Essential Utilities, Inc. Q1 FY2024 Earnings Call

Hello and welcome to the Essential Utilities Q1 2024 Earnings Call. My name is George and I will be your coordinator for today's event. Please note that this conference is being recorded. I would now like to turn it over to your host today, Mr. Brian Dingerdissen, to begin the conference. Please proceed.

Thanks, George. Good morning, everyone, and thank you for joining us for our First Quarter 2024 Earnings Call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website and the slides that we will be referencing in the webcast of this event can also be found there. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, 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. Reconciliation of any non-GAAP to GAAP financial measures is posted on the website. We will begin the call with Chris, our Chairman and CEO, who will provide an update on the company. Mike Huwar, the President of our Gas business, will then provide an update on the Gas business; and then Dan Schuller, our CFO, will provide an overview of the financial results before Chris closes the call and opens the call up for questions. With that, I will turn it over to Chris Franklin.

Thanks, Brian, and good morning, everyone. I appreciate you joining us. I'll start with some highlights from the quarter so far. First, as Dan will elaborate on our financials, we reported GAAP earnings of $0.97 per share, which includes a significant gain from the sale of energy projects that closed in January. The beginning of the year has been unusually warm, highlighting the need for weather normalization at our Gas utility. Operationally, this was another very strong quarter for both Gas and Water, and we continue to achieve industry-leading operational metrics in both areas. You will hear more about the Gas division from Mike Huwar shortly. Concerning our acquisition program, we have seen real progress on the C-motion, introduced by Chairman D. Frank. We understand that over 30 people have contributed to the comment period for the C-motion, and we anticipate the PUC will vote on it soon. We will keep an eye on this progress and hope for a swift resolution in Pennsylvania. As you might have noticed, the EPA published the first-ever limits on PFAS last month. These were generally in line with our expectations, and I'll go into more detail shortly about our CapEx spending related to PFAS. Speaking of CapEx, our significant infrastructure investment program continues to enhance our pipes and plants, bolstering our ability to provide reliable water and natural gas to our customers. Through March 31, we have invested approximately $253 million. As a reminder, we expect to spend between $1.3 billion and $1.4 billion this year, which will be a record capital expenditure for us. I am extremely proud of our company's leadership and their accomplishments in improving customer reliability. In our ongoing focus on operational excellence in 2024, you will hear from Mike Huwar, our President of the Natural Gas division, and later in the year, from Colleen Arnold, who oversees our Water business. We have strong initiatives underway in our Natural Gas business, which I believe will be insightful. Lastly, it has been a busy week for the company. On Wednesday, we held our Annual Meeting of shareholders, with over 90% support on all agenda items. I'm pleased to report that Tammy Linde and Chris Bruner have been elected to the Board. If you look at the next slide, I believe you'll agree they will be excellent additions to the Essential Board. Over the past decade, we've prioritized corporate governance and, as a result, have developed best-in-class governance guidelines. I believe we are leaders in this domain. For example, our corporate governance includes tenure limitations and retirement ages. Ellen Ruff, our longest-serving Board member and former Duke Executive, along with Lee Stewart, our long-time Audit Committee Chair, reached retirement age over the past year and officially retired from the Board this week. Through a formal Board succession search process, we identified Tammy and Chris, who I believe will smoothly fit into our already strong board. Tammy, as many of you may know, is a long-time industry Executive and General Counsel at PSEG in New Jersey, bringing valuable utility, legal, and regulatory insight to our Board. Chris is a retiring audit partner at EY, who previously headed the Philadelphia office and brings substantial knowledge and experience from his work with audit committees and Board discussions. Chris has passed the independent criteria of the New York Stock Exchange and the SEC and has been declared independent by our Board. We welcome Tammy and Chris to the Board and look forward to their contributions. Additionally, I want to mention that we disclosed in an 8-K this morning that the Board has offered me a new three-year contract, which I have accepted. This contract will commence on July 1 of this year and extend through mid-2027, marking my fourth three-year contract since becoming CEO. Moving on to PFAS, I want to spend a little more time on this topic following the final EPA rule published last month. For over five years, Essential has been an industry leader in establishing company-wide standards for PFAS and publicly disclosing all our sampling results where we detect PFAS. We have also been developing innovative solutions to tackle the PFAS issue, positioning us to comply with the recently established EPA limits. Unlike many other utilities, we have tested all our water sources, identified ones needing treatment, and have been implementing mitigation solutions for years. To date, Aqua has installed nine treatment systems and mitigated ten sites by optimizing supply use and taking wells offline. For 2024, we expect to have more than ten systems operational by year-end. By utilizing our modular design suited for small systems, we foresee ramping up our capability to mitigate potentially 100 systems in a single year. Last month, we held the groundbreaking for a site in New Jersey. The final rule aligned with our expectations, with no surprises. One major change noted was that the compliance period was set to five years instead of the previously anticipated three years. We consider this a prudent approach that may alleviate some supply chain pressures for utilities rushing to implement mitigation solutions. Recently, we appointed one of our internal experts to a newly created position focused on rolling out treatment technology. One of his key responsibilities is to standardize our approach and reduce design and construction costs. He leads this initiative from headquarters to ensure our standard is adopted across all subsidiaries, regardless of location and for all impacted operations. We are already seeing benefits from this structure. We continue to work on mitigating PFAS-related costs for our customers by pursuing lawsuits against manufacturers and applying for state and federal loans and grants. We remain focused on keeping costs down. While our costs may fluctuate as we progress, we currently estimate spending at least $450 million to complete PFAS mitigation. In closing, I want to emphasize that we have been pioneers in PFAS commitment for five years, and we plan to maintain our leadership in this area. We also see opportunities to assist other utilities with their PFAS mitigation strategies, which could contribute to our corporate development efforts. Now, it's my pleasure to introduce Mike Huwar, the President of our Natural Gas division. Mike has over 38 years of industry experience and joined us from NiSource in 2020 when we completed the transaction with Peoples. He has been a tremendous asset to the team. I've asked Mike to share some details about our Natural Gas utility that he leads. By the way, we provide service to 750,000 customers in Pennsylvania and Kentucky. Mike, the floor is yours.

Sure. Thanks, Chris, and I'm happy to be here today and appreciate the opportunity to highlight the significant and important work that the team of Peoples and Delta's Gas is doing. So moving to Slide 9. As noted on the slide, Peoples is the largest LDC in PA with over 703,000 customers and $3.5 billion of rate base as of the end of 2023. Additionally, our Gas segment includes Delta Gas, now serving over 40,000 customers in Kentucky. When you think of these two jurisdictions, it's important to remember that both Pennsylvania and Kentucky have supportive regulatory environments. In Pennsylvania, People's service territory sits directly on top of the Marcellus and Utica shale production zones that continue to provide customers with a lower-cost commodity compared to the national average, which helps keep bills affordable. Since the acquisition by Essential, the focus of our Gas segment has been the increased safety and reliability of our 15,000-mile distribution system. The best example of that focus has been the reduction of year-end outstanding leakage on our annual DOT Report, having reduced outstanding leaks by 83% over the past five years. It should also be noted that Peoples has maintained its strong focus on customer service, continuing to lead its peer group on the annual PA PUC customer satisfaction survey. Moving to Slide 10, you will recall that we filed a Pennsylvania gas rate case just before the new year; it is the first case under Essential ownership after staying out since 2019. This case includes a doubling of the rate base from the last fully projected future test year as compared to this case from $2.1 billion to $4.2 billion, primarily for replacement of aging bare steel and cast iron mains, work that both increases safety and reliability and reduces greenhouse gas emissions. In this case, Peoples has included a weather normalization mechanism like many of our peers currently have available to them. The case is proceeding as planned, evidentiary hearings are scheduled for May 9. As you would know, this is the typical time during the rate case process when conversations are happening between stakeholders. Finally, we expect rates to go into effect before the winter heating season. On Slide 11, beyond our operational focus and customer satisfaction performance, the Peoples and Essential teams continue to execute on aggressive pipeline modernization programs. Under the currently active long-term infrastructure improvement plan in PA, Peoples replaced over 510 miles of pipeline or 60% of the current LTIP target while enhancing the safety and reliability of our distribution system. This effort leads our way to the target of reducing CO2 emissions by 60% by 2035. At the conclusion of our current LTIP, Peoples will assess our progress and continue this critical infrastructure improvement work in a series of 5-year plans. It should be noted that the runway of needed safety and reliability enhancements continues to grow as the industry focuses on rebuilding infrastructure and reducing greenhouse gas emissions. Beyond pipeline replacement and modernization, Peoples has been active in implementing technology improvements that have short-term and long-term benefits to system operation. Our ability to reduce the potential of overpressure events and the GPS functionality of our tracking and traceability program highlight this opportunity. Lastly, Peoples will pilot a game-changing meter technology in 2024 that allows utilities to interact with customers and have greater control over the distribution system. At Peoples and Essential, we are excited about the progress we have made and look forward to our future and continued focus on safety, reliability, affordability and our customers. Chris, thank you, and back to you.

Mike, thanks for your leadership. Now let's view the financial results. Dan?

Thanks, Chris, and good morning, everyone. On this slide, let's discuss high level, and then we'll get into the details of the waterfall. The quarterly performance was strong, especially when factoring in the gain in the energy project sale that was completed in January. Operating revenues were down due to the decline in natural gas commodity prices year-over-year, which positively impacted customer bills. Weather was warmer than normal, largely comparable to last year. We continued our focus on managing O&M expenses with a slight decline year-over-year. I'll cover this in more detail as we talk through the waterfalls. These items, combined with the after-tax gain of $66 million from the sale of three district energy projects, resulted in a net income growth of 38.8% and earnings per share grew up to 34.7% compared to last year. Next, let's walk through the first quarter waterfalls. On Slide 14, we have the revenue waterfall for the first quarter. Moving left to right, we have regulatory recoveries or rate increases and surcharges of nearly $14 million. Acquisitions and organic growth in the Water business contributed $3 million, and that slow increase is due to increased volumes of both Water and Gas. This was then offset by a decline in other and a significant reduction in purchase gas costs. The decline in other reflects a positive one-time impact of contract to deposit fees in Q1 2023 and lower PNG Universal Service rider revenue this year due to lower customer bills. The lower purchased gas reflects the significantly lower gas commodity prices that our customers enjoyed relative to 2023. I'll note that one thing you don't see here is a large change in the volume of gas due to weather. This is because the same period in 2023 also had materially warmer than normal weather. For the first quarter of 2024, it was about 15% warmer than normal, resulting in weather-related natural gas sales net of purchase gas costs, think about $20 million below projections or an earnings impact of $0.05 per share. Next, let's take a look at the O&M on Slide 15. Here, we have the O&M waterfall. We saw increases in production costs of $2.4 million and employee-related costs of $2 million. Employee-related costs are largely in line with inflation. However, we saw some larger increases in production expenses due to purchased water, purchased wastewater and power prices. Next, we had an increase due to customer growth in the Water segment. These increases were offset by lower costs from the Gas segment Universal Services rider, which decreased due to the lower gas commodity prices this year as well as lower other expenses. Other includes a number of items, increases in bad debt and materials and supplies, decreases in year-over-year Gas segment expenses and the impact of the sales of both West Virginia utility assets and the energy projects. This resulted in an O&M that was down slightly from last year. Overall, a positive story here. For the year, we expect O&M to be largely in line with our historic norms. Next, let's look at the EPS waterfall on Slide 16. Starting on the left side of the EPS waterfall was $0.72 from last year. The next thing we see is the $0.20 pickup in the Other category. This increase in EPS includes the $66 million after-tax gain on the sale from the energy projects, which closed in January. This was offset by increases in depreciation, interest, and taxes other than income. Next, we have the impact of the rates and surcharges, which contributed almost $0.04. Then we have slight increases due to Water growth and additional volumes for both Water and Gas. Finally, an insignificant impact of increased expenses. This lands then at $0.97 of EPS for the quarter. When we provided that $0.97 GAAP earnings per share for the quarter, and we subtracted off the gain on sale of $0.24, and then we add back the $0.05 for weather that I mentioned earlier, we get to a number that exceeds our Q1 consensus. Next, let's turn to Slide 16 to provide an update on regulatory activity. This slide depicts our regulatory activity so far this year. We continue to manage our regulatory activity to maintain safe and reliable service, earn a return on capital we invest and minimize regulatory lag while considering affordability for our customers. Thus far, we received authorization to increase Water segment revenues by $13.7 million annually in Illinois, North Carolina, Ohio and Pennsylvania, and the Kentucky and Pennsylvania gas businesses have surcharges that will increase revenues by $1 million annually. We have Water segment rate cases or surcharges pending in Illinois, New Jersey, Texas and Virginia that amount to $43.2 million. The detailed breakdown of these can be found in the Appendix. And of course, Mike just covered the Peoples rate case, which is underway currently. Finally, we expect to file a Pennsylvania water rate case during the third full week of May, which is nearly three years since the last trials. We'll provide more details on that case on our Q2 call in August. With that, I'll hand the mic back to Chris. Chris?

Alright Dan, thanks. So next, let's briefly touch on the municipal acquisition program. As of this call, we have six signed asset purchase agreements in two states where we already have existing water and wastewater operations. These acquisitions will add over 215,000 customer equivalents and about $385 million in purchase price. We continue to see a strong and healthy pipeline of opportunities for additional growth, and we're currently engaged in active discussions with many municipalities. In fact, the customer count is over 400,000, and that would be on the water and wastewater side. As we mentioned, if Chairman De Frank's proposal and any of the associated bills in the legislature are successful, there should be a much clearer path to closing municipal acquisitions in Pennsylvania in the future. I think that will free some of the municipals that are currently thinking about it but may be standing still for the moment. We continue to believe increasing compliance requirements, such as PFAS, should lead to continued consolidation in what, as you all know, is a very fragmented industry with over 50,000 water systems and 14,000 wastewater systems throughout the country. Alright, so in closing, let's update the guidance we provided in February so you have a clear line of sight to the opportunities in front of us. In February, we provided guidance for 2024 of net income per diluted common share of $1.96 to $2. At that time, we clearly indicated that guidance was based on normal weather, as most utilities do. As mentioned, the weather in Q1 has been much warmer than normal. For clarification, if we assume normal weather from this point forward, we would finish the year on a GAAP basis above our guidance range due to the gain on sale. Dan took you through some of the calculations a moment ago. Now through 2028, we plan to invest about $7.2 billion in regulated infrastructure in our existing utilities, which is a really strong capital program. In 2024, we expect to invest between $1.3 billion to $1.4 billion, and we're on track to do this. As we've said many times, this is the primary generator of more reliability and service for our customers, as well as the primary generator of earnings per share for our shareholders. Based on this investment, we expect rate base to grow at a compounded annual growth rate of approximately 8% for Water and about 10% for Natural Gas through 2028. The combined utility rate base will grow at a compound annual growth rate of over 8%. We continue to expect that together, organic customer growth and growth from acquisitions for water and wastewater will climb at a rate of 2% to 3% per year on average. We remind investors always that growth from acquisitions is lumpy and should be viewed over a three-year average. We expect continued stability in our natural gas customer base. As we've said before, we expect to raise about $250 million in equity this year using an ATM equity program. We remain committed to a 60% reduction in our Scope 1 and Scope 2 greenhouse gas emissions by 2035 from our 2019 baseline and, as you know, we've made significant progress already on this, estimating it to be over 25% as of year-end last year. I'll note that the team feels that we are well prepared for the SEC climate rule, which is currently stayed due to various legal challenges. With that, I'm going to conclude my formal remarks for today, and we'd like to open it up for questions. I'll send it back to the operator.

Our first question today is coming from Durgesh Chopra from Evercore ISI.

Just I wanted to kick start with the gas rate case in Pennsylvania. Obviously, you guys have probably seen all the media reports around the water case that is ongoing. Just any read-throughs from there? Or any color that you can share on how that case is progressing?

Yes, I would just say it's quite different in many ways. We feel very positive about the compelling case we presented. As Mike noted in his comments, we are currently in a phase where we can discuss a settlement, and we will see how those discussions unfold, but we are ready to continue with this case. So far, we have enjoyed very positive relationships with the advocates and the commission.

Excellent. Thanks for that update, Chris. And then maybe just switching gears. Other states, and I'm sure you've seen this too, there have been some lawsuits filed by residents against the utility, the water utility related to PFOS, PFAS. Can you comment if you've seen anything like that in your service territories and implications, if any, for your business?

So, fortunately, we have not. I'd like to think that that's because we've been so out front on this issue for so many years. Durgesh, you'll recall, five years ago, we started down this path before most people knew what the PFAS discussion was, and we started mitigation well before many others. I’d like to think it's because of our proactive work. Our disclosures have been really strong. Anywhere we've found PFAS, we have reported it publicly. And of course, we created that internal standard at 13 parts per trillion several years ago, well before the EPA issued any standard. I'd like to think that all of that proactive work is part of the reason why we haven't faced lawsuits. But no, at this point, we've not seen anything.

I can certainly attest to your leadership there. You're kind of the first voice in the industry talking about those issues. Okay, thank you.

Our next question will be coming from Davis Sunderland calling-in from Baird.

Wanted to ask about the pending municipal transactions and the PFAS guidance for the $450 million in capital. Does this include the pending transactions? And maybe, I guess, just to add on to that, how have PFAS discussions or discussions surrounding costs associated with upgrading systems made their way into potential actions for new systems so far?

Yes, it's a good question. What we're largely focused on, as you mentioned at the beginning of your question is municipal transactions. Generally, I'm not talking about Los Angeles and Philadelphia or New York, but generally, the municipal systems that we're focused on are smaller. More of a prevailing theme would be that they haven't tested yet. Not all of them know whether or not they have PFAS. I think we're going to find as this MCL, the maximum contaminant level, was set recently, that a lot of testing will be done and I expect that discussion will ramp up in this coming year and over the next five years as everyone is forced to comply with the four parts per trillion. I wouldn’t say that it was a major theme at this point in our current discussions with municipal transactions we have today. I think your second question, Davis, was around whether the $450 million included capital for acquisitions? We typically do not include until we close those in our calculation. Dan?

Yes, that's correct. If you look at the acquisitions we have pending, they are more biased towards wastewater acquisitions rather than water. I don't believe at this point that there are PFAS concerns in the water acquisition or two that are on that list. In any event, we think that the $450 million would not be materially impacted if we have a few more studies.

Got it. That makes sense. That's helpful. And maybe one other question. This might be a bit hypothetical. So I guess just asking as to weather normalization and what you've applied for in the pending gas case. Do you have any estimates or any commentary or thoughts on what a normal season would have been for this past quarter or what the impact would have been had you been granted this weather normalization clause that you guys have applied for?

I guess, the way I'd characterize that is if you think of the $20 million net revenue shortfall that I mentioned, that would fall into a $5 million impact if we had weather normalization, depending on where that weather normalization comes out. It would materially reduce the volatility that we see in years like last year or this year in terms of downside, but also, in a very cold year, it would help keep customer bills at a more normalized level as well.

Our next question will be coming from Travis Miller calling from Morningstar.

A couple of follow-ups to some of the things you mentioned in the prepared remarks. One is the supply chain; I thought that was an interesting comment there and thought process. In terms of raw materials or equipment, do you see any constraints right now or do you anticipate any could arise, keeping in mind the short time period here?

Yes, we think about tanks, right, each of them has to be fabricated and purchased. Most of our systems where we're doing mitigation are small systems. We do have large ones, but the vast majority are small. So when you think about two different tanks needing to be fabricated, we must consider all of the systems that we need to implement, which are hundreds. The carbon material is also something that may face ongoing supply challenges, as that would need to be replaced or regenerated. We think about those materials. There could be some constraints on the ability to deliver. That’s why it’s crucial to spread that over a five-year period; it will be much more manageable.

Okay, that makes sense. And then just a real quick follow-up. The tanks that you mentioned, can you use the tanks you're using already? Or are those unique tanks that you would have to replace?

Yes. These would be brand new added to the site of each of these sources. The two tanks could be situated in a building or outside of a building, but they would be brand new to the process at each site.

Okay, that makes sense. And then one other question pertains to data centers. Any impact there, either that you're seeing with large manufacturers or for the gas business, large factories? Anything additional on that front?

Yes, Mike is here, and there are no significant impacts that I’m aware of. But Mike, anything you're seeing?

I think it's a great question. Locally within our service territory, there are project developers looking for opportunities that include sites with connection to the grid. Customers may want to take power offline, and the value of being located with ample and low-cost natural gas is driving that opportunity.

And anything on the water side? We fear that the data centers are water-intensive. Anything relevant there?

Yes, it’s a good question. Ohio has successfully attracted some of these facilities, not only data centers, but also chip manufacturing and general manufacturing. They’ve done a marvelous job there, and we would like to participate in that. So we are engaging in Ohio. Also, there’s a lot happening in Texas. That isn't necessarily the plant itself, but the housing that comes along with a new manufacturing plant because of the employee base that's added. So we’re seeing that kind of growth, particularly in Texas.

We'll now be moving to Jonathan Reeder calling from Wells Fargo.

I was hoping to just get a little more clarity on the guidance. Excluding the $0.24 gain on sale, do you expect to be able to deliver the full year '24 EPS within that $1.96 to $2 range? In other words, can you offset the $0.05 weather headwind in Q1?

Jon, I think we'd say that it's a difficult challenge at this point given the $0.05 weather impact in the first quarter.

I think the math Dan took you through is fairly clear. What we can't predict—as we saw in 2022—is a significant November or December in natural gas, which could help. We try to guide based on normal weather. That’s why when we add in the weather normalization, it makes it an easier prediction. We wouldn’t have anticipated, especially two years in a row, having the weather impact we saw in Q1. So again, I think Dan's math is based on what we saw in the first quarter.

For some reason, I was thinking the impact on Q1 '23 was even larger, closer to $0.08. So when I saw—or when I heard you guys mention $0.05, it sounds like, okay, maybe that was something a little more manageable? Or like you said, maybe you get some favorable weather, whether it’s on the water business over the summer or the gas business in Q4 that helps balance things out.

Yes. Jonathan, I might add that last year had a significant impact in Q1. However, we also had positives we were already experiencing or anticipating. For instance, we had the New Jersey contract fee reversal that we talked about in Q1 last year. We had a Texas water passthrough. And we had some things cleaned up from our SAP implementation in Q1 2023, which were beneficial. At this point in the call, we also had a relatively chilly April. This year we’re in a different situation. Overall, we're a bit more susceptible to the weather impact. We will do everything we can to claw back expenses and focus on our operating model.

Got you. I appreciate that additional clarity there. Maybe trying to ask Durgesh's one question a little differently. Can you discuss the prospects of reaching a settlement in the Peoples Gas case, as well as just more broadly the challenges or inability on the water side for you and now it appears Pennsylvania American to reach settlements in the cases? Historically, settlements seemed to be the norm in Pennsylvania.

Listen, I can’t give you any details for obvious reasons. But I think it's often about the healthy exchange between the parties. We aren’t going to agree on everything, which is why I referred to the settlement. I would just say that it’s a constructive discussion. I can’t predict yet whether we’ll settle or litigate. It’s a constructive discussion.

Got you. Okay. So you don’t think there's anything more broadly in the Pennsylvania regulatory construct or environment that is leaning parties not to settle anymore?

I do not.

Okay, and then I know you said you expect the commission will vote shortly on the final revisions to the fair market value framework. Do you have any insight regarding the significance of changes from Chair De Frank's original proposal? And are you still of the opinion that any changes to the proposal will come from the commission and not legislatively?

Let me answer that in two parts. There were over 30 commenters. A lot of comments regarding Chairman C-motion. They are carefully considering all of those comments and we'll think about how they might impact; but I wouldn’t say there’s anything new in those comments from what we've heard in the C-motion. So I would be hopeful that the Chairman's would be fairly close to his initial view. However, there are five votes and five opinions to consider. We’ll have to see how that shapes up as they progress. Regarding your second question about the legislation, no, I think there’s a series of placements moving through the House of Representatives on the committee level, and those are on the floor. There’s ongoing discussions with House leadership about what might be accomplished. The bills released from committee are not things that we would want to see passed—we understand they probably wouldn’t be successful in the Senate. However, if there was some compromised language that mirrored Chair De Frank's motion in the commission, we think there are real options there. That discussion in the House is ongoing, and there are many stakeholders involved. We are participating, but I’d hope that it would come out similar to the motion in the commission, as that would provide a clear path for how this will work moving forward.

Okay. No, that's really helpful to know that. If something emerges from the legislature, it's more about tweaking fair market value to promote consolidation rather than a complete repeal.

That's correct. I'm told that in the Senate, there is no appetite for repeal. They believe that municipal leadership, as sector officials, have the right to decide whether or not to transact. That has been made clear by the Senate. So if there’s a compromise, we can all work together. If not, I don’t expect much action on the legislative side.

Great. That's excellent color. Good luck with the fair market value and the rate case. You mentioned on the water side you're going to file, I think, next week for the new water rate case in PA, is that right?

Later in the month of May, the third full week in May.

Third full week. Got you. I missed that.

We'll now move to Ryan Connors calling from Northcoast Research.

Yes, I actually had a couple of big picture questions. One came to mind as you were discussing the PFAS potential bottlenecks in equipment purchasing. I've been on some of the earnings calls for these vendors lately, and they are talking about not giving back any of the pricing increases they've taken over the last few years. That’s happening at the same time your industry is seeing greater concern about affordability. Are water utilities going to be squeezed in between the manufacturers and the rate payers here, or what is in the regulatory framework to account for potential price gouging? Curious on your thoughts.

Yes, to some extent you're correct. Although I will give Dan and the procurement team a lot of credit; they've been out there negotiating some of these things. Dan, would you want to elaborate?

Absolutely. We think about different scales here. We’re planning for small systems in areas like North Carolina and Western Pennsylvania, where we’ll put in three-foot diameter canisters. We will work to buy those in mass across the need. We have many of them to do, with two tanks per installation, resulting in hundreds of vessels we will look to purchase. For larger vessels, there are multiple manufacturers. We’ll seek multiple bids and go with the best price. Our goal is always to install appropriate equipment at an appropriate price for the benefit of our customers. Additionally, for federally funded projects, we must use American-made products, but we don’t have to use that everywhere. Municipal and investor-owned utilities will need to broaden their search to find sufficient supply. We need to keep prices down as much as possible.

Yes, we'll capitalize on our economies of scale, being a big player in these purchases. I do think the concern will be more about on-going purchases for resin or carbon, but we're hopeful we can negotiate fair pricing.

Okay, I appreciate all the detail. My other question was about the reform process for Act 12. You mentioned that potential sellers are standing still. I’m surprised it isn't the opposite; if I'm a city expecting a cap on valuations, shouldn't I be rushing to get my APA signed before that happens? Why isn't that the case?

I think the reality is that even if there's grandfathering in place, these situations often end up in court. Even if a deal is grandfathered, if the commission approves it and the consumer advocate challenges it, we can end up tied up in legal disputes. We want to avoid that. Investors also want to see deals that are actionable and can close. That’s why the C-motion is important; we want clarity on what public benefit means and what’s not challengeable in court. Municipalities appear to be exercising caution, taking a wait-and-see approach.

Yes, that makes sense when you put it that way. Lastly, on PFAS, you talked about treatment or testing. You're the only state-certified utility lab that does PFAS in Pennsylvania now, right? Is there a meaningful commercial opportunity if many of these systems need testing?

Yes, we are still the only certified utility lab performing PFAS testing in Pennsylvania. There is opportunity there. However, we need to ensure we are in full compliance within the five-year period. Thus, we are focused on compliance at Essential Utilities before pursuing additional commercial opportunities. That said, you’re considering the right angle.

Do you have anything to report on the DELCORA purchase agreement?

Gregg, we couldn't go on one call without a DELCORA question. I'm kidding, of course, but yes. I guess one bit of good news, I can share. We were due to be in court on May 8, and this was in Commonwealth, not State Court. We were hearing arguments from the county, which was appealing the decision of the lower county court that said the asset purchase agreement is valid and enforceable. That oral argument was canceled, and the judges said they would make their decision based on final briefs. Typically, that’s good news. We won't know until the decision is out. However, the timing actually could be helpful, as we are often told that judges may act more quickly when they’re not digesting oral arguments. We've taken this as a positive sign. In Delaware County, where DELCORA exists, they raised taxes last year, and there's ongoing talk about raising taxes again this year. We’ve taken that as an opportunity to reengage with elected officials in the county, reminding them that there are significant proceeds associated with closing this transaction. Therefore, we might pursue a settlement discussion to reduce the need for a tax increase. Always something occurring with DELCORA, but remember that the key gating factor is the stay on the process by a federal bankruptcy court judge, which is not related to the transaction itself but pertains to the bankruptcy of the City of Chester where some of DELCORA's assets lie. We're still waiting for action on that but continue activity in the background.

Ladies and gentlemen, we don't appear to have any further questions. I'd like to turn the call back over to Mr. Chris Franklin for any additional or closing remarks. Thank you.

Alright. Thanks, folks, for joining us. As always, Brian, Dan, and the team are ready to answer any follow-up questions you might have. Thanks for being with us today, and have a great weekend.

Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may now disconnect. Have a good day, and goodbye.