.8 million in revenue and our Regulated Natural Gas segment contributed $188.7 million. Incremental revenues from regulatory recoveries and water and wastewater customer growth contributed positively. However, these impacts were offset by the lower purchase gas costs, lower volumes in both the Natural Gas and Water segments and other items for the quarter. Operations and maintenance expenses decreased 15% to $157 million for the quarter, down from $184.7 million in the same quarter of last year. Decreases in other items, lower recoverable costs related to our Natural Gas customer rider and lower bad debt were the primary drivers of the decrease. These were offset by higher water production costs and operating expenses related to acquired systems. Net income was up year-over-year from $114.9 million to $135.4 million and GAAP EPS was up 13.6%, from $0.44 in the fourth quarter last year to $0.50 for the quarter this year. Next, we'll discuss…

Thanks, Dan. And it's hard to believe it's been 5.5 years under your leadership as CFO, and I want to thank you for that. I also want to recognize the great work done by Dan and his team in achieving our 2023 financial results. It was a challenging year on the weather front.

Thank you, Chris.

Yes. Let's talk for a moment about our Water and Wastewater acquisition program. As you know, the program has been successful and continuously evolving for nearly 30 years now. I have to tell you that we're really pleased with the leadership of the Pennsylvania Public Utilities Chairman -- Commission Chairman, Steve DeFrank, on addressing some of the issues that have arisen associated with the use of the fair market value statute that was passed in 2016. We believe that the proposal he has made at a recent PUC public meeting will make a real difference in moderating rate increases for customers, while still providing a fair price to governmental entities when they decide to sell their water or wastewater utilities. We view this as a very positive development in our acquisition program in Pennsylvania and believe that the pipeline remains strong. As I mentioned earlier in the call, in 2023, we acquired 7 systems, adding over 11,000 customer equivalents to our current water and wastewater footprint. We have now acquired over $500 million of rate base via acquisitions, since this leadership team came together in 2015. That statistic just doesn't do justice though to the amount of work that goes into the program. I fully expect that the company will continue to be a major player in the consolidation of the water and wastewater utility industry in the United States. Now moving to the next slide, let's take a minute to review the pending transactions. As of this call, we have 6 signed asset purchase agreements in 2 states, in which we have existing water and wastewater operations. These acquisitions will add over 215,000 customer equivalents and total approximately $380 million in purchase price. As I noted in my opening remarks, this includes the recently signed agreement with North Versailles…

[Operator Instructions]. The first question comes from the line of Ryan Connors from Northcoast Research.

I think you did a great job with the details, Dan. Just a couple of bigger picture questions here. Chris, you talked about -- strategically about kind of rate and CapEx strategy. But tactically, lots of high-profile industry noise in Pennsylvania right now, in terms of rate increases in water. How does that impact your tactical thinking about rate strategy in PA, in terms of the rate cycle and the cadence of CapEx going forward? Any thoughts there?

Yes, Ryan, listen, I think cadence is important. The challenge that we could face, and I outlined a moment ago is if Pennsylvania, for example, requires us to comply with the PFAS rules over a 3-year period. It appears in the federal regulation that hasn't been formally released yet, but the draft would suggest that states can extend that by 2 years. So if they allow us to extend it, it would give us an opportunity to spread that a little bit. That's the only thing that could push us in a little sooner. But we think that the cadence we have now is a good cadence. Now there's a lot of capital before us, including lead. So that could impact the cadence of future cases. But listen, I think affordability is key in how we think about things. I think how we think about Act 11 and shifting of cost is key to us. And I also think about that throttling of capital to make sure that things remain affordable to our customers is also critically important.

Yes. And then relatedly, so this -- you mentioned your comments on the M&A environment, which I appreciate, but there was some big news yesterday, not one of your deals, but the PUC actually rejecting an Act 12 deal. How do you view that in terms of the potential impact on the near-term pipeline? I mean will that scare off some potential sellers, at least until we can get finality on where this reform process ends up?

It's an interesting question. And I think what it does is it provides pretty clear guidance to sellers, as to what's the multiple on depreciated original cost that they can probably expect. Now we're probably a couple of months away from the finalization of Chairman DeFrank's motion because there's 30 days followed by a 15-day comment period. Assuming it stays even close to where Chairman's proposal is, it will give pretty clear guidance as to where those purchase prices can be. And believe me, I think that those are still really nice premiums that can be paid for these utilities while we keep rates in check. And I think yesterday's decision probably is in line with the commissioner's 5-0 vote on Commissioner DeFrank's (c) motion on his proposed changes. I think that given the difference in the multiples on depreciated original cost, it would have been hard for them to do this one. Now I do think, and this is important, as we think about acquisitions, particularly in Pennsylvania, troubled systems are really differentiated from this process. And so I think the acquisitions that we have in the pipeline, many of them are troubled. And so you have a little bit more flexibility in this for troubled acquisitions and they may take more of a focus.

Yes. I appreciate that. And one last one for me, if I could sneak it in. Just super big picture, Chris. I mean there seems like there's been a pretty big -- pretty stark role reversal for water and gas over the last 6 months or so. Water seems to be facing some headwinds now and gas utility stocks are now actually outperforming the water names. That's one of the reasons your stock has done relatively well. How does that shift your thinking, if at all, on portfolio strategy going forward? I mean, you've talked in the past about kind of staying put in gas and really growing in water. Is there a thought process that maybe gas could be more of a growth platform?

Well, I'm not ready to say that yet, but I think you're exactly right in your -- the public sentiment. Including in Europe, you saw that -- even in the European Union, gas is now considered green again. So I think public sentiment has changed a bit. I think the realization that natural gas is going to be here for a very long time, given the critical role it plays in the energy mix is more evident in Peoples knowledge today. But having said that, listen, we're going to remain focused this year on delivering a really quality rate case in Pennsylvania. And so that's going to be our primary focus in the Gas business in 2024.

The next question comes from the line of Durgesh Chopra from Evercore ISI.

Just I wanted to kind of stick on the theme of the rate cases, getting a lot of questions from investors, obviously, on the water front. Maybe can you just give us a sense of what kind of revenue or rate increase ask that you might seek in the upcoming water case? You mentioned affordability several times in your comments. So just trying to get a sense of how big a rate increase you might see if you can give us a range or something along those lines?

So Durgesh, we're still working through that case right now. And of course, as you indicated, affordability is a concern. So we don't have a number to share. We'll obviously share that number -- or we'll be pretty close to that number when we have our first quarter call. So we'll provide more detail at that point. I would say though, and you see it in the 5-year CapEx guidance that we've shown, that we're going to continue to have strong CapEx in the Water business and PFAS and later a portion of that CapEx. So those capital expenditures here for the time period kind of through 2025 will be included in this rate case.

Yes. Let me just point you to, Durgesh, to some of the comments I made in the call here. We're meeting with regulators as we speak -- environmental regulators, that is, to talk about this time line for PFAS. We pretty much know where we're going with lead. But that timing is a key consideration even in this -- how we think about this case. So numbers are still moving around a bit. But as Dan said, it should be clear in the coming months.

I appreciate that. And then a pretty large step up in CapEx. I think if I just take the average annual capital amount, it's like 30% higher versus previous guidance. 1.4% on average versus 1.1%. Maybe just, can you talk to -- obviously -- and thank you, by the way, for sharing the equity plan for this year, much appreciated. But then can you talk to the financing needs in '25 and beyond. Should we use that $250 million as a run rate? Or should it be higher given the CapEx is stepping up quite a bit? Maybe just talk to that? And then I have a follow-up.

Yes. We probably won't provide too many details on that beyond 2024, only because the needs in the future for equity also depend on acquisitions and how they play out. But I would say, as we think about that $1 billion ATM program, generally, we're thinking about that as 3-plus years. But again, it depends on both acquisitions and investment needs.

Okay. Perfect. I appreciate that, Dan. And then maybe just like one last question for me is, rate base is growing at a materially faster clip or projected to grow at a materially faster clip, assuming you've got favorable regulatory outcomes in the PA rate cases? Could we see a step-up in long-term growth rate going forward, as you're spending more money? Or maybe perhaps to the -- towards the high end of that 5% to 7%? Or how should we think about that? I don't know -- I appreciate there's no long-term guidance, but maybe directionally, you could help us think about long-term growth rate.

Yes. Listen, I think we're trying to refrain from front-running the commission in Pennsylvania. So I'm going to be careful in how I answer this. Listen, I think Peoples is coming out of repair, which we've -- I think we've talked about many, many times. And so as we think about coming out of repair and earning well before that, the step is not what would be in a normal step rate case. So I think I would be -- I think we're comfortable with the guidance we've given. And hopefully, that gives you a little bit of sense of how we think about it.

The next question comes from the line of Travis Miller from Morningstar.

Kind of going back to again, this whole PFAS discussion and the investment needs. I think, Chris, if I heard you correctly, huge and expensive was the quote? Does that refer to the $450 million in the 5% O&M? Or is there more potential CapEx and/or O&M?

Yes. Yes, good question. So here's how we think about it. As we estimate today, we're saying at least $450 million. But the timing, right, if -- for example, we heard this week when we were in North Carolina, that we must comply with the 3-year time line in North Carolina. And so we're going to be all on push. In Pennsylvania, we're hoping to get some definition around that from the regulators here. But if we have to move faster, if we have to comply with 3, which we originally were hoping for a 5-year, then it could be added cost. And the added costs come from potentially our inability to get loans -- low interest loans and grants in that process because often, they require us to apply and get the grant before we build, and we can't wait. And so that's the conversation that we're having with the regulators now is help us, help our customers. Our customers didn't put this contaminant in the water nor did we, but we are all faced with fixing it and paying for it. And so we're trying to mitigate those costs as best we can. That's why that number is moving around a little bit and could go north more, if we can't attain some of these grants.

Okay. That partially answers and then my follow-up was how much discussion are you having with regulators in terms of getting some of those costs recovered outside of having to file full base rate cases? Would there be some kind of [indiscernible] treatment potential? Have you discussed that at all? Or is that on the table?

That is a discussion we are having in several locations. We had a long discussion even internally here about how to make some of those things happen last night. And I think it's important for customers to recognize that, that portion of their rates is associated with compliance with a cleanup and not simply an investment in pipe or improvement that we would normally make in the course of running a utility. I really want customers to understand that they're paying for some of these costs. Now I'll remind you that we are getting some recovery from lawsuits. We hope to get somewhere between $90 million and $110 million from the polluters, but that's not going to cover, clearly, the costs we're talking about here.

Okay. That's all helpful. And then one other on the gas side. Any thoughts in terms of getting a weather normalization clause, either in this rate case or a separate application? I know that at least one other gas utility in the state has a pretty robust weather normalization -- weather normalization costs. So I wonder if that's part of the discussions in the current rate case? Or is that something that would come along in a separate filing?

Let me just remind you, this is our first rate case too, since we've owned the company. So that's why we don't have weather norm. Go ahead, Dan.

Great point, Chris. So yes, Travis, we have filed this rate case, including a request for weather normalization. And to your point, a few of our peer companies here in Pennsylvania have it and achieving a similar program will be very beneficial to our company.

Okay. Handicap wise, do you think given that the other utilities have it, that there's a good chance? Or is there something unique about what you're discussing with regulators?

I would say the fact that other utilities in the state have it bodes well for a positive decision here.

The next question comes from the line of Davis Sunderland from Baird.

Two questions for me. I wanted to ask about the decision not to give long-term EPS guidance. And I know you guys mentioned the rate case for being the reason for this, but should we think of any pending acquisitions, as playing a role in this? And then I have one follow-up.

Yes. No, not at all. We're not worried about the acquisitions. It's really the fact that we have 2 major rate cases filed in Pennsylvania, which account for, as you all know, a large portion of our net income. And so I actually had conversations with regulators who said it was to be a sign of respect to be able to do that. And so I gladly comply with that. So it was really just not front-running the commission in terms of how they think about returns and processing a rate case, especially given its import to the overall picture here in our company.

That makes sense. And then another one on just the acquisition pipeline. Broadly speaking, I guess, at a high level, have you seen in light of the higher rate environment an increase in the number of systems or I guess, maybe any thoughts on where valuations are? Any commentary on where you're at with the 400,000 customers too right now would be helpful?

Yes. I would say there's a lot of active conversations happening. Clearly, the news of the Chairman's (c) motion and then maybe the newest information on [indiscernible] that just occurred is -- people are processing that information. I'd say that was really, really new information, both of those. So not sure exactly how the market will react. But I'll tell you what, assuming the Chairman's motion is successful and we see a clear path to actually closing these and not having to deal with the court issues and just the prolonged nature of the challenges. I think that will actually be a very positive signal to the market. Number one, they can be paid a premium, all to be at a controlled premium. And then two, there's a clear path to closing, which I think in some of these cases today, that path is not as clear. So now in terms of our general conversations with others in the pipeline. I would say they're steady as she goes, municipal acquisitions are lumpy. We've talked about that many times. And so sometimes you feel like it's 2 steps forward and 1 step back. But nevertheless, I do feel comfortable that the pipeline is still strong.

[Operator Instructions]. The next question comes from the line of Jonathan Reeder from Wells Fargo.

I just wanted to quickly clarify that the '24 guidance range doesn't include the onetime gain from the nonregulated sales that recently closed. Is that correct?

Yes. That's correct, Jonathan. So that EPS guidance presumes normalized weather and excludes that gain on sale.

Okay. Great. And I appreciate that you rolled out the 5-year guidance in terms of CapEx and rate base. I'm still just a little confused, why you didn't also provide, I guess, the long-term EPS CAGR, since there's potentially another round of PA rate cases that would fall during that 2024 to 2028 period, after the pending gas and soon to be filed [indiscernible] kind of wrapped up. So I guess, kind of the first part of the question is, do you just intend to provide a 3-year EPS CAGR when you do roll it out next year. And then the second part, if we were to assume no change to the current [indiscernible] Gas and Water, like return parameters, meaning the allowed ROEs and equity ratios. Is there any reason the EPS CAGR wouldn't be consistent with the prior 5% to 7% range, given rate base is expected to grow at over 8%, even taking into account presumed step-down in people's earned ROE?

Yes. So a lot of questions into one question. So in terms of the guidance range and why with regulators. I kind of covered that before, Jonathan, but I'll just say again. I recognize there's a stream of cases coming through Pennsylvania. And so, the way we think about it is take one case at a time. We just happen to have a really heavy overlap here. The Peoples case won't conclude until really fourth quarter 2024. The Aqua case won't conclude until first quarter, probably of 2025. It's just right on top of each other. I think we have to look at the cadence and then how we would provide that respect to our regulators and guidance to our investors. And evaluate it as we go. And hopefully, we can stay with largely the guides we've always provided. I would anticipate as we return at this time next year to regular guidance, I would expect a 3-year cadence, not -- we could probably continue to do 5 years on CapEx, but a 3-year guides. I just think there's so many things happening in the industry. That's a much clear view of what's coming.

And I think, too, Jonathan, if you look at what we provided in terms of the Peoples Natural Gas rate case and rate base and equity layer and so forth. We've tried to provide some data there that would help you model 2025, a fully projected future test year in terms of an outcome. So if you need any more help on that, we obviously take your call any time and we can have conversations. But we're just not going to provide a guidance range at this moment.

Yes. No, I mean, just with the step-up in CapEx, even the rate base growth, the strength there -- I just now some people kind of wondering like is it sending a mixed message, but if it's just purely out of deference to the regulators and the plan was just to keep the EPS CAGR at 3 years versus 5 year along with the other stuff. Then I guess that makes a little more sense. So in terms of kind of, I guess, modeling the $7.2 billion, like first off, that's just pure CapEx, that doesn't include anything for pending M&A or future placeholder, right, consistent with how you've done it in the past?

Yes. It's consistent with the past. So it includes -- it doesn't include acquisition prices -- purchase prices paid. It does include CapEx subsequent to acquisitions closing for those acquisitions, where we have a signed purchase and sale agreement.

Okay. And then in terms of like [indiscernible], should we just assume like gradual annual increases off of the to or -- is it going to be a little more heavy in '25 and '26 because of the PFAS stuff? I mean, I guess that's what you -- still a little bit to be determined, but...

Yes, a little bit to be determined whether PFAS is a 5-year or 3-year program and by state. Otherwise, I guess I would say that if you take $7.2 billion and you divide it by 5, you're kind of in this $1.3 billion, $1.4 billion range, and it kind of bounces around in that range over those years. It's not necessarily a directionality to it.

Okay, can you kind of just talk about the drivers of the CapEx increase? What caused you to kind of step it up? Because I think you'd kind of been relatively consistent the past few years in your budget. This is a lot bigger increase. And then along with that, what sort of impact the higher CapEx will have on the average annual customer bill increases that you foresee?

Yes. I'm happy to start and then Chris can chime in. But as we look forward, and I think all utilities and really all companies that do construction work have experienced this, we do see higher construction costs in the future than we've had in the past. So that gets incorporated when we develop our 5-year plan. And then, of course, we've got a bit more clarity here in this 5-year plan regarding PFAS and lead than we had previously as well. And then...go ahead, Chris.

Yes, it's really step up. I mean we were in '22, in '23 and now we're coming up to, call it, an average of . So it's not a massive increase. But given the cost we're seeing -- labor costs as well, we're seeing increase. And then more clarity on PFAS and lead, it just is migrating north.

Okay. And then last for me, on the PFAS front. Can you provide any update on federal or state efforts to protect the water utilities from any potential liabilities related to distributing water, that might have a PFAS in it prior to the EPA actually establishing a rule? I think there's some class action lawsuits perhaps in Connecticut around this issue that have been filed?

Yes. I mean listen, I think a number of people are trying to figure out ways in -- at the state level even to protect water utilities through legislation from that kind of liability. As you said, there's 2 in Connecticut, with the public company there. One is about product liability lawsuits, class action. And -- which we're watching clearly very closely as the rest of the industry as well. I'm not aware of any that have successfully passed in terms of protections. As we think about looking for protection, we're also looking for on the waste side, right? [indiscernible] we want to understand really how we're going to be treated going forward with the waste. So work to be done. Listening to guys like [indiscernible] and the industry lobbyists are working hard in Washington to try and get protection. And I'll just give a quick shout out to Senator Shelley Capito, who's really done nice work in this area and leading some of the work and really understands what we're facing. The team, Jonathan, that we're talking to -- elected officials about is, again, we didn't put the water there. As a matter of fact, we've taken steps even before now to put mitigation in place. And so we believe that our customers and our companies need to be protected. So I would put that in the category of work that needs to be done.

Okay. Yes, I know it's definitely kind of interest, given the size of the liabilities that the actual polluters face is, hopefully, that doesn't come back on the water utilities, which ultimately gets passed on to the customers and bills and everything like that. So good luck with that.

Yes, thank you.

Next question comes from the line of Gregg Orrill from UBS.

Just thoughts on Aquarion and how your criteria would align with that as an opportunity, how you think about that? And I guess a separate question, I guess, '23 is the base year for the rate base growth guidance?

Yes, that's correct.

Yes. On Aquarion, Greg, it's a good question. Obviously, the asset is in the market as announced by Eversource. Let's start with -- it's a strong asset in terms of the quality of the asset itself. Don Morrissey, who runs the company, along with Joe Nolan, who runs Eversource, they've done a nice job in maintaining the asset, growing it a little bit. So from that perspective, I think it's a nice asset. But I also think it's a challenged regulatory environment. An 8.7% ROE in the latest case is a little bit concerning, I think to any potential buyer. And I think the ability to grow in Connecticut is also challenging with the requirement of a referendum to grow. So I think there are some challenging things. Listen, there's a lot of people are going to look at that asset. We don't talk about what our plans are. But I think it's an interesting asset, and it has some pluses and minuses to it.

There are no further questions. So I'll hand you back to Christopher Franklin to conclude today's call.

Thanks for sticking with us, folks. I know we went a little long today, but good questions and a lot of material to cover on the year, so many things happening in the industry. Obviously, Dan, myself, Brian and the team are always available for your follow-ups. Thanks for joining us today.

Thank you for joining today's call. You may now disconnect your lines.