Essential Utilities (WTRG) Q2 2026 Earnings Call Transcript

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DATE

Wednesday, Aug. 5, 2026 at 11 a.m. ET

CALL PARTICIPANTS

• Vice President Investor Relations and treasurer - Brian Dingerdissen
• Chairman and Chief Executive Officer - Christopher H. Franklin
• Chief Financial Officer - Daniel J. Schuller

TAKEAWAYS

• Operating Revenues -- $530.9 million, an increase of 3% year over year reflecting higher regulatory recoveries and purchased gas costs.
• GAAP Earnings Per Share -- $0.37 for the quarter, which includes $0.01 per share in merger-related costs.
• Non-GAAP Earnings Per Share -- $0.38 for the quarter, reflecting core results when excluding nonrecurring transaction expenses.
• Infrastructure Investment -- $1.7 billion planned for the full year 2026, with $662.2 million invested through the first six months.
• Quarterly Dividend -- $0.3606 per share, following a 5.25% increase approved by the board of directors in July.
• Water Segment Revenue -- $357.5 million, representing a 7.6% increase driven by regulatory recoveries and higher water consumption volumes.
• Natural Gas Segment Revenue -- $169.3 million, a decrease from $177.3 million in the prior year due to lower volumes resulting from warm weather.
• Finalized Rate Activities -- $56.6 million in annualized revenue increases finalized year to date, with 78% of the total coming from water and wastewater operations.
• Pending Gas Rate Case -- $163.2 million requested for the Pennsylvania natural gas subsidiary to support system safety and emissions reduction.
• Acquisition Pipeline -- 200,000 potential customers under signed purchase agreements, representing a total purchase price of approximately $282 million.
• Operations and Maintenance Expenses -- $153.6 million, an increase of 3.5% primarily due to $5.9 million in higher employee-related costs and merit increases.
• Water and Wastewater Rate Pipeline -- $79.7 million in requested annualized increases across five pending cases and one surcharge proceeding.
• Integra Water Acquisition -- $4.9 million for the purchase of systems in Texas, which added 1,100 customers to the company footprint.
• Municipal Acquisition Pipeline -- 400,000 potential customers, representing the current backlog of opportunities the company is pursuing.
• Cost of Fixed-Rate Debt -- 4.16% weighted average as of June 30, 2026.
• Liquidity -- $960 million available on credit lines to support ongoing capital investment and acquisitions.
• Effective Tax Rate -- Low single digits, expected to be below 5% for the full fiscal year 2026.
• DSIC Eligibility -- 55% of Pennsylvania capital for 2026, reflecting the current mix of distribution pipe replacement versus plant infrastructure work.
• Earnings Guidance -- 5% to 7% compound annual growth rate through 2027, anchored to a 2024 non-GAAP baseline of $1.97 per share.

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RISKS

• Schuller stated, "what we have seen in the Middle East that is driving higher fuel costs this year," when discussing inflationary pressures impacting the company fleet of approximately 3,000 vehicles.

SUMMARY

Essential Utilities, Inc. affirmed its long-term financial guidance while navigating regulatory approvals for its pending merger with American Water. Management reported steady progress across multiple states, expecting a first quarter 2027 closing. The company remains focused on a multiyear capital plan, targeting significant infrastructure upgrades in its water and natural gas segments. Executives highlighted the impact of regulatory rate cases and a disciplined acquisition strategy as primary drivers for earnings growth. The company stated its commitment to balancing necessary infrastructure investments with consumer affordability, particularly in response to evolving state-level regulatory priorities.

• Chairman and Chief Executive Officer Franklin addressed a letter from the Pennsylvania Governor regarding capital costs, stating the company will "explicitly demonstrate the necessity of proposed investments" in its filings.
• The company intends to advocate for an expansion of the Distribution System Improvement Charge mechanism to include more capital items, which management stated would lengthen the period between base rate cases.
• Progress on the $276.5 million DELCORA transaction remains stalled due to a stay by a federal bankruptcy court involving the city of Chester, though the agreement is considered assumable by the merger partner.
• Management reported that regulatory approvals for the merger have been secured in Kentucky, Ohio, and Virginia, with the Illinois statutory process set to conclude by November 2026.
• CEO Franklin expressed high confidence in the post-merger integration, stating, "the collaboration and cooperation among the teams has exceeded my expectations."
• CFO Schuller identified fuel price increases as a specific inflationary pressure, noting that costs related to the company fleet of 3,000 pieces of equipment are being incorporated into financial results.

INDUSTRY GLOSSARY

• AFUDC: Allowance for Funds Used During Construction, a non-cash utility accounting item representing the cost of debt and equity used to finance construction.
• DSIC: Distribution System Improvement Charge, a regulatory mechanism allowing utilities to recover certain infrastructure costs between base rate cases.
• GAAP: Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting in the United States.
• Non-GAAP: Financial measures that exclude specific items, such as merger costs or asset sales, to provide an alternative view of core performance.
• PFAS: Per- and polyfluoroalkyl substances, a group of man-made chemicals subject to federal maximum contaminant level regulations in water.
• ROE: Return on Equity, a measure of financial performance calculated by dividing net income by shareholders' equity.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us and welcome to Essential's 2.52 million. To raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Brian Dingerdissen, Vice President Investor Relations and treasurer. Brian, please go ahead.

Brian Dingerdissen: Good morning, everyone, and thank you for joining us for our second quarter 26 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 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 ks 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 Christopher H. Franklin, our Chairman and CEO, who will provide an update on the company then Daniel J. Schuller, our Chief Financial Officer will provide an overview of the financial results. With that, I will turn it over to Christopher H. Franklin.

Christopher H. Franklin: Thanks, Brian, and good morning, everyone. Let's begin on slide 5, and we will talk about some corporate updates. First on the merger, As you have probably seen from our press releases, now received 3 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 have 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 27. Now significant planning work is ongoing as we consider the many factors involved in integrating the 2 companies. We are intent on hitting the ground running as a world class organization on the day after we close this transaction.

Alright, now 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 are confident that we will meet our 5% to 7% earnings growth guidance anchored to the non GAAP 2024 earnings per share of $1.97 and Daniel 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 have invested $662 million and we are on track to invest a record $1.7 billion in needed infrastructure improvements and up upgrades. Turning now to the regulatory environment. Let's start in Pennsylvania. As you are 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. Now following his communication, the special counsel for the governor's office on energy affordability called into 1 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. 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, remain dedicated to absolute transparency in our rate filings and will continue to operate strictly within Pennsylvania's established statutory framework. Finally, reinforcing our long standing commitment to shareholder value, We are 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.

Consistent with last year's increase, and this dividend is payable on 09/01/2026, to shareholders of record on 08/11/2026. Now if you turn to slide 6, this is a snapshot of the regulatory approvals process across our states. The slide provides dockets and next steps so you can follow the approval process. Now, note on the integration work. That is underway with the merger. it is 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 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, Daniel, let me turn it to you for a deeper dive into the quarter.

Daniel J. Schuller: Thanks, Christopher, 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 25 Q2 earnings of $0.38 per share. In terms of positive drivers, earnings for this quarter benefited from a $0.06 increase in regulatory recoveries in 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 items, 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 will see the details of our O&M expenses in our queue in the MD and 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 our water and wastewater operations and about $800 thousand 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 nonrecurring merger costs, O&M expenses increased by 2.6%, which aligns with our historical norms. Also, we adjust our GAAP earnings per share of $0.37 to exclude the nonrecurring 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 5 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 reduction. 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 will turn the call back over to Christopher.

Christopher H. Franklin: Christopher? Alright. Thanks, Daniel. Let's move to slide 11, and we will 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 purchase price of $4.9 million. And we welcome the 1.1 thousand 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 thousand customers with a purchase price of approximately $282 million Now this does include our DELCORA transaction.

But I will remind you that progress on our DELCORA transaction continues to be stalled by a stay in place by a federal bankruptcy court judge. And 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. Pipeline of potential water and wastewater municipal acquisitions for the company stands at approximately 400 thousand 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 will wrap up our prepared remarks on Slide 12. As we have discussed before, we are reaffirming our 5% to 7% multiyear 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 are focused on keeping the balance sheet strong, improving our cash position and growing the dividend while keeping our payout ratio between 60-65%. As part of our strong focus on customers, we are investing $1.7 billion in regulated infrastructure just this year. With that, I will wrap things up and hand it back to the operator so we can take your questions.

Operator: We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press 1. To raise your hand. To withdraw your question, press 1 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 Julien Patrick Dumoulin-Smith from Jefferies. Julien, your line is open. Please go ahead.

Andrew: Hi. Good morning. This is Andrew on for Julien, and thank you for the time. I guess maybe 2 questions on my front. Just 1, I think you have talked about the timing for your future Aqua case filing. Can you kind of maybe give a bit more details as to kinda how your planning the case? Kinda what are what are you guys doing differently in light of kind of the focus that we are seeing from the governor's office on ROE as well as, the capital structure front. Thank you.

Christopher H. Franklin: Sure. Good morning, Andrew. Thanks for the question. So, yeah, as you are aware, in Pennsylvania, we have got a lot of activity going on. Right? We have got the merger case which is the largest case. We have got, in that combination consideration, the American Water case, which was just completed, and we have the Peoples natural 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 deliberate here and we would delay the filing of our Aqua Pennsylvania case. In terms of how we think about filing that case, listen.

Andrew: The case is largely a capital case. So there is not there is no complication to the case.

Christopher H. Franklin: And so we follow all the rules. We are a very compliant company as we always are. 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 is a lot of positions in every rate case. Right? there is always interveners of all sorts. So we will be very respectful to the governor's position. Frankly, we, we think that, the company, shareholders, and customers deserve a return of and on the capital, In a fair return, we will let the commission determine what fairness actually is.

Daniel J. Schuller: And you know, we think that where the commissioners adjudicated Americans' case, they anchored that around the disc ROE at, you know, somewhere around 9.07%. You know, is a pretty good start. Obviously, there is a debate always around capital structure and everything else.

Christopher H. Franklin: So we will file a case as we normally would have. With, all due respect to all the parties. And we will we will adjudicate it as such. Thank you. that is very clear. And maybe as a as a follow-up, you know, we appreciate that. Some of the water specific expenses, you know, PFAS are not actually recoverable under the disc. I guess maybe just more of a housekeeping question. Can you kind of speak to how much of your CapEx qualifies for the DSIC versus kind of, like, you know, what is being recovered under the GRC? Thank you. Yeah. Let me have Daniel answer that combination.

What I will say, though, we will continue to press for an expansion of the disc to include some of these items. You know, we will -- we believe that at this point, that 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 is included today in percentages, Daniel, let me turn to you.

Daniel J. Schuller: Yeah. Andrew, so today for 2026, it is 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 is where we are today.

Andrew: that is very helpful. Thank you guys again.

Christopher H. Franklin: Thanks, Andrew.

Operator: Your next question comes from the line of Davis B Sunderland with Baird. Your line is open.

Davis B Sunderland: Your line is open. Go ahead.

Davis Sunderland: Good morning, gentlemen. Thank you very much for the update, and thank you for taking our questions. Christopher, I appreciate all the details on the merger related activities and sounds like everything is 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 has not gone according to plan? Just to, I guess, open things up.

Christopher H. Franklin: Yeah. I would say, is that things have gone largely according to plan. Listen, there is always bumps and, you know, it is a it is a negotiation process in many ways. With the with various parties in various states. But the states that have statutory timelines seem to be on track The last 1 with a statutory timeline would be Illinois, Record is closed there. it is proceeding according to plan. In Pennsylvania, the conversations have been constructive. Thoughtful, and I am pleased with that. You know, we do not necessarily agree on all the issues, but that is that is 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 in North Carolina. So I feel good about things. You know, that could affect time line, I will I will 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, 55, 60 days, obviously, that could 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 the road, but that we are not aware of.

But as it looks today, it looks to be comfortably in that first quarter range for closing. With what we know today. That is super helpful. Thank you for the details there.

Davis Sunderland: Maybe 1 for you, Daniel. Just a question about shaping of the year, any 1-timers to consider, and especially anything on tax rate, just as more modeling than anything, but just thinking about the balance of the year and the earnings trajectory?

Daniel J. Schuller: Sure, David. So the in terms of tax rate, you know, you have seen low single digit effective tax rates thus far in the year. Both for this quarter and year to date. We would expect to see that for the full year. So low single digits, less than 5% to around that area. And, you know, it was in the in the S-4 that there is a 1-timer this year. You know, that remains on track. We would expect to get that later this year. That would be beneficial to our earnings as we think about landing inside that target zone. With that guidance that is based on 2024 adjusted earnings. Also super helpful. Thank you.

Davis Sunderland: And maybe if I could just be greedy and sneak in 1 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 refunds 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.

Daniel J. Schuller: Yeah. Absolutely, David. I think the 1 you mentioned first there really fuel price increases. You know, we have seen that across the platform. And, of course, know, we have somewhere on the order of 3 thousand total vehicles and pieces of equipment. So what we have seen in the Middle East that is driving higher fuel costs this year that so far, you have seen that incorporated into our numbers, and you will see that continue to be in our numbers until things really calm down there in the Middle East.

Christopher H. Franklin: Yeah. But nothing real, not at least. Thanks, guys.

Daniel J. Schuller: Yeah. Yeah. that is right, Christopher. Really nothing other than fuel prices that we are seeing.

Christopher H. Franklin: Perfect. Thanks, guys.

Daniel J. Schuller: You bet.

Operator: If you would like to ask a question, please press 1 to raise your hand. Alright. There are no further questions at this time. I will now turn the call back to Christopher H. Franklin for closing remarks.

Christopher H. Franklin: Alright. Thanks, everyone, for joining us. As always, Brian, Daniel, and myself are all open for follow-up questions. And in the meantime, hope you enjoy the rest of your summer. Thanks for joining us.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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