WTRG - NYSE

Hello, and welcome to the Essential Utilities Second Quarter 2023 Earnings Call. My name is George, I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'd now like to turn the call over to host today, Mr. Brian Dingerdissen to begin today's conference. Please go ahead, sir.

Thank you, George. Good morning, everyone, and thank you for joining us. I am Brian Dingerdissen, Vice President, 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 at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our site. 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. We'll begin the call today with Chris Franklin, our Chairman and CEO, who will provide an update on the company. So with that, I will turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Thanks for joining us today. As a reminder for those of you who may not be as familiar with our story, Essential Utilities is an industry-leading water, wastewater service and natural gas utility. The core of the company's 135-year-old nature is that it's the second largest regulated water utility in the United States with operations in eight states and a proven track record of nearly three decades of growth through acquisition, which, coupled with a substantial capital investment over the same period of time has led to significant and consistent earnings growth. In addition, Essential Utilities includes the largest gas LDC in Pennsylvania, also with a 135-year history of industry leadership and growth. Together, these utilities form a platform poised to deliver consistent 5% to 7% earnings per share growth. The key component of our long-term rate base growth is the significant need in both water and gas for investment in core infrastructure, and I'm talking about things like pipe and plants. This is the engine, which helps us deliver long-term shareholder value. I want to spend a few minutes with you on this topic today. But first, let's talk about the good news of the second quarter. Although we were off to a rough start with warm weather in the first quarter, the second quarter has put us back in a strong position. For the quarter, we reported earnings per share of $0.34. Dan will provide much more detail in a few moments. But I'll note that with this quarter's strong performance, we are even more confident in our ability to achieve this year's guidance despite the lower results in the first quarter associated with the abnormally mild winter weather. We remain on track to invest $1.1 billion in capital projects this year. In fact, this work includes more than 8,000 projects that improve service and reliability for our customers and will add substantial rate base to generate future growth for shareholders. We'll get into that in just a few minutes. So far in 2023, we closed six acquisitions, which included seven systems. You may recall the village of Frankfurt was both water and wastewater but those were done across four states in which we have existing water operations. Combined, these acquisitions added over $44.6 million in rate base and more than 11,000 customer equivalents. Additionally, we have four asset purchase agreements signed that are expected to add over 208,000 customers or customer equivalents and nearly $336 million in purchase price. Now importantly, I will remind you that at our August Board meeting just a week or so ago, the Board increased the dividend by 7%, demonstrating confidence in our ability to deliver long-term value to both customers and shareholders. So the next slide before I get into the meat of this slide, I want to remind investors of the importance of our capital -- quality is also what generates more than 90% of our growth in earnings per share in any given year. And I'll remind you that the municipal acquisition program is important because it gives us the opportunity to improve water and wastewater systems for the future and deepens the pool of capital needs for the future as well. In fact, you could say that most of today's capital projects are taking place in systems that were acquired at some point in our company's history. However, I want to underscore that the most important contribution to earnings per share growth is the execution of the company's capital improvement plan. Over the years, we've demonstrated a core competency in infrastructure rehabilitation and specifically in deploying large amounts of capital over many individual projects each year, as I said, 8,000 this year alone. The first half of 2023 was no exception. We invested $547.6 million in infrastructure improvements as compared to $424.6 million for the same period in 2022. Those of you who have been following us know that we've been increasing our capital investment over the years. And in fact, just since I became CEO in 2015, we've invested nearly $5.8 billion, some of that pre People's and some of it post People's acquisition. And both our capital annual -- I'm sorry, both our annual capital plans and our rate base have grown by approximately 200% during this period. Now despite today's discussion on the relative importance of capital plans to earnings generation, I will tell you that our municipal acquisition program is very important and remains strong because although acquisitions don't typically add significantly to earnings at closing, over time, they are an important part of our growth story and deepen the capital improvement opportunities for the future. I'll update you on our acquisition progress in just a moment. Hopefully, you'll get a sense of the magnitude of our capital improvement program on this slide. We have certainly done our part to improve American infrastructure over the years. This chart shows that we have already replaced over 1,100 miles of pipe in just the last three years, and we expect to replace another 1,300 additional miles between this year and 2025. If you look at the miles of pipe, in just these six years, it would be like installing a pipeline from Philadelphia to Sacramento, California. This is the work that all utilities in the United States should be doing, especially because much of the pipe across the country is now over 100 years old. Our pool of capital needs remains strong as we continue to improve plants, address PFAS, remove lead services and replace aging pipes. We expect our annual capital budgets to continue to exceed $1 billion for the foreseeable future. And that's why we've developed a focused program to seek low interest loans for as much of our capital program as possible. Now shareholders won't necessarily benefit directly from lower interest rates but customers benefit through lower utility bills, which, in turn, allows us to continue to make these large necessary infrastructure improvements. I want to point out that although we have a massive sustained capital improvement program, our efficiency and safety measures continue to be at optimal levels. In 2015, we committed to a strategy, which has remained consistent, maintain operational excellence in the utilities we own and operate, invest capital in needed infrastructure improvements and target acquisitions in the water and wastewater space. And I've said before, we don't plan to do any more gas acquisitions. Now infrastructure investment is the low-risk backbone of our guidance of 6% to 7% rate base growth in water and 8% to 10% rate base growth in our natural gas business, which results in the 5% to 7% earnings growth guidance which we have achieved every year since we established that target. All right. Let's talk for a moment about our strong acquisition program. On this slide, you can see that we are having another good year in our growth through acquisition work. So far this year, we've acquired seven systems, adding over 11,000 customer equivalents to our current water and wastewater footprint. To notice that this is a recent uptick in closed acquisitions. As a reminder, Essential has been a pioneer driving consolidation of water and wastewater utilities for over 30 years. In fact, we've done more than 400 utility acquisitions over that same period of time. Just in 2015, we've added nearly 129,000 customer equivalents and over $526 million in rate base to our water and wastewater footprint to a very successful acquisition program. On June 30, we closed the acquisition of Union Rome Sewer system in Ohio, which serves approximately 5,300 customers. This is the largest municipal acquisition to date in Ohio. We're very proud of that one. And on July 24, we closed the Borough of Shenandoah's municipal authority in Pennsylvania, which serves about 3,000 customers. And in addition, to these two systems, we acquired four other systems on July 31, Southern Oaks in Texas, the Village of Frankfurt Water and Wastewater assets in Illinois and the Village of La Rue in Ohio. Collectively, these four systems added nearly 2,500 customers and $7 million in rate base to the company's footprint. We include the previously announced acquisition of North Heidelberg in Pennsylvania. Some of you may recall that this was the system where we were appointed receiver. It's a small wastewater system in Pennsylvania, we were appointed receiver by the PA PUC. If we add that to the mix, then year-to-date, we've acquired seven systems and added more than $44.6 million in rate base and 11,000 customer equivalents, pretty nice year. All of these acquisitions demonstrate our ability to provide operational expertise and a solution to systems needing substantial capital improvements to ensure customers have high-quality, safe and reliable services. Let's talk about a recent court decision that's been in the news. In August of 2022, after approval by the PA PUC, we acquired the East Whiteland wastewater assets in Pennsylvania, which was subsequently appealed by the consumer advocate in Commonwealth Court. And just last week, the court issued a decision to overturn the PUC order approving our acquisition. We are obviously disappointed with the decision and we'll work with the PA PUC to defend its order including evaluating options for appeal in concert with the PUC and East Whiteland Township. We believe that no matter what the ultimate outcome of this decision, there is a path forward to a continued regionalization of water and wastewater systems in Pennsylvania. It will require the continued engagement of all stakeholders so that using fair market value as a regulatory tool benefits all of those impacted by the process. Okay. Shifting now to the dividend. As I mentioned upfront, last week, the Board declared a 7% increase to the quarterly dividend. We have a great and consistent history of delivering what our investors expect. This marks the 33rd increase in 32 years and the 78th consecutive year of quarterly dividend payments. This supports our consistent record of delivering shareholder value. Following the increase, the annualized dividend rate will be nearly $1.23 per share. All right. With that, Dan, let me turn it to you to talk about our financial results.

Thanks, Chris, and good morning, everyone. I'll start off with the second quarter highlights. We have revenues for the quarter of $436.7 million compared to $448.8 million last year. Our Regulated Water segment contributed $293.7 million and our Regulated Natural Gas segment contributed $139 million. The largest contributor to the decrease in revenues for the quarter was the recovery of lower natural gas commodity costs with purchased gas costs decreasing by $33.2 million from the same period last year. Incremental revenues from regulatory recoveries, water and wastewater customer growth and increased volume in the water segment contributed positively and offset lower purchased gas costs and volumes for the quarter. O&M expenses decreased 1.1% to $133.5 million for the quarter, down from $135 million in the second quarter of last year. Other items 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 employee-related costs as well as operating expenses related to acquired systems. Net income was up year-over-year from $82.3 million to $91.3 million, and GAAP EPS was $0.34 for the quarter, a nearly 10% increase from $0.31 during the same quarter last year. Next, we'll walk through the waterfall slide, starting with revenue. In the second quarter of 2023, revenues decreased $12.1 million or 2.7% on a GAAP basis. Starting on the left-hand side of the waterfall, regulatory recoveries added $19.6 million in revenues year-over-year. This includes the impact of water rate cases in Pennsylvania, Ohio and North Carolina, among other regulatory proceedings. Next, organic and acquisition growth as well as increased volumes from our Regulated Water segment combined, added $4.9 million and other items provided an additional $1.4 million toward the second quarter revenues. As you may recall, natural gas commodity prices were significantly elevated during March of 2022. They have since declined. Therefore, when compared to the second quarter of 2022, we notice the primary driver of the decrease in revenues for the quarter was a recovery of $33.2 million less in purchased gas costs. And lastly, decreased gas volumes of $4.7 million from our Regulated Natural Gas segment also contributed to the 2.7% reduction in revenues. Next, let's through the operations and maintenance expenses on the next slide. Operations and maintenance expenses were $133.5 million for the second quarter, a decrease of 1.1% compared to $135 million for the same period in 2022. Increased production costs related specifically to chemicals, purchased water and purchased power contributed $4.4 million for the quarter. Employee-related costs added another $4.1 million and operating expenses from newly acquired systems in our regulated water segment added $1 million. These were offset primarily by other items of $8.2 million mainly related to lower maintenance and insurance expenses. And finally, the gas customer rider, which is recoverable through a revenue surcharge, decreased $2.8 million due to lower commodity prices and decreased volumes in our Regulated Natural Gas segment. Next, we'll spend a minute on the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for the second quarter of 2022 was $0.31. Regulatory recoveries contributed $5.4 and growth and increased volume from our regulated water segment together, added $0.01. These were offset by other items of $1.8 which include increases in interest -- both interest expense and depreciation, offset by lower taxes, $1.3 related to decreased volume from our Regulated Natural Gas segment, and $0.2 as a result of increased expenses. The result is GAAP earnings per share of $0.34 for the second quarter of 2023, a 9.7% increase over last year. We continue to expect to meet our annual earnings per share guidance for the year and remain confident in our ability to deliver on the 5% to 7% earnings growth per share. Moving on to regulatory activity and other matters. So far in 2023, we completed rate cases or surcharge filings in six of our regulated water states, with a total annualized revenue increase of $26.4 million and in our Regulated Natural Gas segment, we have completed a surcharge filing in Pennsylvania with a total annualized revenue increase of $20.9 million. Also, we currently have base rate cases or surcharge filings underway in Ohio, Texas and Virginia for our Regulated Water segment and a surcharge filing in Kentucky for our Regulated Natural Gas segment. As a reminder, we plan to file a base rate case for our Pennsylvania natural gas utility by the end of the year. This will be the first Pennsylvania natural gas case filed under our ownership and we expect to ask for weather normalization, a mechanism that our peer companies in Pennsylvania have today. Since our ownership in 2020, we replaced over 450 miles of pipe in Pennsylvania through our long-term infrastructure improvement plan. Rate base at People's has grown significantly, we've increased safety for both our employees and our customers, all while avoiding a rate case for nearly five years. I'll also add that just through the year-end of 2022, the pipe replacement program at People's has resulted in the reduction of nearly 80,000 metric tons of annual CO2 equivalent GHG emissions. Said more plainly, this is the equivalent of permanently removing nearly 18,000 cars from the road. Bear in mind that every mile of mainly replace -- with every mile of mainly replaced, we reduce fugitive methane which is a potent greenhouse gas. As you know, the pipe replacement plan for our Natural Gas segment is the main driver of the 60% essential company-wide reduction in GHG emissions through 2035. Moving on. In July, we released new 2023 equity issuance guidance, where we announced that we expect to issue, subject to market conditions, approximately $300 million of common stock in 2023 and in addition to the equity raised earlier in the year through our ATM program. This revised equity guidance superceded the $500 million in equity or equity-linked securities that we previously communicated. We are not providing an update to this revised guidance today. In the future, you should assume that all debt and equity needs to support our capital program and our acquisitions are included in our earnings per share guidance. Going forward, we will not provide detailed advanced guidance on the timing or amount of debt and equity capital to be raised, but we will most certainly provide details upon execution of each capital raise. And with that, I'll hand it back over to Chris. Chris?

Great. Thanks, Dan. Before I talk about our acquisition work, I want to make all of you aware of one of the key factors that we believe could spur further and more rapid consolidation of water systems in the coming years. PFAS is now widely written about and most Americans have heard about this forever chemical. As a reminder, in 2020, we set an industry-leading commitment to ensure that all finished water across the entire footprint at Aqua would be -- would not exceed 13 parts per trillion for multiple PFAS chemicals, which is much more stringent, as I'm sure you recall, then the EPA health advisory level of 70 parts per trillion for the PFAS chemicals at the same time. We were and still are the only multistate company that I'm aware of that made such a commitment. Our own estimates to remediate PFAS at Aqua systems across our eight states, which suggests that the capital and operating expenses currently estimated by the U.S. EPA are far below what will be needed for remediation across the United States. Based on preliminary estimates, we believe that Aqua's capital investment will be at least $350 million. At this point, we're not predicting that PFAS-related capital will have any impact on the existing rate base growth guidance. Protecting the health of our customers and the communities we serve is our priority. And given the investments needed, we will continue to legally advocate that the polluters bear the burden of the cleanup costs. Neither our company nor our customers should bear the cost of this cleanup. We have initiated litigation against the polluters and have applied for federal and state grants and loans were available. Longer term, though, we do see PFAS regulation being a catalyst to drive further consolidation. Finally, we believe that the strength and expertise of our company will be an important part of our value proposition to municipal leaders who are struggling with PFAS issues. We've been a pioneer in this issue and have developed deep expertise, and we are committed to remaining a leader in this important work. All right. Let's take a minute to address the pending transactions in our acquisition pipeline. As of this call, we have four signed asset purchase agreements in two states where we have existing water operations. Collectively, these acquisitions are expected to head over 208,000 customers or customer equivalents and totaled nearly $336 million in purchase price. During our Q1 earnings call, we discussed our intent to sell three unregulated energy projects owned by Peoples in Pittsburgh. This includes the innovative Pittsburgh Airport microgrid, a combined heat and power project at a large hospital and a district energy project, providing steam and hot water to multiple buildings in downtown Pittsburgh. We conducted a thorough sale process and I can report that the process is nearing a successful conclusion, and we expect to announce the result in the coming weeks. Further, on a separate topic piece of news here, a quick update on the sale of our small gas utility in West Virginia. We have reached a joint stipulation and agreement for settlement with the parties in West Virginia and are awaiting a decision by the West Virginia Public Service Commission in what could be the coming days or weeks. As many of you know, progress on the DELCORA regulatory process continues to be under astay by the Federal Bankruptcy Court, which is handling the bankruptcy of the city of Chester. We continue to remain confident that we will ultimately close the DELCORA transaction because our asset purchase agreement outlast all litigation. We continue to also believe that customer rates over time will be lower under our ownership when compared to DELCORA remaining independent. But given the delay and the lack of a clear time line in the process, we have, and this is new news, we have completely removed DELCORA from our 2023 and 2024 financial plans and have removed any impact from DELCORA prior to the second half of 2025. Importantly, and I want to reiterate that we remain confident in our current year and long-term earnings guidance. While DELCORA could still close earlier than we have in our financial plans, we think this is a key point for those of you who have been concerned about the financial impact of delays related to DELCORA. Turning to the next slide. We continue to see a strong and healthy pipeline of opportunities for growth in addition to the signed municipal transactions on the previous slide. We're currently engaged in active discussions with municipalities and pursuing over 400,000 potential water and wastewater customers. As a reminder, our in-state teams in all eight states where we have water operations, focus on potential acquisitions that have at least 2,500 to 25,000 customers. As you know, we often evaluate even larger opportunities, and we'll continue to do that. We are excited about the momentum we are seeing in each of our eight states, and we believe our value proposition remains compelling. With that, I'll wrap up with a reminder of the 2023 guidance we've previously published. We continue to meet guidance for the year. We expect to continue to meet guidance for the year. We continue to expect earnings to be between $1.85 and $1.90 per share and expect that our three-year earnings per share growth will be 5% to 7% through 2025. And to be clear, we believe that we will achieve these targets even if there happens to be further delays in closing DELCORA. Our capital plans remain on track as we expect to invest about $1.1 billion annually through 2025. Rate base growth is expected to be between 6% and 7% for water and 8% and 10% for natural gas with customer growth between 2% and 3% on average for water and stable for natural gas. Finally, we remain committed to our ESG targets, commitments and initiatives and you should see a new ESG report published early this fall, which will document what we believe are again industry-leading ESG efforts. And by the way, we were just named to Newsweek's Most Responsible Companies list for the second year in a row. And on that note, I'll conclude my formal remarks and look forward to your questions. George?

Thank you very much, Mr. Franklin. [Operator Instructions] Our first question is coming from Durgesh Chopra calling from Evercore. Please go ahead. Your line is open.

Hey, Durgesh.

Good morning, Durgesh.

Hey, Chris and Dan, good morning. Thank you for giving me time. I have a couple of housekeeping questions, and I just want to go back to the municipal M&A water strategy in light of the East Whiteland decision. Just a couple of housekeeping first. Dan, can you remind us what weather was in terms of unfavorable impact in the first quarter? And then how did that turn in the second quarter?

Yeah. We were -- in the first quarter, given the warmer weather, if we look at net revenue, our net revenue impact was about $30 million. We're about $30 million short of net revenue from the gas business in the first quarter. And then with warmer, I should say, continued cold weather early into the second quarter, we sold additional gas. And so we think it is -- I should say, too, we should think of this relative to budget. So relative to budget, that was the $30 million shortfall I mentioned a minute ago, that gap was closed a bit in the second quarter. So we think of that gap as ending the second quarter but with about $26 million shortfall. But again, that's budget-to-budget for us.

So it was $30 million, and then you made up $4 million in the second quarter?

That's correct, Durgesh.

Okay. And then I know you said no color on equity guidance in the future. But can you just tell us how much have you issued year-to-date?

Year-to-date, on the ATM, it was just about $20 million.

Okay. And then the guidance for the balance of the year is about $300 million, right?

Correct. $300 million in addition to what we've already done.

Okay. Thank you. Those were my housekeeping questions. And then maybe just big picture, Chris. The decision that you mentioned on East Whiteland, as I was reading through it a couple of days ago, they mentioned public benefits. So just curious, what are your thoughts there? I guess that was kind of the rationale for denying that PUC decision. But just what are you thinking through as read throughs, if any, through your other pending M&A transactions that in future M&A outlook in the state?

Yeah. It was a little bit curious, and that's why I'm fairly certain that you'll see the Public Utility Commission defend their order with -- by taking it back to Commonwealth Court again. But I think one of the reasons it's curious is because the fair market value legislation itself does not require an affirmative benefit. And so there was a little bit of a disconnect at the Commonwealth Court. Let's face it, I guess the -- I think the active point here is that there is a concern -- general concern about customer rates. And we share that concern, frankly. But we also believe that even if this court decision were to stand, and we think we're a long way before conceding that, but even where we do see a path forward to working with the parties, all stakeholders for that matter, to continue a strong acquisition program in Pennsylvania. So we do think there is some ability to find common ground here and have completed the program. So I don't -- I mean, while it's a significant marker, it's still not done, and I think there are multiple paths to continue to consolidate.

Got it, okay. Thank you for that. I appreciate the color. I'll jump back in the queue. Thanks guys.

You bet. Thanks, Duresh.

Thank you, sir. [Operator Instructions] Next question is from Travis Miller calling from Morningstar. Please go ahead.

Hey, Travis.

Good morning, Travis.

Thank you. Hi, everyone. Chris, going back to -- at a high level, your opening comments on the CapEx. Is this more of a near-term type of strategy where you're just seeing a lot of opportunities, especially on the gas side and the pipe side? Or is this kind of a shift in thinking that you're trying to convey to investors over the longer term that we should look for more relative growth organically versus historically the water acquisition?

No. I would put it in the category of a reminder. As I said in the opening remarks, it's -- we get so many questions on the M&A component of the work we do. But really, the earnings were generated from the CapEx. And I tried to say it a couple of different ways, but the beauty of the M&A work we do is it fixes problems for customers, but it deepens the pool of capital for the future. And so there is a blending of this, right? An acquisition today may not add that much to earnings per share given how they -- what the rates are when they join us. Once we fix it, over time that goes into that CapEx pool and generates those earnings for the long term. And so it's more of a reminder that this is how we've generated earnings for a very long time. And that we have a deep pool as we look forward to continue to do that. And then the enhancement of that program is really buying new utilities that need to be fixed up so that we can fix them and put them in the capital pool. Does that make sense?

Sure. Yeah. No, that definitely makes sense. Thanks. And then the 400,000 active municipal opportunities, I've been talking about that for several quarters now at least. And just wondering what's the timing cadence. Has that changed from several quarters ago? Is this still something that's imminent? Just wondering thoughts around that number since it's been roughly the same for quite a while.

Yeah. I would think of that more like a pool that fills and drains. So we're constantly tilling the soil and then talking to new municipalities. And the drain of that pool is some we close, like we did just this quarter and some fall away because they either lose interest or for whatever reason, like the ability to close. And so what we try to give you a sense of is, what's the total pool of customer bases that we're talking to, but there's movement in that pool all the time.

Okay, got it. And I appreciate the thoughts for those questions.

You bet.

Thank you, Mr. Miller. Our next question is coming from Paul

Hey, Paul.

Good morning, Paul.

Hi, good morning. Thank you for all the details. And just to clean up, I noticed that the rate base disclosures changed a little bit for '23- '24. Is that just relating to the DELCORA comment you mentioned on removing it from the outlook?

Yeah, Paul, that's correct. So otherwise, we're not changing our rate base guidance at this point in time, other -- it's really just a removal of DELCORA. And DELCORA, I think, was always footnoted before.

Okay. Great. No, that's right out there. And then one other clean up, just what was the kind of the effective tax rate that you had in full year 2023 guidance? Because it looks like a decent sized benefit in the first half of the year.

We've had a strong benefit and we continue to have a benefit through the rest of the year. So think about effective tax rate for the full year, I would think benefit as opposed to an expense and think still single digits, and company wide

Pennsylvania.

Does that help you, Paul?

Yes. Yes, it is. Thank you. And then just quickly, curious on the decision to change prospectively. So I heard it right. Don't plan to give equity or debt guidance beyond '24? Just kind of what's caused that change in thought process there?

Well, it's a good question, Paul. I think simply put, speaking too much about equity needs, seems to have caused some of our investors to wait for a block trade rather than just investing even when our price was attractive. And so that's not necessarily been helpful for our stock performance lately. Plus, whenever we provide earnings per share guidance or earnings per share growth guidance, we've already incorporated the dilutive impact of any equity needs, any equity issuances into that. And we do think this is consistent with what we're seeing in other utilities as well.

Okay, great. Thank you, team.

Thank you.

Thank you.

Thank you, sir. Our next question is coming from Ryan Connors of Northcoast Research. Please go ahead, sir.

Hey, Ryan.

Hey, Ryan.

Yeah, thanks. Good morning. Thanks for taking my question. So first one for you, Dan, on your financial comments there. It seems like the water business has some really exceptional kind of leverage in the quarter. You've got almost double-digit top-line growth and O&M was basically flat. It seemed like you kind of called out lower maintenance and insurance as kind of the big drivers of that on the cost side. Can you elaborate on that a little bit? I mean, was that something you were comping from a year ago? In maintenance that was -- where that was lower. What was going on there?

Yeah, probably a few things to talk about. There are some -- when you think about comparisons to last year, we were favorable because there were some higher costs that I would say occurred in the second quarter last year. So on a comparative basis, we're better off. I would say, two, we also made it a focused initiative this year to really work with our subsidiaries on their operating expenses. So one thing that falls into that category is outside services type cost, and we've been very cognizant of those expenses and work closely with the state presidents and state controllers and their organizations to focus there. So I agree, though, nice quarter in terms of top-line growth and cost control for the water business.

Yeah. So it sounds like that lower maintenance, I mean, if that's a structural initiative you're on, that should be something that continues to be good going forward.

We will certainly -- I guess what I'd say, Ryan, is we'll certainly continue to focus on that.

Okay. And just a couple of questions on the East Whiteland. I mean the first one is more housekeeping, I guess. I mean presumably, these assets have been transferred. It's in the financials and now we're obviously potentially -- it sounds like you're going to work through the appeal process. But what happens in that time frame? I mean, it wasn't a tiny deal. It wasn't a huge deal, but $55 million, certainly not immaterial. So is there any kind of assessment of the goodwill there or anything, Dan that has to take place? Or I mean, what exactly the mechanics now that you've got that kind of a decision hanging over that asset that's in the barn, so to speak?

So at this point, since there still are a number of avenues for appeal, and we think there's an opportunity here to really work with all the stakeholders to ensure a positive outcome and a continued strong process for these acquisitions in Pennsylvania, there's really no accounting to do at this point in time.

Ryan, just to think about it, too. West Whiteland doesn't want their wastewater utility, right? They sold it. And so, we think there's a path forward there that can be worked through.

Yeah, right. It would be pretty crazy to force them to buy it back. But in terms of bigger picture, Chris, going back to the prior question on the pipeline, I mean until you get this thing kind of resolved and hopefully, the appeal -- your appeal would be successful. I mean what effect does that have on the pipeline in terms of obviously, the detractors to privatization are going to run around with this, says, here's why you shouldn't sell because it's going to be the PUCs being overruled. And they're going to make a lot of noise about that. I mean how does that affect the pipeline, the willingness of people to step to the table and sign APAs with that going on.

Yeah. I'll tell you what I think it does. I think it's going to underscore rates. And my hope is that we see some sellers thinking even more regionally about sale prices, right? I think we all agree that some of the sale prices we're seeing are pretty high. And to the degree that those can get back to areas where the outcome is not only high proceeds for the seller, but also outcome is very good rates for the customers of the system that's being acquired. I think that's actually a positive outcome. So I wouldn't see probably maybe a bit of more reasonableness on purchase prices. Time will tell the story. But many may also be looking at this and say, okay, well, what's the outcome of the appeal? I think most would probably pause to say this is probably not the end of the road here for the court decision itself. So I think the story is yet to be written. But if anything, the impact probably will be a focus on customer rates.

Got it, okay. Thanks for your time.

You bet.

Take care.

Thank you, sir. We'll now move to Gregg Orrill calling from UBS. Please go ahead, sir.

Hey, Gregg.

Good morning. So Chris, just to clarify with regard to East Whiteland, is the reaction for the company to appeal it? Or is that not your place? Or what's the path here?

It's a good question. So it's really the PUC's order. So they have a decision as to whether or not they'll defend their own order. Typically, and I would say with some level of certainty, that's where they've been in the past. So I have no reason to believe that they will do anything different here. There is a clock, they do need to respond, I believe it's this week and make that determination. And then we would certainly support their appeal or the request for reconsideration. So there's a couple of ways to go here. One would be an appeal to the Supreme Court. The other one would be a reconsideration at the State Court, which this was heard by a three-judge panel. If it was reconsidered it would go to seven judges. So I think the PUC has some decisions to make in terms of how they'll frame their reconsideration or appeal. But we will most certainly be in support of that, I would expect the industry to be in support of that as well as others.

Thank you. And with regard to the PFAS estimate of $350 million. Do you have any detail around that, that you could provide in terms of how you're looking to comply in terms of method?

Sure. Most of it is GAC-activated carbon is a solution for much of it. Although, there are multiple solutions we could deploy. As we think about it, it's largely filtration. We know how to treat PFAS. And so I guess, as you drill down in a little bit of more detail, it's really centered in several of our states. If you look at some of what's on the Internet with PFAS, it's concentrated in states like New Jersey, some in Pennsylvania, heavily in North Carolina. And that's where we're seeing the major work that needs to be done in some of those states. And so it's not like we can spread this cost over our entire customer base, we'll be centered on the areas that are impacted. And so the treatment itself is fairly straightforward. What we get to in areas like North Carolina is some of these systems are fed by small well systems. They don't have big footprints. And so there, we have to get a little bit more creative in the treatment process. But it's not -- these are things we know how to do. But it will be expensive, and we think it should be -- that cost should be borne by the polluters.

Yeah. Appreciate it.

You got it.

Thank you, sir. We'll now move to Davis Sunderland of Baird. Please go ahead, sir.

Hey, good morning, guys. Thanks for the updates and thanks for taking my question.

Good morning.

Good morning.

Gregg actually took my question about the $300 million -- or $350 million CapEx outlays for PFAS. And I was just going to add to that maybe any assumptions as far as time line of these deployments or anything like that? Or if we should think of those over a two, four, five, however year time line? And then my second to that would just be any estimates or predictions as far as the upcoming case for PFAS as far as potential recoveries and time line and total decision there?

Yeah. I'll take the first one on time line. As it currently stands, and I think you're all aware that the federal government is still coming, going through their regulatory process. And so we should have final determinations on some of these things in the first quarter of next year. But as it stands, most of this work needs to be done between now and 2027. And then there is some opportunity for, I think, two-year extensions. And so we may need to get some of the systems into compliance because we have many of them. But we will comply whatever the up final determination is, the work is heavily underway. And it's our intention to comply with whatever those requirements are. So I would say it's relatively short term if we think about between now and 2027 or maybe some spread beyond that for two more years, but that's probably the compliance period.

That's helpful. Thank you.

Bon jour [ph] Davis. We'll now go to Jonathan Reader calling from Wells Fargo. Please go ahead, sir.

Good morning, Jonathan.

Good morning, gentlemen. So a lot of my questions have already been addressed. Dan, just hoping you can maybe give a little more detail on what gives you the increased confidence in delivering on '23? I know you mentioned that Q2 weather helped a tab, but is it more just delivering these lower other operating expenses, as well as the expense proceeds from the sale of three Peoples projects? Or has July weather been beneficial on the water side, too?

Yeah. Jonathan, a few things to touch on there. So I would say we've managed our expenses well. And fortunately, a few other things have broken in our favor. So as we mentioned, we did have that colder than budgeted weather for the early part of the second quarter, which provided for higher natural gas consumption. And then we had warmer than budgeted weather later in the second quarter, leading to higher water consumption, so that weather outcome that you just mentioned. And then the IRS put out their safe harbor for gas, those long-awaited gas rigs came out in April that actually provided a pickup and the repair benefit due to increased eligibility of our pipeline replacement program. So a little bit of a pickup there. And then maybe a little bit of a benefit from a purchased water pass-through in Texas that we're now receiving. So a number of things that are moving there to try to really bring us back to the range.

Okay. Great. I appreciate that. And then Chris, just to confirm, I guess, nothing particular transpired, I guess, in the last few months regarding the DELCORA deal that caused you to move the assumed financial close back the second half of 2025. You just made the move to give investors confidence in the near term, I guess, EPS growth plan that is dependent on DELCORA?

I think that's well said. I mean there's always minor developments here and there, but nothing of substance I would say, has occurred that would trigger this. We just felt like it was a constant concern for many investors. And we wanted to address it and let people know that our plan in the next couple of years really doesn't require DELCORA. And we want to just make that crystal clear to people.

Okay. Any -- I mean, with the stay out there, is there any near term or kind of date where there could be some more movement on DELCORA? Or it's really just a wait and see?

Yeah. Unfortunately, a federal bankruptcy judge is on no time line. And so as you know, that was a twist that we never saw coming. And it's only tangentially involved with DELCORA. It's really the bankruptcy of the city of Chester and the Chester Water Authority. So we didn't expect to be swept up in that. So that stay can't stay forever, as we all know. Whether it's lifted next week, next month or in several months, we just don't know. So we continue to be involved. And obviously, there are certain court filings that we continue to work on, but no real activity at this point to report.

Okay, great. Thanks for taking my questions today.

You bet.

Thanks, take care.

Thank you very much, sir. At this time, we don't have any further questions. I'd like to turn the call back over to Mr. Chris Franklin for any additional or closing remarks. Thank you.

Thanks, everyone, for joining. And obviously, the team is ready to -- for follow-ups if you have them. Thanks again for joining us today.