Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essential Q2 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for the second quarter 2025 earnings call. If you did not receive a copy of the press release, you can find it by visiting our website. The slides are also 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, references may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted on our website. We will begin the call with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Then Colleen Arnold, the President of our Aqua business will provide an update on the Water business; Dan Schuller, our Chief Financial Officer, will then provide an overview of the financial results before Chris closes the call and opens it up for questions. With that, I will turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Let's just jump right in on Slide 5 there with some highlights from the quarter. We delivered another strong quarter, reporting GAAP earnings per share of $0.38. That's a 35% increase over the same quarter last year. Both our Water and Gas businesses performed very well and in line with our expectations. And simply put, both divisions are firing on all cylinders. Our gas business continued its impressive trajectory with net income for the quarter of $17.5 million. I'm not going to steal any thunder from Colleen. She is going to share a little bit more about the Water business in a few minutes. But as you come to expect, we are executing nearly flawlessly in both our Water and our Natural Gas segments. Based on our strong year-to-date performance, we expect to achieve GAAP earnings per share above our guidance range of $2.07 to $2.11, largely due to several nonrecurring benefits. We're also reaffirming our capital investment plans with a target of approximately $1.4 billion in infrastructure investment for 2025. As of June 30, we've already deployed $613 million in critical infrastructure improvements across our footprint. Now let me take a moment to highlight some exciting developments happening in our home state of Pennsylvania. Earlier this month, we participated in the Pennsylvania Energy and Innovation Summit, which was hosted by our new United States Senator, Dave McCormick. Energy leaders from around the country gathered to share thoughts, breakthroughs in energy and technology. And our Gas division President, Mike Huwar, showcased our ongoing hydrogen pilot project. This is a cutting-edge technology developed in partnership with H Quest and the University of Pittsburgh. Now the comparatively low price of energy in Pennsylvania makes it such a logical choice for hyperscalers looking to locate data centers,…

Thanks, Chris. I'm happy to be here today and especially appreciate the opportunity to highlight the important work that the team at Aqua is doing. As a reminder for our investors, Aqua, as Chris just mentioned, has a strong 140-year history and has grown from a small water company in suburban Philadelphia to serving more than 1 million customers with over $7 billion of rate base in eight states. Notably, as shown on Slide 9, we are expecting annual rate base growth of 6% through 2029, not including acquisitions. And the need for infrastructure investment has never been greater. With EPA estimating $1 trillion of need in water and wastewater infrastructure, that growth rate could easily grow with acquisitions. Now I've worked in the water industry for over 30 years, including as a consultant for municipalities and for a large city itself. Between the increasing complexity of PFAS, cybersecurity, wastewater and declining funding, the conditions have never been more opportune. Now highlighting our operational excellence on Slide 10. As you see on the left, our O&M efficiency performs in the top quartile and has done so for over a decade. We take pride in ensuring that we are spending our customers' dollars efficiently. But equally important is that it is not at the expense of safe, reliable service. The top right-hand side chart shows that we outperform water systems nationally with 5 to 9x fewer health-based and aesthetic violations. The bottom chart also shows our strong safety record, with top quartile performance with respect to severe safety incidents. Also, as we move to Slide 11, we are tremendously proud of our industry-leading PFAS commitment. We have been working on this for our customers since 2016, well before the EPA and state NCLs, because it was the right thing to do…

Thanks, Colleen. Let's begin on Slide 15 with a high-level view of the first quarter results, and then we'll get into the details on the waterfall. Our quarterly performance was strong with revenues up 18.5%, due primarily to favorable rate case outcomes in Pennsylvania, both for our gas and water subsidiaries, higher purchased gas costs and increased gas volumes. Corresponding earnings per share are up 35.7% on a year-over-year basis due to those drivers, partially offset by higher O&M, depreciation, interest and taxes. On Slide 16, we have the revenue waterfall for the first quarter. Revenues increased $80.5 million from $434.4 million a year ago to $514.9 million this year. Approximately $44 million of that increase is a result of rates and surcharges, with $31 million of that attributed to water and $13 million from natural gas. Purchased gas, which represents the cost of the gas sold by the company, increased $23 million year-over-year due to an increase in gas commodity prices and higher natural gas usage. The other category of $9.8 million includes $4.6 million in weather normalization and $4.1 million in reduced tax [ referred ] store credits to customers as a result of last year's Peoples' rate order. Increased gas volumes provided $4.3 million in increased revenue, while growth in the water business contributed $2.1 million. These were offset by $2.6 million from lower water volumes. Due to wet weather, we saw decreased consumption in a number of our states. Next, on Slide 17, our O&M slide. We see O&M expenses up about $6 million or 4.2% year-over-year. The main drivers include an increase in employee-related costs of $6.1 million compared to prior period, an increase in bad debt expense of $2.2 million, and increases in legal expenses, partially offset by favorability in other expenses, primarily as…

All right. Thanks, Dan. Now let's move to Slide 23, where we touch on our long-term growth through acquisition strategy that for many years and really continues to be focused on growing our water and wastewater business. Last week, we finalized our $37.75 million purchase of the City of Beaver Falls wastewater system in Beaver County, Pennsylvania, serving about 7,000 customers. That's out near Pittsburgh. We had plan to invest $10 million in the system, focused primarily on improving both operational efficiency and environmental compliance. We're very excited to welcome our new customers and bring their system up to our standards. Now for 2025, in total, the company has acquired systems, which serve approximately 10,300 customers for approximately $58 million. We also have another four signed purchase agreements for relatively small systems in Pennsylvania and Texas. I'll remind you that progress on DELCORA continues to be stalled by a stay put in place by a federal bankruptcy court judge related to the bankruptcy of the City of Chester. Now there is really nothing new to report on DELCORA, but I'll remind you that DELCORA is not included in our current guidance numbers. Now turning to Slide 24. I'll close by reiterating some of our goals and aspirations, both short term and long term. We continue to see strong growth potential in both our water and gas platforms and expect our combined utility rate base to grow at a compounded annual growth rate of about 8%. Breaking this down a little further, the Regulated Water segment is expected to grow about 6%, and our Regulated Natural Gas segment rate base will grow about 11%. We are reaffirming our 5% to 7% multiyear earnings per share guidance through 2027. This includes acquisitions expected to close in 2025 and 2026, but as we've said before, excludes DELCORA. This projection includes the crucial work that we're doing to remediate PFAS across our water platform as well as our work to replace aging water and natural gas pipes. We remain committed to maintaining a strong balance sheet, improving our cash flow and debt metrics, and delivering consistent dividend growth while keeping our payout ratio between 60% and 65%. All in all, we see a bright future for our company as we continue to invest in our nation's infrastructure and continue to deliver long-term value to our shareholders. And with that, I'm going to conclude the formal remarks for today, and we'll open it up for questions. Let me send it back to you, operator.

[Operator Instructions] And our first question comes from the line of Julien Dumoulin-Smith with Jefferies.

Maybe actually just to break it down, a bit of a nuanced question, but it has implications here. You guys provide this timing through the year in terms of quarterly earnings. If you take the midpoints from those and kind of look at what's implied, it kind of implies maybe high end is the better if you look at implied third quarter and fourth quarter here. Again, I don't mean to nitpick too much, but if you have any comment there, I'd love to kind of read between the lines there, if there's anything you'd say.

Yes. So what we said on the call here, both Chris made the point and I did as well, that we're going to come out on a GAAP basis above our guidance range, so above that $2 [Technical Difficulty] All of a sudden, we had some strange music going on. So let me give you a little bit of detail there. So as I said, we're going to come out above the GAAP guidance range. We had strong revenue in gas this winter with more gas usage than weather alone would have predicted. And then this year as well, we benefited from some tax items and the reversal of a regulatory reserve as a result of the Aqua Pennsylvania rate order, and we had some insurance proceeds as well. Those are on the positive side. We've also had some headwinds this year. We've had the wet summer in several of our states, which has impacted us in Q2. It's currently continuing to impact us in the early part of the third quarter. Interest rates, of course, remain higher than expected. Inflation is still impacting some areas like chemicals, and we're still in the investing stage on our lean initiative. So -- and of course, it's still early in the year relative to the gas business. We've had one half -- we've had half of last year's heating season, we still have November and December to go this year. So things can still move around. And thus, we're not being overly specific on where we'll land, but we're saying on a GAAP basis, it will be above the guidance range.

Yes. Got it. Just wanted to elaborate a little bit there. And then just on the cash flow front, I mean, just where are you trending on FFO through the year here? And then specifically within that, how are you thinking about PFAS here and some of the tailwinds from the settlements here and the timing for the collection of those, if you will?

Yes. So you'll see -- let me touch on those in pieces. So our focus really for this year is to be above that 12% downgrade threshold, ideally put some distance in there, call it, like a 12.2% target area because we've obviously been in close conversations with Moody's, and we'd like to see that negative outlook removed in early 2026 once they see full year 2025 results. And then in terms of PFAS settlement dollars coming in and being helpful from a cash perspective, you'll see when we file the Q on Monday next week, you'll see that we received just about $7.1 million in PFAS proceeds from those lawsuits already, and we expect a number this year that's kind of in the $45 million, $46 million range in total.

Our next question comes from the line of Ryan Connors with Northcoast Research.

So a couple of big picture questions on Pennsylvania and then a housekeeping for you, Dan. So I know you're out of rates in Pennsylvania at the moment, but obviously, we have the new consumer advocate there. And I assume your team watches other matters going on really closely. So curious whether you've gotten -- been able to get any feel for the approach that he's going to take and how that will differ from the prior consumer advocate. And then secondly, I've been hearing some chatter about the Office of Small Business Advocate being tougher to get to the settlement table on various matters and maybe being the next fly in the ointment, if you will. So I wonder if you had any perspective on that as well.

Yes. Listen, I think our engagement with Darryl Lawrence and the OCA has been very positive. And I would expect that Darryl and his team will continue to do their job as advocates for the customers, and we'll do our job. But I do think that there is maybe an enhanced desire in that group to figure things out, put this puzzle together in a way that's constructive and that all parties feel like they've come out of it with a win, if you will, or at least not with a loss. And so I do expect a more constructive relationship there at the OCA, and that's been our observation so far. Listen, the small business advocate, she has a role as well, and these are statutory parties, and they've got their priorities. I would say this, the advocate has been very open to conversations. She's visited us here at the company in Brynmawr, and she has been open to conversation on all the topics. So listen, I'm hopeful that we can have constructive relationships with all the advocates, and that's been our experience so far.

Great. That's very helpful color. And then secondly, on the fair market value front, I've been hearing that there are some municipal sellers out there holding out for a price above the reasonable review ratio that was set in the reform to FMV in Pennsylvania. And I guess the reasoning is that the PUC does have the ability to approve something above that level on a case-by-case basis. Is that something you've seen? And would you be willing to go take that risk over the cap? Or would you just be staying kind of at or below the RRR?

Yes. I can't say that we've seen that yet. But I will say that on occasion, we might pay more than the RRR if we thought that, for example, there was huge rate base growth and we could grow into it. I'd like to think that the RRR is a target for both seller and buyer given impact on rates, right? And I think that was the Chairman and the commission's primary goal here was to minimize impact on rates from transactions. And we're big believers that, that's important. And so I'm not saying it would never happen, but we'd like to see both buyer and seller be closer to that RRR than above it.

Got it. Okay. Very helpful. And then Dan, yes, just on the tax rate, it really continues to kind of jump around and at least for us, found it very difficult to model. So any perspective you can give us on where -- how we should think about the landing zone there, not only for the balance of '25, but even into next year? Like what's your advice here on trying to model that tax line because it really seems to be kind of a random spin?

Yes. So, the way I think about that is for the full of 2025, think of a low single-digit benefit. And then for the whole of 2026, at this point, of course, we haven't finished our budget or plan. But I think of that as a low single-digit expense. So think of a crossover from -- at year-end from small benefit this year to small expense next year.

[Operator Instructions] And we have a question comes from the line of Davis Sunderland with Baird.

Two questions for me. Maybe first, just jumping back, Chris, to your comments about the hyperscalers and obviously, a lot of activity going on in Pennsylvania right now. Could you maybe just talk a bit more about the potential opportunity here and specifically the time line for ultimately folding some of these into rate base? I just -- I guess I'm trying to square the stable customer count through '27 makes me think maybe beyond that would be the opportunity, but just wanted to clarify some of the thoughts there. And then I have one more.

Yes. I think, listen, most of the hyperscalers that are talking are talking about really short-term turnaround. They want to build and get in service. And as I said, I think Pennsylvania is a prime location for that, particularly Western Pennsylvania, where there was low- cost energy. I have to be careful in what I say. There are some NDAs in place, and I can't really talk much about the opportunities we're engaged with right now. But I will say quick turnaround. And I would also just maybe position it to think about as you think about these things, maybe not all rate base or all regulated, but some unregulated opportunities as well.

That is super helpful. And then maybe second one, Colleen, I appreciate the comments on PFAS. Maybe just wanted to ask about this potential EPA pushout and the rule may be coming out later this fall. I would assume no change to how you guys are thinking about it and plowing ahead with the upgrades. But maybe just more about what you're thinking munis might do. Is this any change in maybe the acquisition pipeline, if there's maybe a pushout in some opportunities related to that or any thoughts?

Yes. Thanks for the question. And as I said in my comments, there's no change to our program at all. We're full steam ahead. I do think really in terms of the acquisition and the growth opportunities, there's no change there either. Most municipalities are going to wait to the last possible minute. They're just starting monitoring. And so they'll -- this gives them a little bit more time to keep their head in the sand, but the opportunities are going to be there. And like I said, with our position, with the amount of experience we have with systems operating well, we're going to be really well positioned to help them.

And Colleen, if you think about it, yes, they might have a couple of more years to comply. But given the fact that we have a resource, a solution, maybe we can help accelerate some of those solutions with our filtration system. And who knows? Maybe that starts some conversation, would you agree?

Yes. And when I was at the American Water Works annual conference this year, generating a lot of interest, a lot coming up to me, the engineers coming up to me, asking about it. And as they, like I said, get their heads out of the sand and know they have to comply, I know our solution is going to be a great fit.

That concludes the question-and-answer session. I would like to turn the call back over to Chris Franklin for closing remarks.

Thanks, folks. Appreciate you joining us today. As always, the team is ready to answer questions or follow-ups if you have them. Thanks so much. Have a great weekend.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.