Good day ladies and gentlemen and welcome to the Essential Utilities Inc. Q1 2022 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Brian Dingerdissen. Please go ahead sir.

Thank you, Kyle. Good morning everyone and thank you for joining us. 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 we will be referencing in the webcast of this event can also be found there. 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 this call, reference may be made to certain non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial measures is included at the end of the presentation is also posted on our Investor Relations website. Here is our agenda for today. We'll start with Chris Franklin, our Chairman and CEO who will discuss the highlights from the first quarter and provide a company update. Next, Dan Schuller, our CFO will discuss our financial results. Chris will then conclude the presentation with an update on our growth strategy and a summary of our guidance before opening the call for questions. With that, I will turn the call over to Chris Franklin.

Hey thank you, Brian and good morning everyone. I want to start off this morning just by letting you know that we held our Annual Meeting of Shareholders last week and I'm pleased to report that all of the items on the ballot were voted according to management's recommendations. So, a good meeting overall. So, let's talk about the first quarter. We had a strong first quarter with earnings per share of $0.76, up 5.6%. Dan is going to talk to you in a lot more detail about that in just a few moments. For the first few months of the year, we invested approximately $183 million in infrastructure improvements. That's in our combined water and natural gas segments. That compares to $178 million in the same period of last year. It's a little bit ahead of that schedule. We remain confident that our ability to execute the $1 billion investment is well in hand for the rest of 2022. Now, we continue to advance our municipal acquisition strategy with our previously announced closing of Lower Makefield, Pennsylvania. That transaction closed which added about $53 million in rate base and 11,000 customers to our water footprint in Pennsylvania. And we're diligently working on the closing and integration of our seven pending acquisitions, totaling $418 million in purchase price. Also, pleased to report that we recently co-hosted a Hydrogen Summit in Pittsburgh. The purpose of the event was to bring together key stakeholders in a region that we know has long been at the forefront of energy innovation. We continue to look at possibilities associated with hydrogen and we'll continue our discussions and our research. Now, the Hydrogen event, along with the changing geopolitical conditions in the world, continue to strengthen our belief that natural gas has a firm place in the short and long-term energy mix in our country as well as many other countries around the world. As we've seen in the macro environment over the last several months, the tone regarding natural gas and its future continues to evolve. I think the public is becoming more educated on natural gas and the importance of American energy independence. Now, like everyone else in the industry, we continue to monitor public and private valuations of natural gas utilities in the market. We also remain committed to making investments in our natural gas utility to improve safety reliability and the environment, all while growing rate base and earnings per share. And lastly, as we continue to recover from COVID, we're pleased to hold a large-scale employee community volunteer effort associated with Earth Day across all 10 states in our footprint. As you know we're very proud of our industry-leading ESG work and have shared some of that work with you in previous calls. Our ESG website has also received important recognition in the market. And it was in that light that we held our first ever essential Earth Day, which involved a variety of activities and opportunities for customer education, employee volunteerism and corporate giving. We kicked off the event on March 22 with World Water Day and concluded the series on April 22, which was Earth Day. Over that course of a month, we hosted 35 events across our 10-state footprint and had nearly 500 employees volunteer almost 2,000 hours of their time. The activities range from forest restoration and park cleanups to assisting with water filtration. Essential also provided $580,000 in financial donations to support 28 non-profit organizations with their environmental causes. When we work together with our customers and the communities we serve to assist and partner non-profit organizations, we recognize we can make a significant difference in our communities. And Dan, with that, we turn the call over to you in discussion about our financial results.

Thanks, Chris, and good morning, everyone. We had revenues of $699.3 million in the first quarter, up 19.8% from $583.6 million last year. Our regulated water segment contributed $239.2 million and our regulated natural gas segment contributed $445.2 million. The largest contributors to the increase in revenues for the quarter were the recovery of higher purchased gas costs and additional revenues from rates and surcharges, increased gas volumes and water and wastewater customer growth. O&M increased to $142.6 million in the first quarter, up from $125.1 million in the first quarter of last year. Employee-related costs and expenses related to the gas segment customer assistance program, which are recovered through a revenue surcharge were the largest drivers of this increase in O&M for the quarter. Net income increased year-over-year by 8.5% from $183.7 million to $199.4 million and GAAP EPS was up from $0.72 to $0.76. Next, we'll walk through the waterfall slides starting with revenue. In the first quarter of 2022, revenues increased by $115.7 million or 19.8% on a GAAP basis. You'll notice the primary driver was the recovery of higher purchased gas costs of $95.6 million due to a significant increase in natural gas commodity prices over the last year. Rates and surcharges, increased gas volumes due to colder weather and customer growth and volume from our regulated water segment provided an additional $23 million towards the revenue increase which was offset by $2.8 million of other items. With that, let's review the first quarter weather on the next slide. As you know, there's a strong correlation between weather and gas consumption and associated revenue. This winter for our regulated natural gas segment, the weather in the first quarter was slightly colder than normal with 2,878 heating degree days. This compares favorably not only to the last two winters, but to the 20-year first quarter average in Western Pennsylvania. As a reminder, the chart on the right shows how residential natural gas consumption in Pennsylvania was distributed throughout 2021 noting that just over 80% of the gas was consumed during the heating season, meaning the first and fourth quarters of the year with the largest portion of gas being sold in the first quarter. In terms of commodity prices, our customers benefited from gas purchases at lower prices in the second and third quarters of 2021 as we injected gas into storage for the 2021, 2022 heating season. Going forward, we expect gas prices to remain elevated for a while due to the geopolitical situation, lower-than-normal storage levels, domestic supply and demand and a supply lag. Thus, we're currently putting more expensive gas into storage for the coming months. However, pricing in the Appalachian Basin remains discounted to NYMEX by $0.50 to $1. Almost half of the gas consumed by Peoples' customers is withdrawn from our own storage and the rest is purchased as needed. Next, let's move on to operations and maintenance expenses. Looking at operations and maintenance expenses for the first quarter, expenses increased 14% to $142.6 million, compared to $125.1 million for the same period in 2021. The largest driver of the increase was $8.4 million in additional employee-related costs, including compensation and benefits, some defined contribution plan enhancements to match market conditions and maintain our workforce, recruiting costs and more expense-related maintenance activities. Gas customer assistance costs increased $6.8 million, due mainly to increased commodity costs. These expenses are recovered through a revenue surcharge. The $2.4 million increase in other expenses reflects, among other things, the favorable prior year impact of an insurance reserve adjustment. Inflationary cost increases contributed to the $1.5 million increase in production costs in our regulated water segment. Organic and acquisition-related water and wastewater customer growth also added $1.3 million and these increases were offset by $2.9 million in lower bad debt. Now if we remove the impact of the customer assistance program rider, as well as one-time expenses, the year-over-year O&M increase would be around 3.5%. Next, we'll review the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for the first quarter of 2021 was $0.72. Rates and surcharges contributed $0.026 and increased volume from our regulated natural gas segment added another $0.023. Continuing on other items, which include increased depreciation and interest, offset by higher tax repair at Peoples added $0.012 and growth from our regulated water segment contributed $0.008. These were offset by $0.03 of expenses, which were up due to a nonrecurring charge related to insurance, as well as an office lease-related charge, increased fuel costs and labor costs. The result is a GAAP EPS of $0.76 for the first quarter of 2022. The $0.76 also includes the impact of 6.7 million additional shares from the forward equity sale that we settled in August of 2021. These shares were not in the denominator when the $0.72 from the first quarter of 2020 was calculated. Given the $0.76 in earnings per share for the first quarter, we wanted to take a moment to remind everyone of how we think about net income by quarter. These strong first quarter results fall above the midpoint of the range noted here on the slide for Q1. But as we've explained before and noted on the heat integrated day slide, the seasonality of the natural gas segment earnings shifts earnings to the first and fourth quarters as a result of winter weather. While the first quarter was strong, we still have three quarters to go and some inflation headwinds, plus our stated guidance range of $1.75 to $1.80 remains intact. Additionally, I'd like to remind all of you that we recently settled the tangible equity units, or TEUs, that we issued three years ago as part of the Peoples transaction financing. Issuing these units tapped another pool of investor capital and thus helped our concurrent common share issuance. We were pleased with the outcome of these TEUs as we were able to issue the minimum number of common shares given our positive stock performance since the issuance date. Please keep in mind that the common equity resulting from this final conversion has always been considered in our formal guidance. And in each quarter since the issuance, the estimated as converted common shares have been included in the diluted shares outstanding. Thus the shares outstanding you should be modeling post this conversion continue to be at the 262 million share level. Consistent with our commitment to maintaining strong investment-grade credit ratings with S&P and Moody's, the company expects to launch an at-the-market equity issuance program in the near term. We will use the program to raise equity over time for municipal transactions and other corporate purposes and expected issuances will continue to be included when we develop our earnings per share guidance. We expect the ATM program will provide us with an efficient and opportunistic way to raise equity as needed to support future investment opportunities. Moving on to rate activity and other regulatory matters. So far in 2021, we've completed rate cases or surcharge filings in our regulated water segment in Illinois, North Carolina, Ohio and Pennsylvania and we completed a rate case in our regulated natural gas segment in Kentucky. The combined total revenue increase is $13.4 million. And as you're aware, we currently have base rate cases underway for our regulated water segment subsidiaries in Ohio and Pennsylvania and in accordance with the statutory timeline, we expect our Pennsylvania base rate case to be on the commission agenda this Thursday and new rates effective later this month. And with that, I'll hand it back over to Chris to discuss the municipal acquisition program.

Thanks, Dan. I appreciate it. As I mentioned earlier in the call, we closed on the Lower Makefield transaction, which is a significant acquisition that added $53 million in rate base and about 11,000 customer connections. It represents nearly a 25% increase to our wastewater customer connection number in Pennsylvania. So this milestone acquisition also increased Aqua Pennsylvania's total number of customers served to more than 0.5 million. Many of you are familiar with the seven signed asset purchase agreements pending, which will add about 224,000 customers or customer equivalents and a total of over $418 million in purchase price. Let's take a minute and talk about the DELCORA transaction. The Pennsylvania Commonwealth Court issued a decision in March, regarding the enforceability of our asset purchase agreement with DELCORA. In its remand the Commonwealth Court found that Delaware County can dissolve the authority if it so chooses, but our purchase agreement must be upheld regardless of whether DELCORA remains standalone, or if the county dissolves the authority. It was very good news for us. Following the court's decision, we sent a letter notifying the Public Utility Commission of the court's decision and requested that the PUC move forward. And as I've said before, we remain confident that we will close the DELCORA transaction. I also want to take a moment and mention our Willistown acquisition in Pennsylvania as well. You may have seen that the ALJ recommended that the PUC reject our Willistown acquisition, and I think this is an important policy indicator. Essentially the question that is now posed to the Pennsylvania Commission is should duly elected municipal officials have the authority to sell or regionalize their water or wastewater utilities even if they're not out of compliance or financially troubled. You'll recall that Willistown is selling their wastewater authority to us to put it in the hands of a professional operator basically Aqua despite the fact that the authority is not technically out of compliance. Now we're optimistic that the Pennsylvania Commission will hold to its longstanding policy that encourages regionalization and respects the authority of local elected officials. Hopefully, we'll see some movement in that in the coming couple of months here. Now the next slide you've seen before, you know our pipeline of opportunities for growth remains strong and healthy. Our value proposition to municipal systems is also strong and includes our competitive capital solutions, industry expertise and long-term rate stability. We'll continue to focus on growth in all eight of our water states and fair market value statutes are in place in each of our eight states as well as a reminder. Currently, we're engaged in active discussions with municipalities and pursuing approximately 415,000 potential water and wastewater customers as illustrated in the table that you see here. All right, I'll wrap up today's call just with a quick review of our guidance. We expect to earn between $1.75 and $1.80 per share this year. We remain confident that our three-year earnings per share growth will be 5% to 7% through 2024. Our capital plans are on track and we anticipate investing approximately $1 billion annually to rehabilitate and strengthen water wastewater and natural gas systems through 2024. Rate base is expected to grow between 6% to 7% for water and 8% to 10% for gas. And customer growth is expected to grow between 2% and 3% on average for water and remains stable in natural gas. Finally, we remain committed to our ESG targets and we'll continue to share our progress throughout the year. And with that, let me conclude our formal remarks and open it up for questions.

Thank you. We'll take our first question from Insoo Kim with Goldman Sachs. Your line is open. Please go ahead.

Insoo, how are you?

Hi, Chris. How are you doing? Good morning, Dan. First question, just thinking through the next few years, I think you reiterated the $3 billion of CapEx through 2024 about $1 billion each. When we just think about the flattish level of CapEx over the three-year time frame just doing math-wise it implies lower rate base growth just given a higher base. How conservative are you on the organic side of things on the CapEx versus your thoughts on I guess the pace of municipal acquisitions maybe playing into that as well?

Yes, good question. As you know, we do not include any potential future acquisitions that are not already signed in our CapEx projections. Therefore, we expect it to be stronger based on our current pace of acquisitions, particularly considering the size of some of the projects we are currently pursuing. Additionally, this does not factor in any follow-on capital for those acquisitions we might undertake during this period. Essentially, we are discussing base CapEx related to our existing system. Dan, do you have anything to add to that?

I think that covers it Chris.

Thank you for the information. For my second question, I want to revisit the overarching strategy. Chris, in your prepared remarks, you mentioned the evolving perspectives on the role of natural gas in the energy mix and how you are keeping an eye on both public and private valuations. I'm interested in your current thoughts regarding the natural gas exposure at Essential Utilities and any timeline for finalizing that strategy.

Yeah, I'll start with the mix. 70%, we think about rate base; about 70% water, 30% natural gas. Certainly, rate base growth is growing in natural gas at a faster pace. Just base capital expenditures I would say it's growing faster. Of course, when we layer in acquisitions and we think we've got a strong pipeline, so we think actually we can outpace growth of gas with growth of water in the coming years. So that's our hope that we would continue to focus on water growth and it would outpace natural gas ultimately diluting natural gas a bit. Now going forward, listen, we are really satisfied with our natural gas utility. It's performing on every level as I've said many times before, beyond what our expectations were when we bought the company. The team is functioning extremely well. And frankly we think in particular the Pittsburgh region of the country, natural gas has a long, long future. We talked today in the call a little bit about hydrogen and its potential mix in that long-term formula there in the Pittsburgh region. Hopefully you get a hydrogen hub there out of the federal government and engage in that research. We have a great infrastructure and a renewing infrastructure, bringing our environmental footprint down. So I guess that's a long way Insoo of saying we're very pleased with our investment in natural gas and we have no plans to do anything other than continue to invest in building that capability there.

Got it. Thanks so much.

You bet.

Thanks, Insoo.

We take our next question from Durgesh Chopra with Evercore ISI.

Hey, Durgesh.

Good morning, Durgesh.

Hey, good morning Chris and Dan, thank you for the update. Hey just can we quickly touch base on Chester and what's the latest there?

Yeah. So Chester City as you know had made a public statement supporting its sale to us having run a request for proposal. Of course, it's tied up with the receiver there as you know. And then the Chester Water Authority has filed to the Supreme Court and appealed to the Supreme Court. The Supreme Court more recently accepted that appeal and so that will play through the courts over the coming year. Now in the intervening time, as we've discussed many times, the political winds have shifted in Delaware County and the surrounding counties since the last set of board members were appointed at the Chester Water Authority. So they all serve five-year terms. They're all up this year, beginning this summer. And so, we'll probably see a short-term shift in the leadership of that water authority. Whether that changes people's minds on their stature of independence and everything remains to be seen. But I think the way to think about this is short-term potential change given mix of Board members. Long-term, we see what the courts have to say, the Supreme Court has to say in terms of the appeal. And that's all about what we can say about it at this point.

Got it. So, Chris, is there a timeline that investors should be following, or is there no set schedule at this point as the Supreme Court takes on the case and other factors are in play?

The Supreme Court doesn't establish a timeline, so we're at their discretion. I can't provide a specific timeline, but the transition of the Board members will occur this summer, likely in late summer.

Got it. Thank you. And then, Dan just on the ATM comment here. Just one can you just confirm for us and I think that's the case that, when we think about your long-term targeted EPS growth rate of the 5% to 7%, that incorporates and includes any equity issuances you may do.

That's correct, Durgesh.

Okay. Perfect. And then, how should we think about you utilizing this ATM as you announce more acquisitions, or is it going to be more sort of programmatic in nature every quarter and things like that? I don't know if you can share any color on that front.

Yeah, it's a great question. I guess the way I'd put it is the timing of issuance depends on a few things, right? It depends on the municipal acquisition program, and the timing of those transactions and when we see those getting through the regulatory approval process and closing. It also depends on our share price at the time, is the share price at a price where we'd like to issue more stock or not. So, a few different factors come into play there. And as Chris noted, right, we've got about $418 million of signed acquisitions yet to close. That was on one of the slides he spoke about. And so, as we've talked we finance those with a combination of debt and equity plus obviously, we've got a robust capital investment program that we need to support. So, we think of this as the best way to support our credit metrics while making acquisitions and doing our capital program.

Got it. Thank you for the update today morning, guys. Thanks a lot.

Thanks, Durgesh. Take care.

We take our next question from Ryan Greenwald with Bank of America.

Hey, Ryan.

Hey, Ryan.

I appreciate the time. Just maybe piggybacking off that a little bit here. How are you guys kind of thinking about the magnitude of equity needs through the base plan? And I mean you alluded to your commitment to the gas business a bit there, but any change in how you kind of think about potential monetization to offset equity needs, particularly kind of given the public market backdrop here?

Not at this moment. Currently, we anticipate our equity needs being financed externally. We expect to utilize this ATM for that purpose. In our plan, we have $418 million in signed acquisitions that we have discussed. We are continuously looking to increase that as we progress with our active business development program across our states. So ideally, we will be using the equity to support transactions as they arise, and we are acquiring more transactions, which over time will necessitate a greater investment at a consistent rate base. Chris, would you like to add anything?

Yes. Listen, I think in terms of our base capital plan, our base CapEx plan and the equity needed is baked into the plan. That's why you're getting the projected three-year EPS, so all that's baked in. If we do acquisitions, as Dan said then we'll add the equity component necessary to finance those at a 50-50. And the good news about that with an ATM is you have call it eight, nine, 10 months to get regulatory approvals and raise the capital through an ATM, raise the equity through the ATM. So that's how we see it as another useful tool basically and paying for, as Dan said it's flexible. But largely I think about it as related to acquisitions.

Understood. And outside DELCORA and Chester here, any particularly sizable municipal opportunities that are on your radar in the near term?

Yes.

Any additional color you can provide?

Yes right. That's harder for us to do right? I mean yes we're working on some good-sized opportunities we really are. And as soon as we can begin to share some of the color around that I'd love to do it. But hard to do that while we're in the midst.

Fair enough. I'll leave it there. Looking forward to seeing you guys next week.

Sounds good.

Sounds good. Safe travels.

We take our next question from Ryan Connors with Boenning and Scattergood.

Hey, Ryan.

Hey, Ryan.

So yes. First one was really for Dan actually. You talked about this rise in employee-related costs. It really did – pretty nice jump there. And you did give some of the color comp and benefit recruiting costs. But can you just discuss what that looks like? Is that just a function of the environment we're in and we're going to continue to see that ramp up given just the tight labor market inflation, or are there things in there that were just hot in the quarter that will kind of settle down going forward?

Yes. There are actually a number of things in there that are one-time kind of hot in the quarter to use your terminology there. So we did go ahead and put in a couple of 401(k) enhancements as I mentioned, really to match market and make sure that we're retaining our workforce. There are a few other things in there that are not regular course, but we'd like them to be like business development bonuses that get paid things like that but they're not a standard compensation expense. So the analysis we've done is we sort of – I guess the way to characterize that is if you just look at that headline number for the increase in employee-related costs it kind of oversimplifies the facts here. If we pull out these one-time-type expenses, we get to a more normal level. I don't want to say – I should be careful in my terminology but certainly as I said, if we look across the whole of the O&M waterfall there, if we remove the one-time expenses and we remove the customer assistance program increase, we would get to about a 3.5% year-over-year increase higher than normal, higher than we think about our 2% to 2.5%, 3% type of range. But we are in this inflationary environment and we are seeing some incremental costs related to employees. And we did see as I noted earlier some incremental expense-related maintenance activities as well.

Got it. Okay. No that's actually really great detailed color. Thanks for that, Dan. And then my other one was more strategic. I mean Chris, you talked about the Willistown proposed decision. And you mentioned I guess the battleground issue at play there being whether these "nondistressed" systems should be subject to sale. But importantly, you noted that as it did the decision also that what's at stake is not only privatization but regionalization, which sort of suggests that it's not an anti-private decision, it's an anti-economies of scale decision. And a couple of questions related to that. Is that the proper characterization of it? Number one. And then two, does that make the – are the other big regional systems around the state sort of your allies? Are they writing briefs on that in terms of supporting that and saying "Hey we're a publicly – public sector system but we want to be able to acquire as well?" Or is it really just at base level kind of a cynical anti-privatization play at the end of the day? I mean what's the read on that?

Yes. Listen, I'll give you my thought. I don't want to characterize the judge's decision. It was actually a pretty detailed decision over 200 pages. So there was a lot of thought that went into it. But my take from it is that the judge was basically saying to the commissioners, this is your decision on a policy level, not mine and we kind of need to make it. I would like to think that the commissioners will think about it in the same way we do and that is this long-term view across the country not just in Pennsylvania, the regionalization of water and wastewater systems is important to long-term viability. And therefore the policy remains consistent with where they've been for many, many years. That's why I tend to think this is going to be a fairly straightforward decision for the commissioners themselves. But I think the ALJs need to hear from the commissioners that in fact this is the case. So it is an important policy decision. I don't want to make any comments on whether it's cynical or anything else. I just think it's an important policy decision that the commissioners have before them.

And then lastly, you mentioned FMV being present in all your states and noted it as a national trend. However, it seems that Pennsylvania remains the most active region by far. Can you discuss the reasons for this? Why have we seen other states pass similar legislation without the same level of success as Pennsylvania, even though it has been in place for a few years in some areas?

Yes, it's an interesting dynamic, and while it's a longer conversation, I want to share a few thoughts. There's safety in numbers. When a few municipalities successfully complete transactions, others take notice and realize that it worked out well for them. There are various reasons for this success, ranging from compliance issues to economic viability, as well as factors like economic development funds and tax reductions. As more municipalities observe their peers achieving success, interest tends to grow. That's certainly what we've seen in Pennsylvania. Our aim in other states is to spark this trend and help people feel comfortable with the process, demonstrating that it's not something that jeopardizes their elections. It proves to be financially and operationally sound, while also ensuring that selling to a regulated utility provides adequate protection for ratepayers. Ultimately, this is an educational journey that unfolds over time.

Okay, great. The second question is, how does inflation impact gas compared to water bills? A gas bill reflects inflation more directly, but how do you perceive inflation, particularly in relation to energy costs affecting water bills? And what is the current trend in that regard?

Yes, that's a good question. When we consider inflation as it appears on a gas bill, the increase is primarily due to the commodity cost of natural gas itself. Other types of inflation, such as maintenance and labor costs, need to be addressed through a rate case. Similarly, in relation to water, inflation impacts our cost structure and must also be recovered through a rate case. Regarding energy, particularly electricity, we have greater exposure in areas where we rely on cooperatives for energy production and supply, and less exposure in locations where we have long-term power purchase agreements in place.

I would add, Dan, that if inflation continues, theoretically we would still spend about $1 billion a year but accomplish less with that money. For instance, we might install fewer miles of mains. Currently, despite a significant increase in costs for ductile iron pipe, our labor costs have remained steady because of contracts, which is the largest portion of our capital plan. Therefore, our capital plan has not been dramatically impacted at this point, but the potential impact would be less work accomplished for the same expenditure.

Okay. Got it. No that's helpful color. Thanks very much.

Certainly.

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

Thanks for joining us, everyone. And as always Dan, myself, Brian always available for follow-on, if you have other questions. Have a great day. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.