Good day, everyone, and welcome to the Essential Utilities Incorporated Full Year 2020 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. Please go ahead, sir.

Thank you, Christy. Good morning, everyone, and thank you for joining us for Essential Utilities 2020 Full Year Earnings Call. I'm Brian Dingerdissen, Vice President, Chief of Staff and Head of Investor Relations. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website. The slides that we will be referencing and the webcast of this event can also be found on our website. Here is our forward-looking statement. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also in the Investor Relations section of our website. After the formal presentation, we will open the call for questions. Here's our agenda for the call today. We'll start with Chris Franklin, our Chairman and CEO, who will provide a company update on our successes in 2020, including our municipal acquisition program. Next, Dan Schuller, our CFO, will discuss our fourth quarter and full year financial results. Chris will then conclude the presentation with a review of our guidance. At the conclusion, we will open the call for questions. With that, I would like to turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Thanks for joining us today. Let me start with the discussion of the impact of this bitter-cold winter weather that so many of us experienced in February. And in terms of the impact on our operations, it's really been a tale of two cities, starting in Texas. First, our hearts go out to those who were impacted and were living it for days without electric and water service, some with frigid temperatures, particularly last week. Water systems and wastewater systems are highly dependent on power to operate our pumps and our plants. So when the power went out in Texas, many of our community well systems went down as well. In fact, at the peak of the winter weather, we had approximately two-thirds of our Texas customers impacted, which is largely due to those rolling blackouts we heard about. We quickly activated our incident command system to marshal the necessary resources to bring service back to our customers as quickly as possible. We brought in teams from our other state operations to supplement the Texas workforce, and they also brought with them supplies like bottled water, repair materials, and equipment to supplement what we had in Texas. Our employees were working to restore service to our customers, and they themselves were dealing with personal hardships resulting from the storm too. I'd like to thank those dedicated employees and contractors that worked around the clock to restore service to customers. While we still have some systems under boil water advisories in Texas, at this point, I'm proud to say that we have nearly all service restored, with only one system left impacted, and we're working as quickly as we can to restore service there as well. Just to remind you, we don't have natural gas customers in Texas, so there were no financial or operational impacts to our natural gas customers, which are in Pennsylvania, Kentucky, and West Virginia. Now, I mentioned the weather's impact was a tale of two cities. Despite the extreme cold temperatures here in the Mid-Atlantic, where the majority of our operations are, we had very good news this winter, particularly in Pennsylvania, where we have been replacing water mains for nearly 30 years now. We really saw the benefit of that investment over the last few weeks and months even. It's impressive to see that even during a difficult winter we are seeing fairly low numbers of main breaks. As a result, we have fewer service disruptions and less overtime than we had in previous years. As you can see by the chart on the right, there is real benefit to investing in infrastructure. Let's talk about some of the 2020 highlights. We invested about $900 million in infrastructure in the communities we serve during 2020, of which $53.5 million was invested by Peoples in the first quarter before we owned the company. This is once again a record amount of capital spending for our company. On a non-GAAP basis, adjusted income per share was $1.58 for the year, up 7.5%. Dan will take you through more details around that when we present the financial results. Our municipal acquisition strategy remained strong with six signed municipal agreements pending closing, totaling $438 million in purchase price. And finally, coupled with organic growth, the company increased its water and wastewater customer base by 2% and increased its rate base by 9.6%, ending the year with nearly 1.8 million customers and $8 billion in rate base across our regulated segments, a very good year. On the next slide here, you can see a more comprehensive summary of the execution of our 2020 objectives. These were the three primary themes we set for 2020. Despite the challenges, we still delivered on all three of these objectives in one of the most historic years of our company. Throughout the year, we adapted our new combined water and gas business to overcome the effects of the pandemic. And through the dedication and resiliency of our people, we remain focused on the mission of providing essential natural resources to our customers. As I mentioned, our commitment to infrastructure improvement drove us to executing a record investment, ensuring that our customers had safe and reliable service. Now, as we approach our one-year anniversary of the closing of the Peoples transaction, I'm pleased to report that we have successfully integrated our employees and customers, and we will continue to adopt the best practices from both utilities across the platform. I feel confident that our team's integration experience and expertise will prove invaluable as we continue to acquire water utilities across our footprint and beyond. Here's a reminder of the municipal acquisitions we closed in 2020 for our regulated water segment. The six acquisitions include Campbell Water System in Ohio; East Norriton Wastewater system in Pennsylvania; Rockwell Utilities, which is water and wastewater in Illinois; New Garden, which is wastewater in Pennsylvania; and a small one in North Carolina called Doug Wood Knowles. Together, these acquisitions added over 12,000 customers and nearly $63 million in rate base. Combined with organic growth, the company increased its customer base by over 20,500 customers in 2020. We now have six municipal acquisitions that have been signed and are pending closing. The addition of Willistown Township in Pennsylvania, which we announced just last month, along with the other transactions, will add close to 227,000 customers or customer equivalents when closed. These signed agreements are expected to generate about $22 million of incremental annual income when they're fully earning, and these are great examples of our acquisition strategy at work, and we look forward to serving these communities and having them join the Essential family. Now DELCORA is never far from our minds, and I'm sure not from yours when you think about Aqua and Essential. Let's bring you up to date. You'll recall that we received a very favorable ruling in late December from the Pennsylvania Common Case Court judge in a lawsuit with Delaware County. Subsequently, we appealed that decision; and in January, the PUC administrative law judge recommended that the transaction be denied for three reasons. The first reason was, we had some outstanding municipal interveners. The second reason was they felt that we didn't include a rate stabilization plan in our application, and the third was the ongoing litigation with the county. Since the ALJ issued the recommendation, we have made significant progress in trying to remedy these issues. Several municipal interveners have already withdrawn from the process. We've been in constructive conversations with the remaining municipal interveners, and we are hopeful and optimistic that they will also withdraw before the Pennsylvania Public Utility Commission rules on the case. We've also taken measures to address the argument that we don't have a rate stabilization plan. Now, the Pennsylvania PUC is expected to render their decision at one of the two regularly scheduled public meetings in March.

Thanks, Chris, and good morning, everyone. Before we go to the full year, let's start by taking a few minutes to review the fourth quarter highlights. We had revenues of $474 million, up from $226 million last year. The natural gas business contributed $240.6 million of that revenue increase. This includes $18.9 million in rate credits provided to natural gas utility customers as a condition of the Pennsylvania PUC approval of the Peoples acquisition. It also includes $92.8 million in purchased gas costs incurred in the quarter. O&M increased to $157.2 million, up from $85.3 million in the fourth quarter of last year. Again, this was primarily due to the addition of natural gas operations and maintenance expenses of $72.6 million. Net income increased from $64.2 million to $102.7 million. GAAP EPS was up from $0.28 to $0.40 compared to the fourth quarter last year. Adjusted income was up from $61.4 million to $116.2 million. Adjusted income per share increased from $0.34 to $0.46. Next, let's discuss the full year financial highlights. As Chris noted earlier, 2020 was a very strong year where we achieved or overachieved our financial objectives in light of the pandemic. We ended the year with over $1.46 billion in revenue, up 64.4% from $889.7 million last year. The natural gas business contributed approximately $521 million of this revenue growth. Adjusted revenue for the year was $1.49 billion, which excludes approximately $23 million of rate credits issued to water and natural gas utility customers, as a condition of the Pennsylvania PUC approval of the Peoples acquisition. O&M increased by 58.7% from $333.1 million to $528.6 million. This was primarily a result of the addition of the natural gas operations and maintenance expenses. Net income was up 26.9% year-over-year, from $224.5 million to $284.8 million. GAAP EPS increased by 7.7% to $1.12. Adjusted income per share was up 7.5% from $1.47 to $1.58, the top end of our $1.53 to $1.58 guidance range. As we noted in our guidance call, strong water usage contributed incremental earnings in 2020. It got us thinking about a normalized $1.56 as a baseline for future earnings growth. Next, let's walk through the details in the following waterfall slides, starting with revenue. In 2020, revenues increased by $573 million or 64.4% on a GAAP basis, of which $520.9 million was related to our natural gas segment. This figure includes $165.7 million of gas costs and the impact of $18.9 million of rate credits to those natural gas customers. Rates and surcharges, increased volume, and growth from our regulated water segment provided an additional $59.8 million towards the revenue increase, which was then offset by $4.1 million of rate credits issued to the water utility customers. The $15.7 million increase due to volume reflects both water consumption and wastewater volumes. Next, let's review water consumption. In the fourth quarter, overall usage was down 0.9%; however, we continue to see strong residential usage, which was up 2.7%, offsetting the declines in the other customer classes. For the full year, we saw that residential water consumption increased close to 6% with more people working from home and with favorable weather. This increase more than offset the declines in the commercial and industrial customer classes, both declining about 6% compared to the prior year. Overall, for the year, usage was up 0.8%. Next, let's talk a little about weather and gas usage for the Peoples business. As a reminder, a heating degree day is a measurement designed to quantify the demand for energy needed to heat a building. 2020 started out relatively warm with below normal heating degree days in January and February. The chart shows that Peoples residential gas consumption in Pennsylvania was distributed throughout the year. In 2020, about 78% of the gas was sold in the first and fourth quarters of the year. This winter for Peoples Natural Gas, year-to-date weather through February is projected to be 3.9% colder-than-normal, based on actual weather through February 21. This compares favorably to last year's mild winter, when year-to-date weather through February was 12% warmer than normal. Let's move on to O&M expenses. The addition of Peoples’ O&M of $199.9 million is the primary reason for the increase in O&M expenses for the year. Other contributing drivers include COVID-related expenses for our water segment, including COVID-related employee costs, growth, and normal employee-related costs, which were then offset primarily by savings in other costs, which reflect a number of one-time items. Next, we'll spend some time on the earnings per share waterfall. Bridging between GAAP and adjusted figures for 2019 and 2020, you will notice that GAAP EPS in 2019 was $1.04. Adding back almost $0.44 from the Peoples-related transaction costs and the dilutive effect of the equity offering, brought us to $1.47 per share on an adjusted income basis for 2019. Before getting the call back to Chris, I want to take a moment to provide an update on the Peoples tax repair filing. Recently, we reached a verbal settlement on the key issues with the parties in the case, and we'll file a settlement agreement on March 11. Consistent with the parties' positions, we'll give the tax repair benefits related to catch-up adjustment back to our natural gas customers in the form of a credit over a five-year time frame. This outcome should not have an impact on earnings. We're filing our next rate case on a more normal cadence. After review by the ALJ and the PUC, we expect a PUC order in the second quarter.

The unflappable Dan Schuller. I passed a slide earlier. I skipped over an important slide. Well done. I won't go back, but it's in the deck. You've all seen it. Other than to point out that we have a nice, strong pipeline. We're in current discussions with systems that total over 375,000 customers. We feel very good about the pipeline of municipal acquisitions. Our 2021 priorities are very similar to what we saw in 2020. We intend to remain focused on integration, growth, and operational excellence this year, 2021. Our emphasis on operational excellence and ensuring quality service is ingrained in our culture. We'll work to instill those same values in our new colleagues that join us from each of the acquisitions that we do once they're integrated. We'll remain focused on our capital program that continuously improves our customer experience, and we'll continue to build on the strong ESG initiatives that we announced earlier in the year. Our adjusted income is expected to be $1.64 to $1.69 per share. Our capital plans include spending of about $1 billion on regulated infrastructure this year and nearly $3 billion between now and 2023. Rate base growth is expected to be 6% to 7% for water and 8% to 10% for gas. Customer growth is expected to be between 2% and 3% on average for our regulated water segment, and lastly, we said achievable yet aggressive ESG targets, including a 60% reduction in our greenhouse gas emissions by 2035, using 2019 as our baseline, and we’ll continue to work to ensure that our water, throughout our entire footprint, never exceeds 13 parts per trillion of PFAS. As we approach our one-year anniversary as Essential Utilities, we are reminded that our 135-year-old company has now been on the New York Stock Exchange for 50 years. Our company remains strong and dedicated to our mission of providing essential natural resources to our water, wastewater, and natural gas customers, and we believe we're well-positioned to play a critical role in solving our country's infrastructure challenges while recognizing our responsibility to keep rates affordable and to be an industry leader in protecting the environment. So that concludes our formal remarks, and we are happy to take questions from here.

Thank you. The first question we have today is from Insoo Kim from Goldman Sachs. Your line is open.

Hey, thank you.

Hey, Insoo.

Hey, good morning. It does seem like ages ago when we met at the last Analyst Day last year.

It’s a while.

My first question is regarding Texas. I know Texas for your water business is about 6% of the rate base or sale of the total water rate base, but could you just give a little bit more detail on the type of costs that were incurred through the past couple of weeks and the regulatory process of recovery?

Sure. Yes. Our operations team did an exemplary job. We had people from our purchasing group looking at fuel and moving pallets of bottled water and equipment all brought in. We feel confident that we did a nice job there. In terms of costs, I would not call the costs material. We capture these costs as a result of summer storms, typically hurricanes and others. This is not unusual for us. And in terms of shutting down our delinquency on our customers in Texas for a while, we won't expect a major impact there either. So, I don't expect there to be a material impact, but let me pass to Dan here to get his opinion as well.

Yes. I think, Chris, you're right. Texas has about $4.5 million a month in revenue, so if we lose a few days there because customers are using less water, it's just not a material impact on the overall Essential business. We're aggregating these costs, whether they are non-capitalized repair costs or overtime expenses, and we'll look to recover them just like we have for hurricanes in the past.

The impact really wasn't about our system not being winterized at all. It was really about lack of power. We did have some main breaks, but we didn't have major pump houses or wells go down.

One thing to add, Chris, we have contracted power in place for the majority of our systems in Texas. We had systems that just get power from local authorities, all under regulated rates. While you see things on the news with very high electric bills, we've been insulated from those peak-type electric prices.

Got it. And if you're saying the costs weren't that material, I guess when we think about the 2021 guidance and the midpoint of that, you feel you will still be able to weather this and meet that guidance?

That's correct.

Yes.

Just one more broader question then sticking to Texas. Do you think that this situation presents to you from your standpoint an increased CapEx opportunity in this state or just an increased focus on expanding our footprint there?

There’s a key consideration here. When you have a series of community well systems throughout a state like we do in Texas, North Carolina, even Virginia, the question is how many standby generators do you need to purchase and keep ready? We typically regionalize those and move them to storm zones before storms. But you could certainly make an argument that we should own more generators. There are capital opportunities there that we'll pursue. The ongoing capital that we were spending even prior to the storm is in the ESCADA category, which is our ability to monitor wells remotely. We will be spending additional capital on that.

Got it. Thank you so much.

You bet.

Next, we'll go to Ryan Connors from Boenning and Scattergood. Your line is open.

Hey, Ryan.

Good morning. Thanks for taking my questions. I hadn't intended to ask about Texas, but since you're on the topic, bigger picture, there's a lot of talk about how this situation is indicative of a broader problem with the grid in terms of reliability, and so on. If you look at your states that are material to the earnings stream, do you have any vulnerabilities in other states where something like that could happen?

Not that I'm aware of today. We're largely in PJM up here, not in ERCOT. This storm was a never-before-seen event, and it’s a good time to revisit these things and consider what else could happen.

ERCOT is a different market; it’s an energy market. They didn't regulate power producers, that led to problems. PJM has pipeline capacity requirements, so that’s a key difference. ERCOT doesn’t have interconnectivity, so when they have a problem, it gets entrenched.

Got it. Okay. Now on DELCORA, could you provide a bit more detail on your comments? You mentioned that one of the issues was the rate stabilization fund in the proposed ruling. What exactly was taken issue with, and how are you getting them more comfortable with that?

A lot has to do with putting the credit on the customer’s bill. The easiest way to do this is to say, the customer used so much in volume and the base facility charge. Subtract the dollars that come in and offset it from the trust and then you have a net total. A lot of advocates believe it shouldn't be on the bill. We've proposed to remove it from the bill, and I think we've addressed the issue.

I'm glad you oversimplified it because it's not as complex as I can take down. Now on the PUC, what's going on with that fifth seat there? It's been almost a year since that seat was vacated.

The governor did send a name over twice, which was not approved by the Republican Senate. So, it's a bit of a stalemate. They’ve been plenty of votes that have been two-two votes. I know it's on the mind of the governor, and I also know that Commissioner Sweet's seat is coming up next month as well. We could potentially have two seats needing to be filled.

Yeah, we'll watch that one. Lastly, Dan, on the gas side of it, the purchased gas costs really ramped in the fourth quarter. Can you help us understand the seasonality on that line?

The usage percentages shown at the Analyst Day will guide how to think about this. Once we refine our quarterly mix of net income, it will be easier to analyze.

Okay, good. Thanks again, guys.

Thanks, Ryan. Take care.

Next, we'll go to Durgesh Chopra from Evercore ISI. Your line is open.

Hey, good morning.

Hey guys, thanks for taking my question. Just one quick one. On the repair tax catch-up filing, can you remind us what the original plan was for Pennsylvania rate base filing?

The original proposal was splitting the catch-up deduction with some going to the customer and some to the shareholder. The outcome is now all of that will go to the customers over a five-year time period. We would back for rates on a more normal cadence.

Understood, thanks for clarifying that. And one last one real quick. Any color on timing of the equity plan?

We'll give more specificity as we get closer to those issuances. We would look to use that equity at the time of the DELCORA transaction.

Thanks, guys. Much appreciated.

Thanks, Durgesh. Take care.

Next, we'll go to Travis Miller from Morningstar. Your line is open.

Hey, Travis.

Hi, Travis.

If I could, I wanted to go back to Texas and think about what could happen across the industry, considering the situation there. What type of water-related policy changes do you think might take place in Texas or broadly?

I believe one of the outcomes will be additional redundancy on power, evaluating how we service each area. When severe storms like this happen, it raises questions about how much power redundancy is necessary.

If you think about this crisis, natural gas infrastructure is pretty well winterized. So our natural gas supply chain is protected from such events.

We do not see movement away from natural gas to electric in the areas we serve. Many customers still on the Marcellus shale region, so we're positioned well to hold our customers.

In cold regions, there’s no more efficient heating source than direct-fire natural gas.

Thank you very much.

Next, we'll go to Ryan Greenwald from Bank of America. Your line is open.

Hey, Ryan.

Hey, Ryan.

So to clarify on Peoples gas catch-up component, under the terms of the settlement, you’d expect to file in 2023 for new rates in 2024?

Yes, in that timeframe. Look for the settlement agreement on March 11th, which will clarify around these things.

Can you help frame how you're thinking about COVID impacts in 2021?

Most employees continue to service our customers. The majority of our field employees have worked throughout. Our two primary offices remain skeleton crews, but we hope to return to a rotation of work soon. Our bad debt expense remains a concern. We can capture some recovery on our receivables. I believe we'll get full collections once we can return to normal.

Commercial consumption will pick up again as businesses return. We expect conditions to normalize more in the second half of the year.

80% of employees are expected to be back to their normal schedule, while 20% may work in a rotational aspect.

Thanks Chris. I'll leave it there, thanks guys.

Thanks Ryan.

Next, we'll go to Jonathan Reeder from Wells Fargo. Your line is open.

Hey Jonathan.

Hey Jonathan.

How should we view the benefits to WTRG of the repairs tax settlement, or what was your motivation for reaching this settlement?

We're in the midst of COVID. Regulators are trying to hold utility costs down. This is a backdrop for discussions around the settlement.

Are you still trying to reach a settlement with Delaware County on the DELCORA deal, or is that ship sailed at this point?

We’d love to see a settlement with Delaware County. They are spending millions of taxpayer money on this battle they can't win. I think the focus now is on the next couple of weeks to see the PUC’s decision.

Does the PUC have the option to extend the March 26th statutory deadline?

Yes, there are options to approve, stale mate, or even remand the case back to the ALJ. We’re hopeful that’s not the case, but we’ll see in the next couple of weeks.

Okay, we'll be watching. Appreciate the update.

Thanks for joining.

Take care.

At this time, I'd like to turn it back to Chris Franklin for closing remarks.

Thanks, everybody, for joining. We're open for follow-up questions.

That does conclude our call for today. Thank you for your participation. You may now disconnect.