Essential Utilities, Inc. (NYSE:WTRG) Q1 2023 Earnings Call Transcript May 9, 2023

Essential Utilities, Inc. beats earnings expectations. Reported EPS is $0.72, expectations were $0.71.

Operator: Hello, and welcome to Essential Utilities Q1 2023 Earnings Call. My name is Melissa, and I will be your coordinator for today’s event. Please note, this conference is being recorded. [Operator Instructions]. I will now hand you over to your host, Renee Marquis, to begin today’s conference. Thank you.

Renee Marquis: Thank you, Melissa. Good morning, everyone, and thank you for joining us for the Essential Utilities First Quarter 2023 Earnings Call. Unfortunately, Brian Dingerdissen couldn’t be here today because he’s under the weather, so I’m filling in. I’m Renee Marquis, the Director of Investor Relations at Essential. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our website. Here is our FLS, 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 or other SEC filings for a description of such risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted on the Investor Relations section of the company’s website. Here is our agenda for the call today. We will begin with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Next, Dan Schuller, Executive Vice President and CFO, will discuss our financial results. And lastly, Chris will then provide an update on our acquisition program and conclude the presentation portion with a summary of our guidance before opening the call for questions.

With that, I’ll turn the call over to Chris Franklin.

Christopher Franklin: Thanks, Renee. Good morning, everyone. Thanks for joining the call. Let’s just start here with a quick mention that last week, we held our Board meeting and our Annual Meeting of Shareholders. And I’m very pleased to report that all of the items on the ballot were voted in accordance with management’s recommendations. So we’re very pleased with the outcome of our Annual Shareholders Meeting. All right. Let’s take a quick look at the first quarter. We reported earnings per share of $0.72, and that was despite the unusually warm weather and the challenges of inflation and interest rates. We mentioned in February that weather was warmer than normal, and similar weather patterns continued through March. Remind you that we don’t currently have weather normalization in our Pennsylvania tariff, previous owners of the company never filed for it.

So we’re going to do it in our upcoming rate case. We’re going to file a Pennsylvania natural gas rate case end of the year of this year. In that filing, we will include weather normalization. Now if the PUC follows its precedent decisions on weather norm, then we should expect to have at the conclusion of our rate case, and that would be, call it, spring of 2024. Again, this will be the first natural gas rate case we filed in Pennsylvania under our ownership. So we need to get that work underway. Now despite the unfavorable weather in Q1, I want to tell you that we remain confident in our ability to meet our full year earnings per share guidance of $1.85 to $1.90. We’ll continue to evaluate our various options and initiatives that could help us make up for the first quarter weather.

One of those initiatives was already in the plan, but it’s the current sale process for our energy projects at Peoples. So you may recall that we operate the Pittsburgh Airport microgrid, another district energy project, which is downtown and a combined heat and power project at a hospital in Pittsburgh. This again was a planned process for this year, and we expect to close the sale this year. This transaction is consistent with our long-term strategy of focusing on regulated growth opportunities. In this case, we hope to continue to work with the buyer of these assets to develop new projects in the future, given the residual benefits they have for our customers and for our gas utility. All right. Let’s talk about capital work. In the first 3 months of 2023, we invested over $243.7 million in infrastructure improvements as compared to $183 million in the same period last year.

Currently, we have asset purchase agreements signed for 9 municipal acquisitions totaling over $380 million in purchase price. Finally, as you may be aware, Earth Day was in April, so last month, we were excited to kick off our Second Annual Essential Earth Day series of events throughout our 10-state footprint. Really proud to mention that we had hundreds of employees participate in over 30 local volunteer events again this year. These activities included opportunities for customer education, employee volunteerism, community engagement, and we made contributions from our company foundation to many of the environmental initiatives, all of which was centered around protecting and providing earth’s most essential resources. Finally, another announcement with big impact was made recently on PFAS.

The U.S. Environmental Protection Agency finally proposed a maximum contaminant level or MCL for PFAS chemicals. We recognize the EPA’s proposed maximum contaminant level for PFAS chemicals. You remember, these are also called forever chemicals, is an important step in protecting human health. Now remember, 2020, in order to better protect the health of our customers and communities we serve, we set an industry-leading commitment to ensure all of our finished water across our entire footprint would not exceed 13 parts per trillion for multiple PFAS chemicals. And also, at that time, the EPA had a health advisory level of 70 parts per trillion for PFAS chemicals. We chose to adopt a much more stringent standard to protect the health of our customers and communities.

To my knowledge, we’re the only multistate company that made such a commitment. The following year in 2021, we cut the ribbon on our new state-of-the-art environmental laboratory, which was just 1 of the 2 accredited labs and the only utility certified to test for PFAS chemicals in Pennsylvania. We believe our commitment to operational excellence, along with the experience and expertise we’ve gained in our PFAS mitigation work will not only help us facilitate our compliance with the new EPA standards, will also be an important part of our value proposition to municipal leaders struggling with PFAS issues. Now I remind you, at the same time, we’re also going to continue to advance our litigation strategy to force the polluters to pay the cleanup costs so that our customers don’t bear the total cost, total burden of these costs.

And of course, we will continue to cooperate and support the EPA in their efforts to ensure all Americans have safe quality drinking water. Now as the national focus on water quality and safety continues to gain momentum, the technical and operational expertise of our people at Essential Utilities continues to be recognized. We understand our responsibilities as a provider of utility services, and it’s also our responsibility to keep our customers and our communities well informed regarding their access to life sustaining resources we provide. We’re reminded of this recently when a pipe ruptured at a chemical plant, which skewed chemicals into the Delaware River, less than 0.5 mile downstream from one of our water plants. Fortunately, our employees’ quick decision to close the plant intake ensure there was no impact to our customers, and we were able to disseminate timely information, provide reassurance of the safety of our water and lend a hand to neighboring systems.

I continue to be impressed with the professionalism of our team and their ability to respond so quickly to ensure there was no interruption to our customers. If you look at that photo in the center on this slide, you can see that latex type material floating down the left side of the picture, close to intakes along the river, and that went on for miles. This was an important operational catch by our team. And with that, let me hand it over to Dan to review the financial results.

Daniel Schuller: Thanks, Chris, and good morning, everyone. I’ll start off with some of the first quarter highlights. We had revenues for the quarter of $726.5 million, up 3.9% from $699.3 million last year. Our Regulated Water segment contributed $267.3 million and our Regulated Natural Gas segment contributed $441.3 million. The largest contributor to the increase in revenues for the quarter was a recovery of higher natural gas commodity prices and therefore, purchased gas costs increased by $28.6 million year-over-year for the first quarter. Additional revenues from regulatory recoveries, water and wastewater customer growth, and other items also contributed positively or offset materially by decreased volumes in the natural gas segment due to the warmer-than-normal temperatures that Chris mentioned a moment ago.

O&M expenses decreased to $138 million for the quarter, down from $142.6 million in the first quarter of last year. Higher water production costs and growth from added water customers were offset by lower employee-related costs, recoverable costs related to our natural gas segment customer assistance program, improved bad debt and other items for the quarter. Net income was down year-over-year from $199.4 million to $191.4 million and GAAP EPS was $0.72 for the quarter. Next, we’ll walk through the waterfall slide, starting with revenue. In the first quarter of 2023, revenues increased to $27.2 million or 3.9% on a GAAP basis. You’ll notice the primary drivers were the recovery of higher purchased gas costs of $28.6 million due to the significant increase in natural gas commodity prices and regulatory recoveries of $22.9 million.

Customer growth from our regulated water segment, which includes both acquisitions and organic growth and other items provided an additional $6.4 million towards the revenue increase. The primary offset to these increases was decreased gas volumes of $30.5 million from our Regulated Natural Gas segment due to the warmer-than-normal winter weather. And with that, let’s review the first quarter weather on the next slide. As you know, there’s a strong correlation between weather and gas consumption and thus, associated revenue and typically, the majority of gas is consumed by our customers in the first and fourth quarters with the largest portion of gas being sold in the first quarter in Pennsylvania. This winter for our regulated natural gas segment, the weather in the first quarter was dramatically warmer-than-normal, with 2,330 heating degree days.

This metric compares unfavorably not only in the first quarter of last year, which was colder than normal, but it also falls short of the 20-year first quarter average in Western Pennsylvania of 2,814 heating degree days. In fact, this was the warmest first quarter in the last decade and the fourth warmest first quarter since 1955. Next, let’s move on to operations and maintenance expenses. Operations and maintenance expenses were $138 million for the first quarter, a decrease of 3.2% compared to $142.6 million for the same period in 2022. Increased production costs, including inflationary increases in chemicals purchased water and sludge hauling and expenses related to newly acquired water and wastewater customers added a combined $4.5 million.

These were offset by lower employee-related costs of $2.7 million, decreased gas customer systems from expenses of $2.5 million and a decrease in other items of $2.5 million mainly related to lower maintenance expenses and a nonrecurring charge in 2022. And finally, bad debt was lower by $1.5 million. Next, we’ll spend a minute on the earnings per share waterfall. Beginning on the left side of the slide, GAAP EPS for the first quarter of 2022 was $0.76. Regulatory recoveries contributed $0.06, growth from our regulated water segment added $0.01 and reduced expenses added $0.007. These were offset by decreased volume from our Regulated Natural Gas segment of over $0.08, other items of $0.03 and decreased volume from our Regulated Water segment of $0.001.

The $0.03 impact in other includes increases in interest costs and depreciation, offset by income taxes. The result is GAAP EPS of $0.72 for the first quarter of 2023. As Chris mentioned earlier, we continue to expect to meet our annual earnings per share guidance for the year. Moving on to regulatory activity and other matters. So far in 2023, we completed rate cases or surcharge filings in 4 of our regulated water states for the total annualized revenue increase of $3.6 million. Also, we currently have base rate cases or surcharge filings underway in North Carolina, Ohio and Texas for a regulated water segment and a surcharge filing in Kentucky for a regulated natural gas business. As we previously indicated, we expect to raise approximately $500 million in equity or equity-linked securities this year to maintain our credit metrics where we invest capital and close municipal acquisitions.

And with that, I’ll hand it back over to Chris. Chris?

Christopher Franklin: Thanks, Dan. Let’s talk a little bit about the municipal transactions. Matt Rhodes and his team have been busy. As of this call, we have 8 signed asset purchase agreements for 9 systems across 4 states in which we have existing water operations. So this includes the recently announced Greenville wastewater system that has over 2,300 customer connections and also serves over 1,700 additional customers through 2 wholesale customers in the neighboring townships of West Salem and Hempfield. Collectively, these acquisitions are expected to add nearly 219,000 customers or customer equivalents and total over $380 million in purchase price. Five, and I count two in Frankfurt, right, five transactions on this slide are on track to close in Q2 or Q3 of this year, includes Shenandoah, Southern Oaks, Union Rome and Frankfort with other acquisitions expected to close in Q4 2023 and of course, some in Q1 of next year.

As many of you know, progress on the DELCORA regulatory process is under a stay by the Federal Bankruptcy Court handling the bankruptcy of the city of Chester. The next hearing of the bankruptcy court is next week, May 15. Settlement discussions do continue, albeit at a slow pace, but we remain optimistic that a settlement can ultimately be reached. Importantly, our rate projections, along with the last rate projections I’ve seen from DELCORA continue to indicate that customer rates will be lower under our ownership when compared with DELCORA remaining independent, so this transaction remains to be good for the customers. It’s probably important to reiterate again that despite the delay in DELCORA process, we still plan to meet our current earnings for the year.

I should also note that our sale of our small West Virginia gas operation remains on track in the regulatory process, and we expect to close the transaction in the third quarter of this year. So in addition to the signed municipal transactions on the previous slide, we continue to see a strong and healthy pipeline of opportunities for growth. As illustrated on this slide, we are currently engaged in active discussions with municipalities pursuing over 400,000 potential water and wastewater customers. Our teams in each of our 8 water states focus on potential acquisitions that happened between 2,500 and 25,000 customers. We continue to offer many benefits beyond just the competitive purchase price, including our technical and operational expertise, commitment to spend the needed capital and make improvements and to provide long-term clean, safe, reliable utility service to the communities we serve.

So let me wrap up with a reminder of our 2023 guidance that we had previously published. As we said throughout the call, we continue to expect to meet guidance for the year. Earnings is expected to be between $1.85 and $1.90 per share with 3-year earnings per share growth of 5% to 7% through 2025. Our capital plans, including investing approximately $1.1 billion annually to rehabilitate and strengthen our water, wastewater and natural gas systems through 2025. We continue to expect that rate base growth will be between 6% to 7% for water and between 8% and 10% for natural gas and the customer growth will be between 2% and 3% on average for water and stable for natural gas. Finally, we remain committed to environmental stewardship, sustainable business practices, employee safety, diversity and inclusion, enhanced customer experience, and a strong community engagement.

We’re supportive of the EPA’s proposed new regulations on PFAS, and we’ll continue to pursue our legal action against those polluters to offset our overall cost of mitigation on the PFAS side. So with that, let me conclude our formal remarks and open the line for questions. I’ll turn it back to you, Melissa.

Q&A Session

Operator: [Operator Instructions]. And our first question comes from Ryan Connors of Northcoast Research.

Operator: And our next question comes from Paul Zimbardo of Bank of America.

Operator: And our next question comes from Travis Miller of Morningstar.

Operator: Our next question comes from Gregg Orrill of UBS.

Operator: Our next question comes from Davis Sunderland of Baird.

Operator: [Operator Instructions]. Our next question comes from Jonathan Reeder of Wells Fargo.

Operator: Thank you. At this time, we have no further questions. So I’d like to hand it back over to Chris Franklin for any closing remarks. Please go ahead.

Christopher Franklin: Great. Thank you, everybody. Thanks for your time today. As always, we’ll remain available for questions, follow-ups at any time. Renee standing in today for Brian. Brian will be back in action soon, though. And I appreciate you being with us today. Take care.

Operator: Thank you, everyone. At this time, you may disconnect. Hosts, you can stay on the line.