Good day, and welcome to the Essential Utilities, Inc. Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Kathy. Good morning, everyone, and thank you for joining us for Essential Utilities Second Quarter 2021 Earnings Call. I am Brian Dingerdissen, 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 at essential.co. 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 posted in the Investor Relations section of the website. After the presentation, we will open the call up for questions. Here's our agenda for the call today. We'll start with Chris Franklin, our Chairman and CEO, who will discuss highlights and provide a company update. Next, Dan Schuller, our CFO, will discuss our financial results. Chris will then provide an update on our municipal acquisition program and conclude the presentation portion before opening the call for questions. 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 a look at the second quarter highlights. We had another strong quarter with net income growth of 8.4%. Dan is going to discuss that in detail in just a moment. We invested over $404 million in infrastructure improvements throughout all of our systems in the first half of the year as compared to $346.6 million in the second quarter of 2020. You might recall that in May, our long-term Board member and former CEO, Nick Benedictis stepped down, creating a vacancy on the Board. Then in July, the Board appointed Dave Ciesinski to join the Board of Directors. Dave currently serves as President, CEO, and Director of Lancaster Colony Corporation, and serves as President of T Marzetti Company, a food company based in Ohio. At Essential, Dave serves on our Audit and Corporate Governance Committees, where he brings extensive experience, developing and implementing plans for growth and with a very successful leadership team. The addition of Dave Ciesinski, along with Edwina Kelly, who was appointed earlier in the year has brought our Board back now to 9 members. Also last month, the Board approved a 7% increase to the quarterly dividend, which is now nearly $0.27, marking 3 decades of dividend increases. Our municipal acquisition strategy remains strong as we announced the closing of our first fair market value transaction in Texas, and we have 7 pending acquisitions, totaling about $458.5 million in purchase price. And finally, we published our 2020 ESG report that fully incorporates our natural gas segment, and I'll talk a little bit more of that in just a moment. But first, the 7% dividend increase we announced in July marks the 31st increase in 30 years and a 76 consecutive year of quarterly dividend payments. We're very proud of that. Following the increase, the annualized dividend rate will be just over $1.07 per share. We're really proud of not only our commitment to providing safe and reliable access to natural resources for our customers, but also our long and consistent record of delivering shareholder value. Now, you might recall that last October, we launched our new ESG microsite, which included our 2019 results for our legacy water and wastewater operations. What I'm excited to tell you today is that we are launching our 2020 ESG report on our microsite. We just published it in the last couple of days. And in the new report, gas operations are fully included for the first time. In fact, we provide the same level of depth for both our legacy water and wastewater business and our natural gas business. We also shared information at the enterprise level in the new report. Now, we didn't simply add gas operations to the report, we also included some new topics and some more extensive information on some of the topics that I know are important to many of you as investors. I think you'll find that the ESG microsite makes the experience even sharper, more dynamic, and even more user-friendly. So I hope you take a look at it. Now this enhanced site covers our continued commitment to our mission despite our COVID-19 challenges. It also covers our excellence in water quality, including our 7-time outperformance of the average in the United States. It further discusses our 7% increase in diversity hiring year-over-year, along with more detailed workforce composition data as many companies are now doing. This progress on ESG during a difficult year in 2020 helped us earn recognition as one of the 100 best corporate citizens in the Russell 1000, again, something we're very proud of. While we're talking about ESG, I want to update you on our progress on the ESG commitments we announced at the start of the year. We set a multiyear employee diversity target to reach 17% of our employees of color. Currently, we're at 14% of our essential employees are people of color. We also set another multiyear target of 15% of our suppliers would be diverse. We've made strong progress since the beginning of the year. In fact, we currently stand at about 9.6%. We've also achieved a 5% Scope 1 and Scope 2 emissions reduction. This is a strong start toward our ultimate goal of a 60% reduction in greenhouse gas from a 2019 baseline by 2035. Achieving that target will put us more than halfway toward our ultimate goal of net-zero emissions. We're confident that we have the programs and the plans in place to achieve our targets and look forward to continuing to share our progress with you over the coming years. We know that our commitment to environmental stewardship, sustainable business practices, employee safety and diversity and inclusion, customer experience, and community engagement is also very important to our investors. And with that, let's talk about the second quarter financial results. Dan?

Yes. Thanks, Chris. Good morning, everyone. We ended the second quarter with revenues of $397 million, up about 3.3% from last year. Our regulated water segment contributed $248.2 million, and our regulated natural gas segment contributed $141.6 million. O&M expenses remained relatively flat for the quarter, decreasing to $127.5 million in the second quarter, down from $128.6 million in the second quarter of last year. Net income was up 8.42% year-over-year from $74.6 to $80.9 million, and GAAP earnings per share increased by $0.03 from $0.29 to $0.32. Next, we'll walk through the waterfall slide, starting with revenue. In the second quarter of 2021, revenues increased $12.6 million or 3.27% on a GAAP basis. You'll see that rates and surcharges were the largest contributors at $9.2 million, with the primary driver being the regulated water segment. Increased volume and growth from our regulated water segment provided an additional $5.7 million towards the revenue increase, while the price of purchased gas added approximately $1.5 million and other added $1.2 million. These revenue increases were offset by decreased volume from the regulated natural gas segment of $4.9 million due to the warmer weather than last year. Next, let's look at the water consumption by customer class. We had favorable conditions in the second quarter and water consumption increased in every state, except Texas. In aggregate, water usage was up 4.2% in the second quarter. However, it's worth noting that for the first time since COVID started, residential usage declined. As you'll recall, commercial water consumption has consistently been down since COVID began, but with many businesses reopening and customers returning to the workplace, commercial usage increased 20% for the quarter, and our other segments were favorable compared to last year as well. When compared to the first 6 months of 2020, overall usage was up 3% in 2021, as almost all customer classes increased their usage year-over-year. Operations and maintenance expenses were $127.5 million for the second quarter, down 0.85% compared to $128.6 million for the second quarter of 2020. Employee-related costs were up $4.6 million for the quarter, which included $3.2 million of increased medical costs. This increase was expected as many people delayed non-emergency medical visits during COVID and then recently began to return to their health care providers. Production costs and growth for the regulated water segment added another $2.2 million. However, these increases were offset by $4.3 million in other and $3.5 million in COVID-19 costs when compared to Q2 of 2020, resulting in the overall decline in O&M expenses. Next, we will review the earnings per share waterfall. GAAP EPS for the second quarter increased by $0.03 from $0.29 in 2020 to $0.32. Rates and surcharges added $0.025. Volume and growth from our regulated water segment together contributed $0.055 and O&M added nearly $0.01. These were offset by lower volume from our regulated natural gas segment of $0.014 and another $0.01 from other items, including depreciation, which brought us to GAAP EPS of $0.32 for the second quarter of 2021. When we rolled out our formal guidance earlier this year, we provided relatively large ranges for our quarterly breakdown. For Q2, we saw warm dry weather across much of our water service territory, resulting in stronger-than-expected water sales and more favorable than expected expenses, including O&M, tax and other, which led to the strong $0.32 of EPS. This builds off of what was expected and largely reflected by many of you, to be a flat to down performance versus the same quarter last year, largely due to the way the people's repair benefit was reflected in our condensed year of ownership in 2020. While I know most investors are not particularly focused on quarterly estimates and are instead more focused on annual earnings, we want to bring additional clarity to what we see for the third and fourth quarters of this year. It's not our intention to permanently provide quarterly guidance, we thought it might be helpful to provide some additional details this year. Specifically, when you look at our year-to-date performance and add current consensus for Q3 and Q4, you might assume that we have a very big year for earnings. But keep in mind that there are expenses that are expected to come through during the second half, including expenses related to the Peoples acquisition commitments, certain maintenance items and increased health care costs that will keep us within our full year guidance range. Additionally, there are an incremental 6.7 million shares from the August 2020 forward offering that we expect to settle next week, and those additional shares will impact the EPS calculation. For clarity, we'll have those incremental shares for more than 4.5 months in the second half of the year. Specifically for Q3, the gas business does not generally make money. When you look at Q3, you should expect something in the lower end of the 10% to 20% net income contribution range that we provided for the quarter. And for Q4, the gas business then starts to generate meaningful revenue again as the heating season begins, but we'll be waiting on new water rates in Pennsylvania and therefore, would expect a result in the lower end of that range as well. Realigning these quarters and considering the expenses noted earlier, if we experienced normal weather, our full year results should be around the midpoint of the stated guidance range of $1.64 to $1.69. Moving on to rate activity and other matters. So far in 2021, we've completed rate cases or surcharge filings for our regulated water segment in New Jersey, North Carolina, Ohio, Pennsylvania, Illinois, Indiana, and Virginia with total annualized revenue of $16.7 million. In our regulated natural gas segment, we've completed rate cases or surcharge filings in Pennsylvania and Kentucky, with total annualized revenues of $1.3 million. We currently have 2 base rate cases underway, 1 for Delta Gas in Kentucky and 1 for Aqua Ohio. Importantly, we expect to file a rate case for Aqua Pennsylvania later this month, in line with the 3-year rate case cadence that we have outlined previously, and we will provide additional details related to that case once it is filed. And with that, I'll hand it back over to Chris.

Thank you, Dan. Let's take a few minutes and review our municipal transaction activity. Matt Rose and his team, along with our state presidents and their teams have been busy at work on our growth projects. Earlier this week, we announced the closing of the Commons Water in Texas. You may recall this water system serves about 1,000 customers in the Houston suburbs and is our first fair market value acquisition in Texas. We have 7 signed asset purchase agreements pending closing, including the recent addition of an agreement to purchase the wastewater assets in the Borough of Shenandoah, Pennsylvania for $12 million. The system serves approximately 3,000 customers. These 7 pending transactions plus the 1 closed transaction will add close to 234,000 customers or customer equivalents and approximately $462.5 million of rate base when closed. We remain confident that we will close the DELCORA transaction. I want to make that clear. This is one of the most frequent questions we get. While we continue to wait for the state court to decide on the case, we want to reiterate that we continue to have positive and productive conversations, both internally and externally. We remain focused on closing this transaction and continue to believe that we are the best solution for the operation of the DELCORA system, its customers, and our investors. I think it's also important to note that our valid and enforceable contract with DELCORA includes a provision that makes the contract valid until 60 days after all litigation is concluded. I think that's an important factor to remember as we continue to pursue the closing of that transaction. Now, in addition to the signed municipal transactions mentioned on the previous slide, we have a healthy pipeline of potential municipal opportunities as we look at the second half of 2021 and beyond. This table includes acquisition opportunities where we are engaged in active discussions with municipalities. As the slide demonstrates, we are actively pursuing approximately 390,000 potential new customers. We continue to believe that fair market value legislation and favorable regulatory environments provide municipalities with the ability to pursue solutions to their infrastructure needs and access industry experience and expertise through companies like ours. So I'll wrap up the call, at least the formal part of the call with a reaffirmation of our 2021 guidance. And despite the very strong first half of the year, as Dan mentioned, we continue to expect earnings to be between $1.64 to $1.69 a share. Our capital plans remain on track as we anticipate spending approximately $1 billion on regulated infrastructure this year. The final mix of this capital spending may be more weighted towards the regulated water segment. We anticipate investing nearly $3 billion across the Essential platform by 2023, driving rate base growth to be 6% to 7% in 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 finally, we continue to make progress with our ESG targets to ensure the strength of our company is not only measured by our financial performance, but also our commitment to environmental stewardship, sustainable business practices, employee safety, diversity and inclusion, customer experience, and community engagement. With that, I'll conclude my formal remarks and open the line for questions.

And we will take our first question from Ryan Connors with Boenning and Scattergood.

Chris, I wanted to get your take on the noise out there on fair market value, FMV. Obviously, there are some detractors, which include some of your peers, and it's a pretty public debate going on there. So my question is twofold. Number one, do you see any of that having any tangible impact legislatively or regulatory-wise in terms of any kind of a rollback of FMV? And then number two, more tactically on discrete deals, do you think that could complicate things if people sort of hold those peer arguments and comments in your face as you try to move deals forward?

It's a good question. I think there is some noise from some of the smaller companies who maybe have less ability to use fair market value. Having said that, there was a very interesting op-ed in one of the New Jersey publications today. Happy to share that around. But it was authored by 3 former public utility commissioners, one from Illinois, one from Pennsylvania, and one from New Jersey, indicating how favorable they view fair market value and how they think it's been a nice step forward for the consolidation of an industry that is, as we all know, balkanized and very fragmented across the country. So I think that although there are different views, I would say the prevailing thought among regulators and legislators for that matter is a very positive view of fair market value. So I don't see any rollback either on the regulatory side or on the legislative side. I actually see it picking up momentum as more and more municipalities are looking for options to deal with their capital constraints and also the ongoing and probably growing environmental constraints.

And regarding the second part, I understand that you don't see any significant impact from legislation or regulations. But how might this affect your individual deals? Are you noticing that this is coming up as you work to progress those deals, or is it not something that those involved are considering?

Yes. I haven't seen it come up in any of the discussions we've had. Most people don't know that there might be an industry leader out there who's not in favor of a fair market value. So it hasn't come up in our discussions. And I think given what I mentioned before with corresponding very positive op-eds and pieces out there, I think we could easily match some of the detractors with probably the more favorable and majority of the people who are saying favorable things in writing.

Understood. My second question is about the water quality accountability legislation in Pennsylvania, SB 597. We anticipated some progress by now, but it seems to have been delayed, with certain municipal interest groups claiming victory and suggesting their lobbying efforts have influenced this outcome. What is your response to that? Is the legislation still moving forward? Do you expect to see it advance this year?

Yes, I haven't seen any pullback. In fact, as you probably know, it was advanced out of the Senate Committee with only one dissenting vote. I believe negotiations will continue. This legislation includes enforcement provisions, which are crucial. What we're advocating for in the Water Quality Accountability Act in Pennsylvania is very reasonable; it involves creating a replacement cycle and implementing cybersecurity plans. These are expectations that should be held for water systems across the country, especially here. While some municipalities may continue to oppose and negotiate against this, I believe this bill will be challenging for them to stop. I anticipate that something will progress through the legislature before the end of the year.

We'll take our next question from Travis Miller with Morningstar.

Wondering on the Texas deal, I know it's small, but I wonder if you could elaborate a little bit on the process you went through? Was it smooth? Was it timely? Any points of friction as you went through that? Thinking mostly about the first one under the FMV? Any thoughts there and how that went?

Yes. I think it took 1 year. So I would call that relatively smooth in the scheme of things. As you know, the Texas Commission is distracted a bit at this point dealing with the events of last winter. And so I would say, it was a relatively smooth process.

Okay. Can you provide details on how much of your pipeline is in Texas? Additionally, what opportunities do you foresee in Texas now that this has gone smoothly and may encourage more deals?

We generally don't provide a detailed breakdown of our pipeline by state, but I can say there are several opportunities in Texas, and some of them are quite substantial. While it's not moving rapidly right now, there is definitely competition in Texas. However, I believe there are also chances for growth. Once we complete one or two deals, other companies tend to take interest, particularly if the pricing is deemed reasonable, which I think it was in this case. Additionally, it's worth noting that in Texas, fair market value considerations also apply to investor-owned utilities, not just municipal ones. This adds an interesting element to the legislation we've observed in other states.

We'll take our next question from Jonathan Reeder with Wells Fargo.

I would like to know the latest updates on the Pennsylvania commissioner appointments. Last time we spoke, you mentioned there might have been a 2 for 1 deal between the governor and the Senate Republicans. Is there any additional information on that?

Yes. It would be more informal than anything. Currently, there are four seated commissioners. Commissioner Sweet's term ended on April 1 of this year, and he is required to vacate his seat on October 1. If nothing changes between now and October 1, which we do not anticipate since the legislature does not reconvene until the second week of September, we expect Commissioner Sweet to step down on October 1. The commission would then consist of two Republicans, Commissioner Yanora and Commissioner Coleman, and one Democrat, the Chairman, resulting in a 2:1 Republican majority. This situation is quite rare, as it involves reducing the number of commissioners and having a majority shift. The discussion now also surrounds the regional greenhouse gas initiative, RGGI. The governor is determined to remain a part of RGGI, and the Pennsylvania Senate has indicated they will not appoint any new commissioners while that is the case, leading to a bit of a stalemate. It is unclear how this will be resolved, but there is speculation that we could finish this year with the 2:1 Republican majority. Only time will tell.

Okay. And if there is that 2:1, I mean do you think they're prepared to still act on your pending DELCORA application in some form or fashion, whether it's conditioned on the appellate court process or whatever.

Well, I can't say for certain what they're going to act on, but what I can say is they are empowered to continue to do the business of the commission. In other words, they don't need a fully seated commission to continue to complete the business of the PUC. So whatever comes before them, they do have the power to act on.

Got it. Any updated thoughts on the timing of the solution of the public court appeal?

Yes, we're discussing 2022. The Pennsylvania State Court, or Commonwealth Court, takes time as we go through the process. Just to provide some context, there is an election in Delaware County where two of the seated council members are up for election. One, Mr. Zidich, who was the Chairman, is not running again, so he will definitely be replaced. There's another council member, Amadon, who is also up for election. This could lead to changes in the makeup of the Delaware County Council. At least one, possibly two seats will change when they are seated in January, around the 3rd. We may see some changes, and there could be an opportunity for a settlement with a new group of council members, but it's uncertain.

Okay. But if the court has to fully play out, I mean it's somewhere in mid-2022 or kind of earlier in the year?

It's difficult to determine how quickly the Commonwealth Court will proceed. We mentioned a possible timeframe of around six months, which may bring us to midyear. However, I prefer not to attach specific numbers to this, as it's challenging to predict the court's pace.

Okay, I understand. That's reasonable. Dan, did you mention that you still haven't filed the PA in the water rate case? Can you share how soon that will be filed or what kind of timeline we should expect?

Yes. Jon, I think of that just in the coming weeks, it will be filed. That will be filed later this month, and which keeps us on that 3-year cadence that we've talked about.

We'll take our next question from Verity Mitchell with HSBC.

I've just got 2 questions. One is about the gas customer count being stable for 2021. I mean, is that in line with your expectations? Or if you want to give us a bit more color on that? And then the second question is, as I'm not local, if you want to give us a feel for what the weather has been like in July and August. Because clearly, I wouldn't know where I'm calling from.

Yes. So gas customer count will be relatively stable year-on-year. It's interesting, we tend to pick up a few customers with new connections, but we lose a few customers as well. So that business is pretty close to stable, whereas in several of the water states we continue to add. On the organic side, growth tends to be in Pennsylvania, North Carolina, Texas, the places that you would imagine that there's building going on. In terms of the weather, I would say, it kind of differs by part of the country; generally, it's been pretty nice, but we have seen spots with some more rain. Texas had kind of a rainy start of the summer, and it started in the kind of mid-July timeframe to warm up, and we're seeing the hot weather again in Texas. Yes. We've had a bit of rain here in Pennsylvania on and off. So kind of we're just getting the July numbers in here and kind of taking a look at it. But that's probably the color I can give at this point, Chris, any further…

I think that's right. Verity, and particularly in this area where we have a lot of water customers in Pennsylvania, you want the summer to be dry, but not too dry that people give up on their grass. And so I think that's where we are right now. People continue to water. We're thinking it's looking pretty normal. But we'll see what the next couple of weeks bring there. They're predicting here in Philadelphia on the morning news today that we could get our fifth heat wave of the season. I guess that's 5 days in the 90s coming up this week. So maybe we'll sell some water.

We will take our next question from Ben Kallo with R.W. Baird.

Can you provide an update on business development, particularly regarding military bases? I haven't noticed any recent activity. Also, I saw the announcement about Texas and some other developments there. Could you share your thoughts on the Texas market and how it compares to your other priorities?

Yes. Regarding the military sector, we haven't been engaged there as we have predominantly concentrated on the municipal market, which is quite active in the states we operate in. I haven't observed much regarding military opportunities recently, although I am aware that there are still some potential prospects ahead. Focusing on Texas, we maintain a positive outlook. The population growth in Texas suggests that we should see an increase in housing starts, which will naturally lead to higher water sales. Our team is actively involved there, both in terms of state operations and legislative matters like the fair market value. We remain optimistic about Texas, although we are still in the early stages for municipal opportunities. However, it’s important to note that the new fair market value legislation in Texas impacts not only municipalities but also investor-owned utilities, opening up the market further. We are committed to nurturing this market now that we have the necessary legislation in place.

Great. Can you discuss if there is any interaction between your ESG profile and local utility commissions, and how that relationship works, or if it has not progressed in that direction yet?

Sure. I believe there are elements of ESG, such as diversity, equity, inclusion, greenhouse gas emissions, and environmental concerns that are definitely present, even if not always labeled as ESG. These topics are frequently discussed in our interactions with regulators. Overall, I think the ESG framework is here to stay, remaining relevant to both investors and regulators. However, the interest seems to be increasingly focused on specific issues instead of the broader ESG concept. For example, renewable natural gas is something we could explore, particularly in terms of how we might recover associated costs. Other utilities have started testing various recovery mechanisms, and we are closely monitoring those developments. In terms of the environmental aspects of ESG, this is particularly relevant for us in the gas sector.

And then, Chris, maybe the other place would just be customer assistance programs.

Yes. Good point.

Congrats on the quarter.

It appears there are no further questions at this time. I would like to turn the conference back to Mr. Chris Franklin for any additional or closing remarks.

Great. Thank you. Dan, Brian, and I are always available for follow-up questions if there are any. But in the meantime, thank you for joining us, and I appreciate the questions and your attention. Be well.

That concludes today's presentation. Thank you for your participation. You may now disconnect.