Essential Utilities, Inc. (WTRG) Q2 2026 Earnings Call Transcript

hello everyone thank you for joining us and welcome to essential's second quarter 2026 earnings call after today's prepared remarks we will host a question and answer session if you would like to ask a question please press star one to raise your hand To withdraw your question, press star 1 again. I will now hand the conference over to Brian Dinger-Disson, Vice President, Investor Relations, and Treasurer. Brian, please go ahead.

Thank you, everyone, and thank you for joining us for our second quarter 2026 earnings call. If you did not receive a copy of the press release, it can be found on our Investor Relations website. website. The slides can also be found on our website along with a webcast of the event. As a reminder, some of the matters discussed today 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 10Q, 10K, and other SEC filings for a description of such risk and uncertainties. References may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted on our website in the Investor Relations section. We will begin with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Then Dan Shuler, our Chief Financial Officer, will provide an overview of the financial results. With that, I will turn it over to Chris Franklin.

Hey, thanks, Brian, and good morning, everyone. Let's begin on slide five, and we'll talk about some corporate updates. First, on the merger, as you've probably seen from our press releases, we've now received three regulatory approvals for the merger from Kentucky, Ohio, and Virginia. In other states, the merger cases have been proceeding as planned, including in Texas, where we've reached a settlement in principle. In New Jersey, public input hearings are scheduled for August. In North Carolina, the process, which does not have a statutory timeline, continues to proceed as planned, and testimony was filed at the end of last week. The merger case in Illinois is now with the ALJ, and that process does have a statutory timeline, and it finishes by November of this year. Finally, in Pennsylvania, negotiations continue with the parties, even though we are in the evidentiary hearings this week. We continue to expect the merger to be finalized during the first quarter of 2027. Now, significant planning work is ongoing as we consider the many factors involved in integrating the two companies. We are intent on hitting the ground running as a world-class organization the day after we close this transaction. All right, now for the quarter, we reported gap earnings per share of $0.37, which includes about a penny of merger-related costs and puts us at non-gap earnings per share of $0.38. sense when we look at 2026 overall we're confident that we'll meet our five to seven percent earnings growth guidance anchored to the non-GAAP 2024 earnings per share of a dollar 97 and dan will go into the details in much more detail in a moment this has been a very busy construction year we continue to invest capital in the improvement of our regulated water and natural gas systems which, of course, results in enhanced service to our customers. Year-to-date, we've invested $662 million, and we're on track to invest a record $1.7 billion in needed infrastructure improvements and upgrades. Turning now to the regulatory environment, let's start in Pennsylvania. As you're aware, on April 29th, he issued a letter to utilities operating within the Commonwealth. The letter instructed companies to prioritize the most cost-effective forms of capital and to explicitly demonstrate the necessity of proposed investments when seeking rate adjustments. Now, following his communication, the Special Counsel for the Governor's Office on Energy affordability called into one of our public input hearings for the pending people's rate case. The special counsel is not an intervener in the people's rate case and acknowledged that our rate case was filed prior to the issuance of the governor's letter. Now, our company has always been a national leader in appropriately replacing aging underground infrastructure, and we are fully committed to sustaining strong levels of capital investment. These investments are critical to ensuring compliance with evolving federal and state regulations, enhancing system reliability, and upgrading safety for both our workforce and the communities we serve. And as always, we carefully balance these critical infrastructure needs with consumer affordability to ensure the delivery of safe, resilient, and reliable service. We continue to engage constructively with the Pennsylvania Public Utility Commission, the governor's office, and the other stakeholders regarding both our current gas rate case and our upcoming Pennsylvania water rate case, which we anticipate filing around the end of the year. As usual, we remain dedicated to absolute transparency in our rate filings and will continue to operate strictly within Pennsylvania's established statutory framework. Reinforcing our long-standing commitment to shareholder value, we're proud to continue our 80-year track record of consecutive quarterly cash dividends. Last week, the Essential Board of Directors approved a 5.25% increase in our quarterly cash dividend. It's consistent with last year's increase, and this dividend is payable on September 1, 2026, to shareholders of record on August 11, 2026. Now, if you turn to slide six, this is a snapshot of the regulatory approvals process. The slide provides dockets and next steps so you can follow the approval process. Now, a quick note on the integration work that is underway with the merger. It's really been gratifying to watch the teams at Essential and American work together to shape the consolidated company. I knew that our similar mission-based employees would work diligently to make certain the combination went well, But I've got to tell you, the collaboration and cooperation among the teams has exceeded my expectations. And I am more confident than ever that this combination will be a top-performing utility and a must-own investment in the market. And with that, Dan, let me turn it to you for a deeper dive into the quarter.

Thank you, Chris, and good morning, everyone. Today, my remarks will focus on our financial performance and the primary drivers of our results. Let's turn to slide 8 to review the year-over-year EPS bridge, beginning with our 2025 Q2 earnings of $0.38 per share. In terms of positive drivers, earnings per share this quarter benefited from a $0.06 increase in regulatory recoveries and surcharges, $0.02 from higher water volumes, and $0.01 from customer growth in the water segment, reflecting both our acquisition strategy and organic expansion. These gains were partially offset by $0.02 in higher operating expenses, a $0.02 impact from lower gas volumes this quarter, and $0.06 from other, which includes $0.03 from increased depreciation and $0.03 from higher interest and lower AFUDC. This brings us to GAAP earnings per share of $0.37 for the quarter. You'll see the details of our O&M expenses in our queue in the MD&A, but let me give you some color here. O&M increased by approximately 5.1 million, or 3.5%. This variance was primarily driven by a $5.9 million increase in employee-related costs, including annual merit increases and higher medical claims, alongside a $2.3 million increase in production costs for water and wastewater operations, and about $800,000 to account for serving newly acquired customers. These increases then were partially offset by a $4.9 million reduction in insurance expenses, largely due to an insurance recovery, a $2.4 million decrease in gas segment bad debt expense, and a $1.5 million decrease in customer assistance surcharge costs, which has an equivalent revenue offset. We also increased our sales and use tax accrual and incurred $1.2 million in merger-related expenses. Excluding these non-recurring merger costs, O&M expenses increased by 2.6%, which aligns with our historical norms. Also, if we adjust our GAAP earnings per share of $0.37 to exclude the non-recurring merger-related costs, our adjusted non-GAAP earnings per share were $0.38 for the quarter. A full reconciliation is available on our website and in the appendix of this presentation. As Chris noted, our long-term outlook remains unchanged. We remain fully committed to our long-term target of 5% to 7% normalized earnings per share growth using our non-GAAP 2024 results of $1.97 per share as our baseline. Turning to slide 9, let me provide an update on our regulatory activity. Thus far in 2026, we have finalized rate cases or surcharges representing $56.6 million in annualized revenue. Approximately 78% of this total is derived from our water and wastewater operations, with the remainder coming from our gas business. Looking ahead, our regulatory pipeline remains on track. Our water and wastewater segment currently has five cases and a surcharge proceeding pending, representing approximately $79.7 million in requested annualized increases. As Chris mentioned, we expect to file the next Aqua Pennsylvania rate case around year Our natural gas subsidiary has a base rate case pending here in Pennsylvania for $163.2 This filing is essential to supporting our long-term infrastructure improvement plan, which enhances system safety and reliability while continuing to drive emissions reductions. As always, we remain disciplined in balancing our strategic priorities. As Chris emphasized, we manage these filings carefully to ensure we continue delivering safe, reliable service and earn a fair return on our invested capital, while remaining highly sensitive to customer affordability. With that, I'll turn the call back over to Chris.

All right, thanks, Dan. Let's move to slide 11, and we'll recap our growth through acquisition strategy. We show here a selection of our business development opportunities. We recently completed our acquisition of Integra Water, LLC, for a purchase price of $4.9 million, and we welcome the 1,100 customers to our Texas customer base. We signed purchase agreements for several small systems in Pennsylvania, Texas, North Carolina, Virginia, and New Jersey, some of which we expect to close in 2026. Now, including these signed purchase agreements, in total, we are adding about 200,000 customers with a purchase price of approximately $282 million. Now, this does include our Delcora transaction, but I'll remind you that progress on our Delcora transaction continues to be stalled by a stay put in place by a federal bankruptcy court judge. That was related to the bankruptcy of the city of Chester. Now, we do not anticipate any negative impact to our pursuit of this transaction related to our merger with American Water. The fully enforceable agreement of sale with Delcora is assumable by American Water. The line of potential water and wastewater municipal acquisitions for the company stands at approximately 400,000 customers, so a nice strong pipeline. and we remain optimistic about the consolidation of water and wastewater systems in the United States and look forward to leveraging the combined resources of essential and American water to accelerate our business development work. Now, I'll wrap up our prepared remarks on slide 12. As we've discussed before, we are reaffirming our 5 to 7 percent multi-year earnings per share guidance through 2027. Upon announcement of the transaction with American Water, we informed investors that we will continue growing EPS by 5% to 7% annual using our adjusted 2024 EPS of $1.97 as the base. Just as a reminder, this outlook includes the acquisitions we expect to close this year, but does not include Delcora. Now, beyond the numbers, our priorities have not changed. We're focused on keeping the balance sheet strong, improving our cash position, and growing the dividend while keeping our payout ratio between 60% and 65%.

As part of our strong focus on customers, we're investing $1.7 billion in regulated infrastructure just this year. with that i'll wrap things up and hand it back to the operator so we can take your question we will now begin the question and answer session please limit yourself to one question and one follow-up if you would like to ask a question please press star one to raise your hand to withdraw your question press star one again we ask that you pick up your handset when asking a question to allow for optimum sound quality and if you are muted locally please remember to unmute your device please stand by while we compile the q a roster your first question comes from the line of Julian DeMoulin-Smith from Jefferies. Julian, your line is open. Please go ahead.

Hi, good morning. This is Andrew on for Julian, and thank you for the time. I guess maybe two questions on my front. Just one, I think you've talked about the timing for your future ACWA case filing. Can you kind of maybe give a bit more details as to kind of how you're planning the case, kind of what are you guys doing differently in light of kind of the focus that we're seeing from the governor's office on ROE as well as, you know, the capital structure front? Thank you.

Sure. Good morning, Andrew. Thanks for the question. So, yeah, as you're aware, in Pennsylvania, we've got a lot of activity going on, right? We've got the merger case, which is the largest case. We've got, you know, in that combination consideration, the American water case, which was just completed. And we have the People's National Gas case going on as well, which is coming toward conclusion there as well. And we made a strategic decision with everything going on that we would be thoughtful and deliver here, and we would delay the filing of our Aqua Pennsylvania case. And in terms of how we think about, Listen, the case is largely a capital case, so there's no complication to the case, and so we follow all the rules. We're a very compliant company, as we always are, and we would expect that we would file that case very similar to how we would in the past, but very respectful to the governor's position. Listen, there's a lot of positions in every rate case, right? There's always interveners of all sorts. So we'll be very respectful to the governor's position. Frankly, we think that the company shareholders and customers deserve of and on the capital in order to determine what fairness actually is. And, you know, we think that weighted Americans case, they anchored that around the disc R.O.E. at, you know, somewhere around a 9-7. You know, it's a pretty good start. Obviously, there's a debate always around capital structure and everything else. So we'll file a case as we normally would have with all due respect to all the parties, and we'll adjudicate it as such.

No, thank you. That's very clear. And maybe as a follow-up, we appreciate that some of the water-specific expenses like PFAS are not actually recoverable under the disk. I guess maybe just more of a housekeeping question. Can you kind of speak to how much of your CAPEX qualifies for the D-6 versus kind of like, you know, what's being recovered under the GRC?

Yeah, let me let Dan answer that combination. What I will say, though, we will continue to press for an expansion of the disk to include some of these items. You know, we believe that, you know, at this point, the DISC mechanism should be expanded so that we get more capital items included, which has the effect of lengthening the period between cases. But in terms of what's included today and percentages, Dan, let me turn to you.

Yeah, Andrew, so today for 2026, it's about 55% of the Pennsylvania capital is DISC eligible. in the past you know in years where we had more pipe work and less plant work that number would have been higher but that's where we are today nope that's very helpful thank you guys again thanks andrew good your next question comes from the line of davis sunderland with fared your line is open good morning gentlemen thank you very much for the update and thank you for taking our questions um chris appreciate all the details on the merger related activities

and it sounds like everything's going very smoothly, especially on the integration front. Maybe just at a high level, I wonder if you could just talk through some of the items that could potentially be called out as having the ability to move the merger close date either earlier or later or anything that hasn't gone according to plan. Just, I guess, open things up.

Yeah, I would say things have gone largely according to plan. Listen, there's always bumps and it's a negotiation process in many ways. Parties and timelines seem to be on track. Timeline would be, the record is closed there. In Pennsylvania, the conversations have been thoughtful, and I'm pleased with that. You know, that's okay, too. And then I think that we now have a schedule, as we said, in New Jersey. Things are proceeding, you know, with good discussions. I feel good about things. I'll take Pennsylvania, for starters. The administrative law judge in Pennsylvania is allowed 90 days to make their decision and come out with their recommendation to the commissioners. So should that take 30, 50, 60 days? Obviously, that could move the timeline up a bit. But as it looks today, you would think if you just run the timelines out, and again, there could be bumps that come in. As it looks today, it looks to be comfortable with what we know today.

That is super helpful. Thank you for the details there. Maybe one for you, Dan. Just a question about shaping of the year, any one-timers to consider, and especially anything on tax rate, just as we, more modeling than anything, but just think about the balance of the year and the earnings trajectory.

Davis, so the, in terms of tax rate, you know, you've seen low single-digit effective tax rates thus far in the year, both for this quarter and year to date, and we'd expect to see that for the full of the year, so, you know, think low single-digit less than five percent area um and there you know you it was in the um in the s4 that there's a one timer this year you know that remains on track we'd expect to get that uh later this year that would be beneficial to our earnings as we think about landing inside that target zone uh with that guidance that's based back with 2024 adjusted earnings also super helpful thank you and maybe if

I could just be greedy and sneak in one more housekeeping, I guess, for both of you, but anything to call out as far as inflationary costs from the war abroad, raising fuel costs or other inflationary inputs, tariff-free funds as a benefit, or just any other unusual items that you guys have seen year-to-date or expect in the balance of the year. And thank you again very much.

Yeah, absolutely, Davis. I think the one you mentioned first there, really, fuel price increases. We've seen that across the platform. And of course, You know, we have somewhere on the order of 3,000 total vehicles and pieces of equipment. So, given what we've seen in the Middle East, that is driving higher fuel costs this year. So far, you've seen that incorporated into our numbers, and you'll see that continued to be in our numbers until things really calm down there in the Middle East. Yeah, but no, no. Yeah, that's right, Chris. Really nothing other than that.

Thanks, guys. if you would like to ask a question please press star one to raise your hand all right there are no further questions at this time i will now turn the call back to chris franklin for closing remarks all right thanks everyone for joining us as always brian dan myself we're all open for uh follow-up questions um and uh in the meantime we'll enjoy the rest of your summer thanks for joining us this concludes today's call thank you for attending you may now disconnect