Hello, and welcome to the Essential Utilities Full Year 2023 Earnings Call. Please note that this conference is being recorded. I will now hand you over to your host, Brian Dingerdissen, to begin today's conference.

Thank you, Francois. Good morning, everyone, and thank you for joining us. 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 be found on the website. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of any non-GAAP to GAAP financial measures is posted in the Investor Relations section of the website. We will begin the call today with Chris Franklin, our Chairman and CEO, who will provide an update on the company. And then Dan Schuller, our CFO, will provide an overview of the financial results before Chris closes the call with an update on our guidance and overall company priorities. 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 some highlights from 2023 and some company updates. Despite the unusually warm winter weather in much of 2023, we remain focused on operational excellence and improving our Water and Natural Gas systems by investing capital and continuous improvement measures. As a result of this good work, we're happy to report earnings per share of $1.86, which is in line with our 5% to 7% guidance. As Dan will discuss in a few moments in more detail, our team was able to make up for the $43 million of weather-related net revenue shortfall versus budget and still meet our guidance range, which was quite an accomplishment in 2023. Now last year, we invested nearly $1.2 billion in infrastructure improvements, as compared to $1.06 billion in 2022. Our commitment to investing in critical infrastructure across our footprint has led to the replacement, retirement, and installation of over 300 miles of pipe in 2023 alone. This improved service and reliability for our customers throughout the water, wastewater, and natural gas part of the platform. As I've mentioned in the past, this investment spans thousands of projects and takes significant expertise to achieve. Excluding West Virginia, we reported year-over-year rate base growth of more than 10% from organic capital investment alone. We also took 2 divestiture actions last year that will allow us to place more focus on our core utilities with fewer distractions. You may recall, in Q4, we closed the sale of our West Virginia Gas utility, a very small unit with less than 15,000 customers. And we announced the sale of our 3 nonutility microgrid and district energy projects in Pittsburgh. We recently closed on the $165 million sale of those energy projects, which, as you know, was a very strong outcome. The proceeds of both were used to finance capital expenditures and water and wastewater acquisitions in place of external funding from equity and debt issuances. Now during the year, we continue to build on our 30-plus year track record of consolidation in the U.S. water and wastewater industry. Last year, we acquired 7 systems, adding over $44 million in rate base and over 11,000 new customers. We currently have asset purchase agreements signed for 6 municipal acquisitions, totaling approximately $380 million in purchase price. This includes the recently signed agreement with North Versailles to acquire their wastewater system in Pennsylvania. Later in the call, I'll update you on the latest acquisition-related activity. Lastly on this slide, I'm pleased to tell you that we have been named to Newsweek's 2024 list of America's Most Responsible Companies. This is the third consecutive year that we've been on this list, which recognizes the top 600 most responsible public companies headquartered in the United States that have demonstrated meaningful and impactful business practices. Now turning to the next slide. Maybe it goes without saying, but at Essential, our focus is on quality and reliability for our customers and sustainable returns for our investors. Our 138-year history, 32 years of dividend increases, and many, many years of continuously delivering on our environmental commitments are made possible by an organization with several competitive advantages. First, I think of the importance of operating in constructive regulatory environments. Essential operates in 9 states, most of which have received favorable regulatory rankings. Secondly, we want to operate where there is growth opportunity. We're well positioned to grow both organically being in states with high population growth like Texas and North Carolina and through acquisition, and we've demonstrated our ability to do so. In the water and natural gas industry, there's a great advantage to possessing advanced technical and engineering expertise. We were and plan to continue to be leaders on issues like PFAS mitigation and lead remediation, safety issues, et cetera. Last but not least, operational excellence. We have 3,000-plus dedicated people working every day to manage the complexity of thousands of projects, which have taken us to industry-leading quality and service levels. I want to share just a couple of those accomplishments of our operating team. By any measure, the numbers on this page make us a clear leader in both the natural gas and water industries. The combination of operational excellence and capital investment has accelerated our quest to continue as leaders in the industry. Now the backbone of our capital program in both water and gas is our pipe replacement program. The tightening of our water and gas mains improves compliance, reduces outages, and improves the environment. According to a report by the Pennsylvania Public Utility Commission, we are running a larger pipe replacement program than our peers. This large amount of gas pipe replacement, combined with a refocused effort on addressing leaks, has allowed us to shift to a find-and-fix approach to leaks. And to put this in context, when we announced the acquisition of Peoples just a few years ago, the company, like most gas LDCs, had a backlog of several hundred leaks. Over the period since we've acquired the company and run the company now, we have reduced outstanding leaks by 83%, so outstanding results. Our Water business continues to operate at a 99.9% compliance rate, which is also outstanding. You can imagine the confidence that this builds in our customers' minds, as they drink and cook with the water we provide. From a reliability standpoint, our systems rarely have outages. And when they experience that rare outage, it's typically because a storm disrupts the power to a plant. Now of course, our larger plants are supported with generators, and we continue to position our portable generation near our smaller systems, especially during storm prep. I am really proud of our operating team, and they continue to raise the bar on operational excellence in both gas and water. Now speaking of operational excellence on the next slide here, given the importance of the expected PFAS regulations from the U.S. EPA and the impact on our customers, we probably need to spend a few minutes on this topic. Now we're diligently working so that we are aligned with the EPA's timeline and standards to ensure that our finished water does not exceed the federal maximum contaminant level of PFOA, PFOS, and PFNA compounds. Our most recent disclosure is that we expect to spend about $450 million, or I should say, at least $450 million, and that's included in the new capital investment guidance that we're providing today. Our capital spending on this mitigation effort is somewhat fluid, though, I have to point out, and we expect that the $450 million could increase as plans for construction are refined, the EPA and states' timelines for compliance are determined, and if any additional sites pop up and require treatment as we move forward. Now for clarity, if the EPA and the state environmental agencies require a 3-year compliance timeline, we would expect our costs to rise because it may not fit with the timelines associated with applications for low-interest loans and grants, and could also cause us to work overtime and increase contractor costs. Having said that, we are in the process of meeting with the heads of all the agencies involved to press for accelerated approval processes for loans and grants to protect our customers and, where appropriate, look for extensions in time to comply with this new regulation we expect in the coming months, year, or so. Now the effort to comply with the 4 parts per trillion standard will be significant. There's no doubt about that. Each of our 300-plus sites that need mitigation must be engineered, permitted, procured, and constructed. To accomplish this in what is anticipated to be a 3-year timeline will be a huge and very expensive effort. Now make no mistake, our team is up to the task, and we will meet compliance deadlines. So with that, let me hand it over to Dan to talk about the year's financial results.

Thanks, Chris, and good morning, everyone. On Slide 9, let's take a few minutes to review the fourth quarter highlights, before moving into the full year. While many of you focus on the company over a longer period of time, which we believe is appropriate, we did want to provide a quick update on how the fourth quarter of 2023 concluded. On a GAAP basis, we had revenues for the quarter of $479.4 million, compared to $705.4 million in the fourth quarter last year. As we experienced in prior quarters, the largest contributor to the decrease in revenues for the fourth quarter was the recovery of lower natural gas commodity prices, with purchased gas costs decreasing by $209.6 million from the same period last year. Additionally, the weather in Q4 was warmer than normal, and therefore, contributed to reduced gas usage by our customers. Our Regulated Water Segment contributed $281.8 million in revenue, and our Regulated Natural Gas segment contributed $188.7 million. Incremental revenues from regulatory recoveries and water and wastewater customer growth contributed positively. However, these impacts were offset by lower purchase gas costs, lower volumes in both the Natural Gas and Water segments, and other items for the quarter. Operations and maintenance expenses decreased 15% to $157 million for the quarter, down from $184.7 million in the same quarter of last year. Decreases in other items, lower recoverable costs related to our Natural Gas customer rider and lower bad debt were the primary drivers of the decrease. These were offset by higher water production costs and operating expenses related to acquired systems. Net income was up year-over-year from $114.9 million to $135.4 million, and GAAP EPS was up 13.6%, from $0.44 in the fourth quarter last year to $0.50 for the quarter this year. Next, we'll discuss the full year financial highlights. Let's talk high level, and then we'll get into the details when we go to the waterfall. We ended the year with $2.05 billion in revenue compared to $2.29 billion last year. For the year, our Regulated Water segment contributed $1.15 billion of revenue, and our Regulated Natural Gas segment contributed nearly $864 million. Purchase gas costs decreased by $249.7 million, or 41.5%, compared to the prior year. Operations and maintenance expenses decreased 6.2%, from $613.6 million to $575.5 million. Operating income was up 4.7% from $661.2 million to $692.1 million. Year-over-year, net income increased $33 million, or 7.1%, from $465.2 million to $498.2 million, and GAAP earnings per share increased 5.1% to $1.86, which was solidly in our $1.85 to $1.90 guidance range for the year. And earnings would have certainly been higher were it not for the balmy December weather in Pittsburgh. Next, let's walk through the full year waterfalls, including how we successfully overcame adverse weather impacts in the first and fourth quarters of 2023, which caused a $43 million net revenue shortfall versus budget or normal weather. Let's start with revenue on Slide 11. In 2023, revenues decreased $234 million, or 10.2% on a GAAP basis. Starting on the left-hand side of the waterfall, regulatory recoveries added $69.1 million in revenues year-over-year, which includes the impact of base rate cases or other regulatory proceedings. Next, organic and acquisition growth from our Regulated Water segment provided an additional $13.1 million. The largest driver of the decreased revenue was the $249.7 million impact of lower purchased gas costs. Now this is simply a comparison of last year's purchased gas cost line on the income statement to this year's, so it reflects both a significant decline in natural gas commodity prices and the lower quantity of gas being purchased. Clearly, lower commodity prices are a good thing for our customers, who benefit with lower overall bills for heating and cooking. As a result of unfavorable weather throughout the quarter— I should say, throughout the year — lower gas usage decreased revenue by $53.1 million from 2022, and 2022 was colder than normal. And lower water and wastewater volumes decreased revenue by $7.5 million as well. And lastly, other items of $6.1 million, which includes the impact of lower customer assistance program recoveries, also contributed to the reduction in revenues. I'd like to remind everyone that we currently do not have weather normalization for our Pennsylvania Natural Gas business. In these results, we're seeing the significant impact of 2023's warmer than normal weather. However, had it been equally colder than normal, our customers would have seen significantly higher bills, resulting in higher revenues. Now as many of you know, we recently filed the first Pennsylvania Gas rate case since our acquisition in 2020. And in that case, we proposed a weather normalization mechanism. Next, we'll review the operations and maintenance expenses. Operations and maintenance expenses were $575.5 million for the year, a decrease of 6.2%, compared to $613.6 million in 2022. Increased production costs, primarily related to chemicals, purchased water, and purchased power contributed $12.2 million, and operating expenses from newly acquired systems in our Regulated Water segment added another $5.8 million. These were offset by other items including lower outside services costs and the prior year impact of a lease-related charge, as well as lower contributions to our foundation, which decreased operations and maintenance expenses by $27.6 million. The gas customer rider, which is recoverable through a revenue surcharge, decreased $18.7 million, again due to lower commodity prices in the regulated natural gas segment. Employee-related costs decreased by $5.4 million, partly due to the incremental pension contributions and an accrual for one-time inflation-related incentive compensation for non-officer level employees back in 2022. And finally, lower bad debt decreased operations and maintenance expenses by another $4.4 million. Next, let's spend a minute on the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for 2022 was $1.77. Regulatory recoveries contributed $0.19, lower O&M expenses contributed another $0.08, and organic and acquisition growth from our Regulated Water segment added $0.02. These were offset by decreased volume from our Regulated Natural Gas segment of $0.14 and other items of $0.03, as well as decreased volume from our Regulated Water segment of $0.02. The result is GAAP EPS was $1.86 for the year. And given the fact that weather in Pittsburgh was approximately 16% warmer than normal for 2023, we believe this is an outstanding result. Now in this waterfall, the other bar includes the impacts of increased interest and depreciation, offset by an increased tax benefit. This increased tax benefit is a result of both increased pipe replacement capital and the ongoing and one-time benefits related to the IRS' Natural Gas Safe Harbor, which we've discussed previously. The one-time benefit related to the IRS change was about $0.045. So all of these impacts, along with the pickups from the O&M items we discussed earlier and the purchase water pass-through in Texas as well as a tax-related change in New Jersey, these were all critical in offsetting the impacts of the unfavorable first and fourth quarter weather. I will note that regarding 2024 financings, you may have seen that last month, we completed a $500 million issuance of 10-year debt at a rate of 5.38%. We also expect to raise approximately $250 million in 2024 through an ATM equity program. Given this, we'll file soon for an ATM of up to $1 billion, which should be viewed as covering our equity needs for multiple years. Now moving to regulatory activity and other matters. In 2023, we completed rate cases or surcharge filings in all 9 states in our footprint with total annualized revenue increases of $47.2 million for Water and $21.3 million for Natural Gas. So far in 2024, we've completed rate cases or surcharge filings in 3 of our Water states with total annualized revenue increases of $9.1 million and achieved $22.1 million in our Regulated Natural Gas segment. We have a busy but manageable regulatory calendar in 2024 with base rate cases or surcharge filings underway in Illinois, New Jersey, Texas, and Virginia for our Regulated Water segment. And just before the end of 2023, we filed a base rate case for our Regulated Pennsylvania Natural Gas utility, which I'll discuss in more detail on the next slide. Now, this is the first Pennsylvania Natural Gas rate case that we filed under our ownership. It's also the first since the adoption of tax repair in the Gas business and also the first case in which there's a request for weather normalization, which is a mechanism that several of our peers in Pennsylvania have today. As a reminder, as part of this case, we expect the tax repair benefit to shift from the shareholders to the customers, as the tax benefit is incorporated into rates. Tax repair allowed us to stay out of rates for 5 years, and we would likely have stayed out longer, but the commission order associated with our repair election required us to file by the end of 2023. In this case, as you see on the slide, we've requested an increase of $156 million or 18.7% in terms of revenue. Now through the fully projected forward-looking test year, we'll have replaced over 1,000 miles of gas mains in Pennsylvania since the last rate case. Therefore, rate base growth at Peoples is significant. The $4.2 billion in rate base in this case is up from $2.1 billion in the prior case, which is a doubling in a 5-year period. This investment has made our system safer and more reliable while significantly reducing our greenhouse gas emissions since 2019. Given the fully projected future test year, we anticipate recovering the impact of rising interest rates and inflation through much of 2025. In addition, we did want to mention that we expect to file a rate case for Aqua Pennsylvania in the second quarter, as it's been nearly 3 years since our last filing. We believe our rate activity, especially in Pennsylvania, is very different from some of what you may be seeing across the industry. We've been out of rates for nearly 3 years for Aqua Pennsylvania. Our plans are known by the regulators in advance, and we've maintained a strong focus on affordability. We will also take a responsible approach to our Proposed Act 11 subsidization. And with that, I'll hand it back over to Chris.

Thanks, Dan. And it's hard to believe it's been 5.5 years under your leadership as CFO, and I want to thank you for that. I also want to recognize the great work done by Dan and his team in achieving our 2023 financial results. It was a challenging year on the weather front.

Thank you, Chris.

Yes. Let's talk for a moment about our Water and Wastewater acquisition program. As you know, the program has been successful and continuously evolving for nearly 30 years now. I have to tell you that we're really pleased with the leadership of the Pennsylvania Public Utilities Commission Chairman, Steve DeFrank, on addressing some of the issues that have arisen associated with the use of the fair market value statute that was passed in 2016. We believe that the proposal he has made at a recent PUC public meeting will make a real difference in moderating rate increases for customers while still providing a fair price to governmental entities when they decide to sell their water or wastewater utilities. We view this as a very positive development in our acquisition program in Pennsylvania and believe that the pipeline remains strong. As I mentioned earlier in the call, in 2023, we acquired 7 systems, adding over 11,000 customer equivalents to our current water and wastewater footprint. We have now acquired over $500 million of rate base via acquisitions since this leadership team came together in 2015. That statistic just doesn't do justice, though, to the amount of work that goes into the program. I fully expect that the company will continue to be a major player in the consolidation of the water and wastewater utility industry in the United States. Now moving to the next slide, let's take a minute to review the pending transactions. As of this call, we have 6 signed asset purchase agreements in 2 states, in which we have existing water and wastewater operations. These acquisitions will add over 215,000 customer equivalents and total approximately $380 million in purchase price. As I noted in my opening remarks, this includes the recently signed agreement with North Versailles Township Sanitary Authority to acquire their wastewater system in Allegheny County, Pennsylvania, which is expected to add approximately 4,400 customers to our Regulated Water segment. Now, this is another transaction that resulted from the reputation and relationships of our Peoples Gas team in Western Pennsylvania. You had another opportunity to leverage that relationship between the gas and water utilities. We continue to see a strong and healthy pipeline of opportunities for additional growth, and we're currently engaged in active discussions with municipalities, which have over 400,000 potential water and wastewater customers. If Chairman DeFrank's proposal is successful, there should be a much clearer path to closing municipal acquisitions in Pennsylvania in the future, and that is a bright spot. Now before moving on, I just want to note that the DECLORA regulatory process continues to be under a stay by the federal bankruptcy court, but we remain confident that we will ultimately close the DECLORA transaction. In early February, we filed another motion requesting the Federal Bankruptcy Court judge lift the stay that has now been in place for 9 months. In April, there is a scheduled hearing at the Pennsylvania Commonwealth Court to rule on Delaware County's appeal of the validity of our asset purchase agreement with DECLORA. You'll recall that was upheld successfully in the lower court. Based on what we know today, we still believe we can close this transaction by mid-2025. Now before I get to guidance, I just want to reaffirm our strategy and visit some of our high priorities for the year. First, with regard to strategy, we're going to continue investing significant capital in needed infrastructure. This will drive quality, safety, and reliability for our customers. It will also drive rate base growth, which in turn also drives shareholder value. Importantly, customer affordability is always a priority. We know that a key piece of driving shareholder value is continued growth in our dividend, and we have a long track record of returning cash to our shareholders, and that will continue. In fact, we've raised our dividend continuously for 30 years now. Lastly, we continue to see opportunities for further consolidation through acquisitions in the Water and Wastewater space, and we'll pursue transactions that broaden the customer base in a constructive regulatory environment, allow us to apply economies of scale to manage our costs, and give us the opportunity to be a solution to communities that need our expertise or financial strength. We believe that this strategy puts us in a great position to continue building and delivering value for our shareholders. As we think about 2024, we have some important work to accomplish. I share my priorities each year with the Board and, of course, the management team, and I'll summarize them quickly for you here. First, we'll remain focused on operational excellence throughout the year. I'll continue to share examples with you on our calls and meetings, and this will include increased exposure to our segment presidents, Colleen Arnold and Mike Huwar. Secondly, we'll continue to look for opportunities to make tangible improvements in the service we provide to our customers. In fact, we just rolled out an exciting new customer portal to provide our water and wastewater customers with more visibility into outages and restoration, as well as allow them to see the details of their usage more easily and pay their bills online. Also this year, we'll continue our leadership role in remediating PFAS and lead across our footprint, and we'll share our knowledge across the industry to help others leverage what we know. Now sustainability. We're going to continue to focus on our continued commitments and sustainability and our accomplishments. We will continue to grow the company through accretive water and wastewater acquisitions. And last, we have some pretty important regulatory things in front of us this year, including 2 rate cases that Dan mentioned in Pennsylvania, among others, the FMV refinement and also the finalization of the PFAS regulations. It's going to be a very busy year this year, folks. All right. Let's get to guidance. Before we walk through this, I want to acknowledge what you read in the release last night. Now throughout this year, we will be working through 2 critical rate cases, both in our largest divisions in Gas and Water, and both in Pennsylvania. Thus, we are refraining from providing a multiyear earnings per share growth rate guidance range. Now once both base rate cases are complete, which will be around this time next year, we will return to our normal longer-term earnings per share guidance range. So let's review the guidance that we're providing, which we believe is significant and provides a clear line of sight to the opportunities in front of the company. In 2024, we expect to earn $1.96 to $2, which is a 5% to 7% earnings growth range. Through 2028, we plan to invest approximately $7.2 billion annually on regulated infrastructure in our existing utilities. And let me point out that some of this increase is being driven by the regulatory requirements associated with PFAS and lead mitigation. Now in 2024, we expect to invest between $1.3 billion to $1.4 billion. The annual amount may be a bit lumpy, based on the needs and regulatory recovery activity throughout the 5-year period, and I'll point again to PFAS, as I mentioned earlier in the call. I also want to point out that we're providing a 5-year outlook on capital investments for the first time. We've always provided you a 3-year capital outlook, and we hope that moving to a longer-term view of capital spending will provide a better picture of our long-term opportunities. Now based on this investment, we expect the rate base will grow at a compounded annual growth rate of approximately 8% for Water and approximately 10% for Natural Gas through 2028. Defined utility base will grow at a compounded annual growth rate of over 8%. We continue to expect that together, organic customer growth and growth from acquisitions for Water and Wastewater will continue at a growth rate of 2% to 3% on average. We are always reminding our investors that growth from acquisitions is lumpy and should be viewed over a 3-year average. We expect continued stability in our Natural Gas customer base. Now as Dan mentioned, we also expect to raise about $250 million in 2024 using an ATM equity program, and we remain committed to reducing our Scope 1 and Scope 2 greenhouse gas emissions by 60% by 2035 from our 2019 baseline. As you know, we've already made significant progress on this, and we estimate it to be about 25% as of the year-end 2023. All right. We've covered a lot. That concludes our formal remarks, and we're happy to take your questions. So let me turn it back to Francois.

The first question comes from Ryan Connors from Northcoast Research.

I think you did a great job with the details, Dan. Just a couple of bigger picture questions here. Chris, you talked about strategically about kind of rate and CapEx strategy. But tactically, there's lots of high-profile industry noise in Pennsylvania right now, in terms of rate increases in water. How does that impact your tactical thinking about rate strategy in PA, in terms of the rate cycle and the cadence of CapEx going forward? Any thoughts there?

Yes, Ryan, listen, I think cadence is important. The challenge that we could face, and I outlined a moment ago, is if Pennsylvania, for example, requires us to comply with the PFAS rules over a 3-year period. It appears in the federal regulation that hasn't been formally released yet, but the draft would suggest that states can extend that by 2 years. So if they allow us to extend it, it would give us an opportunity to spread that a little bit. That's the only thing that could push us in a little sooner. But we think that the cadence we have now is a good cadence. Now there's a lot of capital before us, including lead. So that could impact the cadence of future cases. But listen, I think affordability is key in how we think about things. I think how we think about Act 11 and shifting of cost is key to us. And I also think about that throttling of capital to make sure that things remain affordable to our customers is also critically important.

Yes. And then relatedly, this — you mentioned your comments on the M&A environment, which I appreciate, but there was some big news yesterday, not one of your deals, but the PUC actually rejecting an Act 12 deal. How do you view that in terms of the potential impact on the near-term pipeline? I mean will that scare off some potential sellers, at least until we can get finality on where this reform process ends up?

It's an interesting question. And I think what it does is it provides pretty clear guidance to sellers as to what's the multiple on depreciated original cost that they can probably expect. Now we're probably a couple of months away from the finalization of Chairman DeFrank's motion because there's 30 days followed by a 15-day comment period. Assuming it stays even close to where Chairman's proposal is, it will give pretty clear guidance as to where those purchase prices can be. And believe me, I think that those are still really nice premiums that can be paid for these utilities while we keep rates in check. And I think yesterday's decision probably is in line with the commissioner's 5-0 vote on Commissioner DeFrank's motion on his proposed changes. I think that given the difference in the multiples on depreciated original cost, it would have been hard for them to do this one. Now I do think, and this is important, as we think about acquisitions, particularly in Pennsylvania, troubled systems are really differentiated from this process. And so I think the acquisitions that we have in the pipeline, many of them are troubled, and so you have a little bit more flexibility in this for troubled acquisitions, and they may take more of a focus.

Yes. I appreciate that. And one last one for me, if I could sneak it in. Just super big picture, Chris. I mean, there seems like there's been a pretty big—pretty stark role reversal for water and gas over the last 6 months or so. Water seems to be facing some headwinds now, and gas utility stocks are now actually outperforming the water names. That's one of the reasons your stock has done relatively well. How does that shift your thinking, if at all, on portfolio strategy going forward? I mean, you've talked in the past about kind of staying put in gas and really growing in water. Is there a thought process that maybe gas could be more of a growth platform?

Well, I'm not ready to say that yet, but I think you're exactly right in your—the public sentiment. Including in Europe, you saw that—even in the European Union, gas is now considered green again. So I think public sentiment has changed a bit. I think the realization that natural gas is going to be here for a very long time, given the critical role it plays in the energy mix, is more evident in Peoples' knowledge today. But having said that, listen, we're going to remain focused this year on delivering a really quality rate case in Pennsylvania. And so that's going to be our primary focus in the Gas business in 2024.

The next question comes from the line of Durgesh Chopra from Evercore ISI.

Just I wanted to kind of stick on the theme of the rate cases, getting a lot of questions from investors, obviously, on the water front. Maybe can you just give us a sense of what kind of revenue or rate increase ask that you might seek in the upcoming water case? You mentioned affordability several times in your comments. So just trying to get a sense of how big a rate increase you might see if you can give us a range or something along those lines?

So Durgesh, we're still working through that case right now. And of course, as you indicated, affordability is a concern. So we don't have a number to share. We'll obviously share that number—or we'll be pretty close to that number when we have our first quarter call. So we'll provide more detail at that point. I would say though, and you see it in the 5-year CapEx guidance that we've shown, that we're going to continue to have strong CapEx in the Water business, and PFAS and lead are a portion of that CapEx. So those capital expenditures here for the time period kind of through 2025 will be included in this rate case.

Yes. Let me just point you to, Durgesh, to some of the comments I made in the call here. We're meeting with regulators as we speak—environmental regulators, that is—to talk about this timeline for PFAS. We pretty much know where we're going with lead. But that timing is a key consideration even in this—how we think about this case. So numbers are still moving around a bit. But as Dan said, it should be clear in the coming months.

I appreciate that. And then a pretty large step up in CapEx. I think if I just take the average annual capital amount, it's like 30% higher versus previous guidance. 1.4% on average versus 1.1%. Maybe just, can you talk to—obviously—and thank you, by the way, for sharing the equity plan for this year, much appreciated. But then can you talk to the financing needs in '25 and beyond. Should we use that $250 million as a run rate? Or should it be higher given the CapEx is stepping up quite a bit? Maybe just talk to that? And then I have a follow-up.

Yes. We probably won't provide too many details on that beyond 2024, only because the needs in the future for equity also depend on acquisitions and how they play out. But I would say, as we think about that $1 billion ATM program, generally, we're thinking about that as 3-plus years. But again, it depends on both acquisitions and investment needs.

Okay. Perfect. I appreciate that, Dan. And then maybe just like one last question for me is rate base is growing at a materially faster clip or projected to grow at a materially faster clip, assuming you've got favorable regulatory outcomes in the PA rate cases? Could we see a step-up in long-term growth rate going forward, as you're spending more money? Or maybe perhaps to the—towards the high end of that 5% to 7%? Or how should we think about that? I don't know—I appreciate there's no long-term guidance, but maybe directionally, you could help us think about long-term growth rate.

Yes. Listen, I think we're trying to refrain from front-running the commission in Pennsylvania, so I'm going to be careful in how I answer this. Listen, I think Peoples is coming out of repair, which we've—I think we've talked about many, many times. And so as we think about coming out of repair and earning well before that, the step is not what would be in a normal step rate case. So I think I would be—I think we're comfortable with the guidance we've given. And hopefully, that gives you a little bit of a sense of how we think about it.

The next question comes from the line of Travis Miller from Morningstar.

Kind of going back to again, this whole PFAS discussion and the investment needs. I think, Chris, if I heard you correctly, huge and expensive was the quote? Does that refer to the $450 million in the 5% O&M? Or is there more potential CapEx and/or O&M?

Yes. Yes, good question. So here's how we think about it. As we estimate today, we're saying at least $450 million. But the timing, right, if—for example, we heard this week when we were in North Carolina that we must comply with the 3-year timeline in North Carolina. And so we're going to be all on push. In Pennsylvania, we're hoping to get some definition around that from the regulators here. But if we have to move faster, if we have to comply with 3, which we originally were hoping for a 5-year, then it could be added cost. And the added costs come from potentially our inability to get loans—low-interest loans and grants in that process because often, they require us to apply and get the grant before we build, and we can't wait. And so that's the conversation that we're having with the regulators now is help us, help our customers. Our customers didn't put this contaminant in the water, nor did we, but we are all faced with fixing it and paying for it. And so we're trying to mitigate those costs as best we can. That's why that number is moving around a little bit and could go north more if we can't attain some of these grants.

Okay. That partially answers my question, and my follow-up is how much discussion are you having with regulators regarding the recovery of some of those costs without having to file full base rate cases? Is there any potential for different treatment? Have you discussed that at all, or is it still under consideration?

That is a discussion we are having in several locations. We had a long discussion even internally here about how to make some of those things happen last night. And I think it's important for customers to recognize that, that portion of their rates is associated with compliance with a cleanup and not simply an investment in pipe or improvement that we would normally make in the course of running a utility. I really want customers to understand that they're paying for some of these costs. Now I'll remind you that we are getting some recovery from lawsuits. We hope to get somewhere between $90 million and $110 million from the polluters, but that's not going to cover, clearly, the costs we're talking about here.

Okay. That's all helpful. And then one other on the gas side. Any thoughts in terms of getting a weather normalization clause, either in this rate case or a separate application? I know that at least one other gas utility in the state has a pretty robust weather normalization—weather normalization costs. So I wonder if that's part of the discussions in the current rate case? Or is that something that would come along in a separate filing?

Let me just remind you, this is our first rate case too since we've owned the company. So that's why we don't have weather norm. Go ahead, Dan.

Great point, Chris. So yes, Travis, we have filed this rate case, including a request for weather normalization. And to your point, a few of our peer companies here in Pennsylvania have it, and achieving a similar program will be very beneficial to our company.

Okay. Handicap wise, do you think given that the other utilities have it, that there's a good chance? Or is there something unique about what you're discussing with regulators?

I would say the fact that other utilities in the state have it bodes well for a positive decision here.

The next question comes from the line of Davis Sunderland from Baird.

Two questions for me. I wanted to ask about the decision not to give long-term EPS guidance. And I know you guys mentioned the rate case for being the reason for this, but should we think of any pending acquisitions as playing a role in this? And then I have one follow-up.

Yes. No, not at all. We're not worried about the acquisitions. It's really the fact that we have 2 major rate cases filed in Pennsylvania, which account for, as you all know, a large portion of our net income. And so I actually had conversations with regulators who said it was to be a sign of respect to be able to do that. And so I gladly comply with that. So it was really just not front-running the commission in terms of how they think about returns and processing a rate case, especially given its import to the overall picture here in our company.

That makes sense. And then another one on just the acquisition pipeline. Broadly speaking, I guess, at a high level, have you seen in light of the higher rate environment an increase in the number of systems or I guess, maybe any thoughts on where valuations are? Any commentary on where you're at with the 400,000 customers too right now would be helpful?

Yes, I would say there are many active discussions taking place. Clearly, the news about the Chairman's motion and the latest information that just came out are being processed by people. Both pieces of news are quite significant. I'm not exactly sure how the market will respond. However, if the Chairman's motion succeeds and we find a clear path to closing without dealing with court issues and the prolonged challenges, I believe that would send a very positive message to the market. First, it would indicate that they can receive a premium, all while being at a controlled premium. Second, there would be a definite path to closure, which, in some cases today, is not as straightforward. Regarding our general conversations with others in the pipeline, I would say they are progressing steadily. Municipal acquisitions can be inconsistent; we've discussed that often. Sometimes it feels like it's two steps forward and one step back. Nevertheless, I remain confident that the pipeline remains strong.

The next question comes from Jonathan Reeder from Wells Fargo.

I just wanted to quickly clarify that the '24 guidance range doesn't include the one-time gain from the nonregulated sales that recently closed. Is that correct?

Yes. That's correct, Jonathan. So that EPS guidance presumes normalized weather and excludes that gain on sale.

I appreciate that you provided the five-year guidance regarding CapEx and rate base. However, I'm a bit puzzled as to why you didn't also include the long-term EPS CAGR, especially since there may be another round of PA rate cases during the 2024 to 2028 period after the pending gas and soon-to-be-filed matters are resolved. So, the first part of my question is whether you plan to provide a three-year EPS CAGR when you release it next year. The second part is, if we assume no changes to the current Gas and Water return parameters, such as allowed ROEs and equity ratios, is there any reason why the EPS CAGR wouldn't align with the previous 5% to 7% range, given that rate base is expected to grow over 8%, even considering the anticipated reduction in earned ROE?

Yes. So a lot of questions into one question. So in terms of the guidance range and why with regulators. I kind of covered that before, Jonathan, but I'll just say again. I recognize there's a stream of cases coming through Pennsylvania. And so, the way we think about it is take one case at a time. We just happen to have a really heavy overlap here. The Peoples case won't conclude until really the fourth quarter of 2024. The Aqua case won't conclude until first quarter, probably of 2025. It's just right on top of each other. I think we have to look at the cadence and then how we would provide that respect to our regulators and guidance to our investors. And evaluate it as we go. And hopefully, we can stay with largely the guides we've always provided. I would anticipate as we return at this time next year to regular guidance. I would expect a 3-year cadence, not—we could probably continue to do 5 years on CapEx, but a 3-year guides. I just think there's so many things happening in the industry. That's a much clearer view of what's coming.

And I think, too, Jonathan, if you look at what we provided in terms of the Peoples Natural Gas rate case and rate base and equity layer and so forth. We've tried to provide some data there that would help you model 2025, a fully projected future test year in terms of an outcome. So if you need any more help on that, we obviously take your call any time, and we can have conversations. But we're just not going to provide a guidance range at this moment.

Yes. No, I mean, just with the step-up in CapEx, even the rate base growth, the strength there—I just now some people kind of wondering like is it sending a mixed message, but if it's just purely out of deference to the regulators and the plan was just to keep the EPS CAGR at 3 years versus 5 years along with the other stuff. Then I guess that makes a little more sense. So in terms of kind of, I guess, modeling the $7.2 billion, like first off, that's just pure CapEx, that doesn't include anything for pending M&A or future placeholder, right, consistent with how you've done it in the past?

Yes. It's consistent with the past. So it includes— it doesn't include acquisition prices—purchase prices paid. It does include CapEx subsequent to acquisitions closing for those acquisitions where we have a signed purchase and sale agreement.

Okay. In terms of expectations, should we anticipate gradual annual increases, or will there be a more significant increase in '25 and '26 due to the PFAS situation? I suppose that's still somewhat uncertain.

Yes, a little bit to be determined whether PFAS is a 5-year or 3-year program and by state. Otherwise, I guess I would say that if you take $7.2 billion and you divide it by 5, you're kind of in this $1.3 billion, $1.4 billion range, and it kind of bounces around in that range over those years. It's not necessarily a directionality to it.

Okay, can you kind of just talk about the drivers of the CapEx increase? What caused you to kind of step it up? Because I think you'd kind of been relatively consistent the past few years in your budget. This is a lot bigger increase. And then along with that, what sort of impact the higher CapEx will have on the average annual customer bill increases that you foresee?

Yes. I'm happy to start, and then Chris can chime in. But as we look forward, and I think all utilities and really all companies that do construction work have experienced this, we do see higher construction costs in the future than we've had in the past. So that gets incorporated when we develop our 5-year plan. And then, of course, we've got a bit more clarity here in this 5-year plan regarding PFAS and lead than we had previously as well. And then...go ahead, Chris.

Yes, it's really a step up. I mean we were in '22, in '23, and now we're coming up to, call it, an average of $1.4 billion. So it's not a massive increase. But given the cost we're seeing—labor costs as well, we're seeing increase. And then more clarity on PFAS and lead, it just is migrating north.

Okay. And then last for me, on the PFAS front. Can you provide any update on federal or state efforts to protect the water utilities from any potential liabilities related to distributing water, that might have PFAS in it prior to the EPA actually establishing a rule? I think there's some class action lawsuits perhaps in Connecticut around this issue that have been filed?

Yes. Many individuals are exploring ways at the state level to shield water utilities from liability through legislation. In Connecticut, there are two cases involving a public company, one concerning product liability lawsuits, which we are monitoring closely, along with the rest of the industry. As of now, I am not aware of any protections that have successfully been enacted. In addition to seeking protection, we are also focusing on waste management and trying to understand how we will be treated regarding waste in the future. There is still work to be done. We are listening to industry lobbyists who are actively advocating for protection in Washington. I want to acknowledge Senator Shelley Capito for her effective efforts in this area and for leading initiatives that address our challenges. We are conversing with elected officials, emphasizing that we did not introduce the water contaminants and have already taken steps to implement mitigation. We believe it is essential to protect our customers and our companies, so I consider this area a priority for action. Thanks for sticking with us, folks. I know we went a little long today, but good questions and a lot of material to cover on the year, so many things happening in the industry. Obviously, Dan, myself, Brian, and the team are always available for your follow-ups. Thanks for joining us today.

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