Essential Utilities, Inc. 2026 Q2 Earnings Call

Brian, please go ahead. Good morning, 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. 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 10-Q, 10-K, and other SEC filings for a description of such risks 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. Dan Schuller, 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. 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. For the quarter, we reported GAAP earnings per share of $0.37, which includes about $0.01 of merger-related costs and puts us at non-GAAP earnings per share of $0.38. When we look at 2026 overall, we're confident that we'll meet our 5%-7% earnings growth guidance anchored to the non-GAAP 2024 earnings per share of $1.97. 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, Governor Shapiro 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. 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 Peoples rate case.

The special counsel is not an intervener in the Peoples rate case and acknowledged that our rate case was filed prior to the issuance of the Governor's letter. 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. 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. Finally, reinforcing our longstanding 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 1st, 2026, to shareholders of record on August 11th, 2026. If you turn to slide six, this is a snapshot of the regulatory approvals process across our states.

This slide provides dockets and next steps so you can follow the approval process. 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 Water 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. I 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. With that, Dan, let me turn it to you for a deeper dive into the quarter.

Thank you, Chris, good morning, everyone. Today, my remarks will focus on our financial performance and the primary drivers of our results. Let's turn to slide eight 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 Q in the MD&A, 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 our water and wastewater operations, and about $800,000 to account for serving newly acquired customers. These increases 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. 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%-7% normalized earnings per share growth using our non-GAAP 2024 results of $1.97 per share as our baseline. Turning to slide nine, 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-end. Our natural gas subsidiary has a base rate case pending here in Pennsylvania for $163.2 million. 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. Chris? All right. Thanks, Dan.