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13-05-2025
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Q1 2025 Essential Utilities Inc Earnings Call
Brian Dingerdissen; Vice President, Investor Relations and Treasurer; Essential Utilities Inc Christopher Franklin; Chairman of the Board, President, Chief Executive Officer; Essential Utilities Inc Michael Huwar; President - Peoples Natural Gas; Essential Utilities Inc Daniel Schuller; Executive Vice President and Chief Financial Officer; Essential Utilities Inc Durgesh Chopra; Analyst; Evercore ISI Travis Miller; Analyst; Morningstar Gregg Orrill; Analyst; UBS Ryan Connors; Analyst; Northcoast Research Operator Thank you for standing by, and welcome to the Essential Utilities first quarter 2025 earnings conference call. (Operator Instructions) It is my pleasure to turn the call over to Mr. Brian Dingerdissen. You may begin. Brian Dingerdissen Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2025 earnings call. If you did not receive a copy of the press release, you can find it on our Investor Relations website. The slides will also be found there, as will be a webcast of the event. 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 risk and uncertainties. During the course of this call, refers 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 Franklin, our Chairman and CEO, who will provide an update on the company; then Mike Huwer, the President of our gas business, will provide an update on the gas business. And then Dan Schuller, our Chief Financial Officer, will provide an overview of the financial results before Chris closes the call and opens it up for questions. With that, I will turn it over to Chris Franklin. Christopher Franklin Hey, thanks, Brian, and good morning, everyone. Thanks for joining us today. And let's begin on slide 5 with some highlights. First, we posted strong results this quarter $1.03 GAAP earnings per share. A 6% increase over last year's quarter results. Both our water and gas businesses performed well as expected. You'll hear more about our gas business from Mike Huwar in just a few moments, as Brian mentioned. With those first quarter results, we are reaffirming our 2025 earnings per share guidance range of $2.07 to $2.11 versus last year's earnings of $1.97 per share on a non-GAAP basis. Dan will provide a quarter by quarter view of our 2025 earnings expectations in just a few moments. We are also reaffirming our plans to invest between $1.4 billion and $1.5 billion in infrastructure investments in 2025. Through March 31, we've already invested $270.5 million in infrastructure improvements across our footprint. Now we previously announced to support our growth and meet our credit metrics, we have begun to raise equity through our ATM program. So far this year, we've issued approximately $210 million. And throughout the year, we'll look at the market conditions and our share price for opportunities to continue using our ATM. It's always important to mention that our achievements go far beyond the financial results. Some of the things of which we are most proud are our operational achievements. Our water quality compliance results continue to be industry leading at a 99.8% compliance rate, meaning state and federal regulations over the last 12 months. Our PFAS work continues to be on time and on budget. We will be fully compliant with the four parts per $1 trillion MCL by 2028, and we remain on target to meet the $450 million in capital spend rate to achieve that compliance. Now importantly for our customers, we expect to receive approximately $100 million in proceeds from the settlements from the polluters, and for Aqua, Pennsylvania, we've already received approximately $10 million in low interest loans and grants from the government and are also on track in Pennsylvania to receive approximately $59 million in grants or loans after all the applications have been approved. We also continue to see strong operating results in the natural gas company, and Mike will fill us in, in a few moments on that work. Environmental stewardship is a key element of our work, and it's why we were so proud to learn that for the third year in a row we were named to USA Today's list of climate leaders, a great honor for us and a nice recognition of our continued commitment to protecting and providing Essential resources for life. As we think about our successes, I have to mention that our work in the Texas legislature to pass future test year legislation is showing positive signs. And just last week, the Texas House of Representatives overwhelmingly passed the future test year bill, and now it's off to the Senate for consideration in that chamber. We'll keep you posted as developments occur, and you may recall that our rate cases in Ohio have been taking an extended period of time over the last few cycles at the PUCO. In the last couple of weeks though, legislation was passed by both the House and Senate in Ohio that sets deadlines for rate cases. After the governor signs the legislation, there will be new statutory timelines associated with rape cases in Ohio. We see this is a really positive development. Also in Virginia, legislation was passed to expand the water and wastewater infrastructure surcharge. We are really proud of our work with both regulators and legislators to find opportunities to make vital and sizable capital investments and quickly and efficiently recover that capital so we can put it back to work again. Now, slide 6, hopefully you recognize our consistent year after year growth in earnings and dividends. 2025 is shaping up to be another strong year in this string of success. For many years now, our team has been able to consistently deliver on the guidance that we provided you. Our earnings per share is consistently within a 5% to 7% annual growth rate. And since we started providing annual guidance back in 2016, we have consistently met or exceeded market expectations. That consistent earnings growth has allowed us to continue to build on our over 30 year history of growing our dividend. That dividend growth has averaged about 7% since I became CEO in 2015. Lastly, our financial results are made possible by the excellent execution of our operating team and their commitment to the community where we serve. Since 2015, we've invested nearly $8 billion in capital improvements and have grown rate base at a 15% compounded annual growth rate if you include the purchase of Peoples. I continue to be impressed by what the team has achieved, and our team is incredibly honored to be the current stewards of this great company with its 140 year history. Many of you have told me you enjoy hearing from our segment President. So today, Our gas segment President, Mike Huwar is joining us. Mike's going to talk a little bit about some of our achievements and some of our ongoing initiatives, and we'll touch a little bit on the data center activity happening in the region where we serve. Mike? Michael Huwar Thanks, Chris. I'm happy to be here today and appreciate the opportunity to highlight the significant and important work that the team of Peoples Gas are doing. As noted on slide 8, Peoples is the largest natural gas LDC in Pennsylvania with over 700,000 customers and over $4 billion of rate base as of the end of 2024. Additionally, our gas segment includes our operations in Kentucky serving over 40,000 customers. Since the acquisition by Essential, the clear focus of our gas segment has been the increased safety and reliability of our 15,000 mile distribution system as we work to reduce risk and achieve constructive regulatory outcomes. Next on slide 9, I wanted to turn to an operational highlight with the Intelis meter program. In Q3 of 2024, Essential implemented a pilot program with the gas division to install and assess the Intelis solid state gas meter. The Intelis meters provide added safety features and increased protection of customers in the communities we serve. The pilot concluded with the installation of over 30,000 Intelis meters in 2024 and in Q1 of this year, 2025. We've moved from the pilot stage to a full implementation plan to install these new meters in all residential and small commercial properties within our service area. The added safety measures associated with these meters include an automatic shut off if the system were over pressurized or if there was an uncontrolled flow of natural gas. Additionally, in the event of a fire, the meter has the functionality to shut down automatically. As of now, we are assessing a comprehensive program to install the Intelli meters at nearly 700,000 customer accounts in the coming years. We are extremely bullish on this effort as we work to be among the safest gas utilities in the United States. Moving along to slide 10. Let me now mention a couple updates to our gas business starting with the weather normalization adjustment, which is a mechanism we received in our last Peoples rate case. As with other utilities across the nation, Peoples Gas also experiences volatility in weather patterns and subsequently impact distribution revenues. Beginning October 1, 2024, Peoples received authority to implement a weather normalization adjustment or WNA mechanism to combat volatility and stabilize bills for customers and the company. Since the inception of the WNA mechanism, actual weather has varied in billing months from greater than 17% colder than normal in January of 2025 to almost 30% warmer than normal in March of 2025. Given the weather volatility, this type of alternative rate making mechanism has proven to be valuable for the company and our customers. The mechanism requires the company to track weather, heating degree days, during the billing cycle of each customer when the weather is 3% colder than normal or 3% warmer than normal, and adjustment is reflected on the bill. The primary driver of the mechanism has been to moderate the financial impact of volatile weather for customers and the company. We believe the WNA mechanism is working as intended for all stakeholders. Finally, throughout the nation, there is a great deal of attention focused on the development of data centers and the associated need for electric power. We continue to field inquiries related to on-site power generation and data center development to support artificial intelligence, AI. As of today, we are in discussions with data center developers that represent up to 5 gigawatts of needed power generation in the Pittsburgh region. It's no secret that the vast natural gas resources within the Marcellus and Utica shale formations presents an opportunity of robust and lower cost power generation within the Peoples gas footprint and across Pennsylvania. The key message is that our company will support these activities in every way possible as they present new and unique economic development opportunities. Given the projected shortfall of available power generation within PJM, our regional transmission organization, the company is working with individual customers, data center developers, energy producers, and natural gas pipelines to support these important development efforts. While it's certainly too early to predict the exact investment needed to develop these projects, there are clear benefits to the region in what has been described as a very, very fluid environment surrounding data centers and energy usage. For Peoples and Essential Utilities, the potential increased load could increase the utilization factor of the distribution system that would help to keep natural gas service affordable for our customers. And with that, I will turn it to Dan for a review of the financials. Daniel Schuller Thanks, Mike, and good morning everyone. Let's begin on slide 12 with a high level view of the first quarter results, and then we'll get into the details on the waterfalls. Our quarterly performance was strong with revenues of 28%, O&M flat, and earnings per share of 6.2%. You'll recall that last year's first quarter earnings per share included a $0.24 gain from the sale of the Pittsburgh area energy project. Let's dive into the waterfall slides to further review the drivers of this strong quarter and the comparisons to last year. And slide 13, we have the revenue waterfall for the first quarter. Revenues increased 28% from $612.1 million a year ago to $783.6 million this year. Additional revenues from regulatory recoveries, higher purchase gas costs, and higher regulated natural gas segment volumes were the primary revenue drivers. Of the roughly $67 million increase in regulatory recoveries, two third is from gas and one third is from water. Of the higher purchase gas costs, about 50% is due to volume and half is due to higher commodity prices. The higher gas segment volumes reflect normal weather in this year's first quarter compared to significantly warmer than normal weather in the Pittsburgh area last year. The other category includes an $8.5 million dollar increase in our customer assistance surcharge costs, which has a direct offset in O&M. It also reflects a lower tax repair related credit to customers as a result of the PNG rate case and $2 million of weather normalization credits back to our Pennsylvania customers. Next on slide 14, the O&M slide, we see flat O&M expenses year over year, but there are a few things going on that we could discuss. The main drivers for O&M were increases in customer assistance surcharge costs, which have an equivalent offsetting amount in revenue, increases in employee-related costs, and water production expenses. These increases were offset by a decrease in bad debt expense and other expenses. The decrease in bad debt primarily reflects the rate recovery of a regulatory asset tied to increased bad debt during COVID. And the other category reflects lower outside services costs and insurance expenses. On the EPS waterfall on slide 15, we see a $0.17 positive impact from rates and surcharges, an $0.08 increase due to higher volumes of gas reflecting normal weather this year, and a $0.02 pickup due to lower expenses. These increases were offset by lower water volume and other. For the quarter, other includes the prior year $0.24 gain on sale from the Pittsburgh area energy projects, tax-related impacts, and other items. Turning to slide 16, this is something we've shown occasionally in the past to provide more insights on how our annual earnings per share breaks out by quarter. We thought it was important to bring this back for those of you that run quarterly models, and we've modified it to more accurately reflect how we expect 2025 to look. In the past we would have said that the first quarter could move our earnings materially higher or lower depending on the weather. Now that we have a revenue normalization mechanism in Pennsylvania, that volatility will be more muted. For this year, we see that the first quarter actual result was at the high end of the 40% to 50% of annual EPS expected in the first quarter. The recovery of the regulatory asset I mentioned earlier was a portion of this outperformance. In the two middle quarters of the year, heating related gas sales are normally light due to warm summer temperatures. Thus, we expect 10% to 20% of our annual earnings in each of these two quarters, and as you will recall, the third quarter EPS is generally the lowest of the year. And the fourth quarter should be between 20% and 30% of our earnings as the gas business picks up going into winter. We remain confident in our ability to meet our full year earnings per share guidance range of $2.07 to $2.11. While we're here, I do want to reiterate what Chris said about the equity needs for the year. We're pleased to report that we've already completed approximately two thirds of our 2025 equity needs. We see this as a significant accomplishment, especially considering the general market volatility that we've experienced so far this year. Next, let's move to slide 17 to provide an update on regulatory activity. We continue to manage our regulatory activity to maintain safe and reliable service, earn an appropriate return on the capital that we invest, and minimize regulatory lag while always considering affordability for our customers. New rates went into effect on February 22 for Aqua, Pennsylvania following the Pennsylvania PUC approval of the recent rate case. The rate order allowed a base rate increase designed to increase total annual revenues by $73 million. During the first three months of 2025, we implemented rate increases in Ohio and North Carolina designed to increase total revenues on an annual basis by $5.8 million. Also during the first three months of 2025 we implemented infrastructure rehabilitation surcharges designed to increase total revenues on an annual basis by $10.8 million in our water and wastewater divisions in Pennsylvania and Ohio and by approximately $50 million in our natural gas subsidiary in Kentucky. On April 30, 2025, the company's regulated water and wastewater subsidiary in North Carolina, Aqua, North Carolina, followed an application with the North Carolina Utilities Commission designed to increase rates by $32.9 million in the first year of implementation and then by two incremental approximately $6 million increases in the second and third years respectively. As a reminder, we began using a multi-year approach in North Carolina three years ago. We find that that works well for all of the stakeholders. And with that, I'll turn it back over to Chris. Chris? Christopher Franklin All right, thanks, Dan. Let's move to slide 19 now. We'll touch briefly on our long term growth or acquisition strategy that as you know focuses on water and wastewater utility acquisitions. In fact, since 2015, we've acquired over $518 million in rate base and more than 129,000 new customers or customer equivalents. Last month, we closed on the acquisition of the village of Midvale's Water System in Ohio, which serves approximately 1,000 customers. We paid approximately $3 million for this relatively small system and as a reminder, Ohio is our second largest water operation with over 150,000 customers, and we continue to see strong opportunities for regionalization in that state. Now, in January, we closed the acquisition of the Greenville Wastewater utility assets, which serves approximately 2,300 customers in Greenville, Pennsylvania. We paid approximately $18 million for the system and just recently, we filed an application with the Pennsylvania Public Utility Commission for the acquisition of the Greenville Water system, which we hope to close later this year. Now, including Greenville Water, as of today, we have five signed purchase agreements for the acquisition of water and wastewater systems in Pennsylvania and Texas, that are pending closing and are expected to serve over 210,000 customers or customer equivalents in total approximately $340 million in purchase price. Our $276.5 million agreement to acquire Delcora, a Pennsylvania sewer authority that serves approximately 198,000 customer equivalents in the Philadelphia suburbs, is included among the signed purchase agreements, but as you know is not included in our current guidance numbers. And finally on slide 20. As usual, we'll close the call by sharing some of our goals and aspirations, both short term and long term. We continue to see a healthy pipeline of opportunities for additional growth, both on the water side as well as the gas business. We expect our combined utility rate base will grow at a compounded annual growth rate of 8%. Breaking this down a little bit further, we anticipate our regulated water segment rate-based growth at about 6%, and our regulated natural gas segment rate-based growth to be at about 11%. Importantly, we are reaffirming our 5% to 7% multi-year earnings per share guidance through 2027. As I said before, this guidance does include acquisitions which are expected to close in 2025 and 2026 and excludes Delcora. Of course, this projection includes the crucial work that we're doing to remediate PFAs across our water systems, as well as our work to replace aging natural gas pipes. By the way, our gas pipeline replacement work is expected to continue well beyond the next 10 years. Now, we will continue to maintain a strong balance sheet with a focus on continued improvement in our debt metrics. While we grow the dividend and we'll keep the payout ratio at the same time at 60% to 65%. So all in all, we see a bright future for the company as we continue to invest in our nation's infrastructure and build value for shareholders. Very excited about the future of this company. With that, I'm going to conclude my formal remarks for the day, and we'll open up for questions. I'll send it back to the operator. Operator (Operator Instructions) Julian Dumoulin-Smith, Jefferies. Hey, this is Mark on for Julian. This is Spark. Congrats on a nice quarter. Christopher Franklin Thank you. Good morning. Morning. My first question is on equity issuance. We know two third of the equity needs have been completed so far. Just given recent share price strengths, are you considering completing the remaining roughly $100 million equity ahead of the second quarter and maybe any thoughts on perhaps pulling forward a portion of 2026 equity needs? Thank you. Daniel Schuller Yeah, I appreciate the question. And I think for the time being our focus is really getting the $315 million in equity raised here in 2025 rather than really thinking about the 2026 equity. But as you know, we've got a relatively strong share price, so when we can, we'll be in the market issuing shares in a way that doesn't dramatically impact the share price. Got it. That's very clear. And maybe if I can just pivot a little bit on the Texas rate case, I know as you're gearing up for your first Texas filings in roughly 20 years, and just what level of revenue increase are we and equity ratio are you targeting? I guess how should we set expectations around the case and outcome? I know you mentioned some positive dynamics earlier in terms of future rate case -- future tests here. Just any color on that front would be helpful. Thank you. Daniel Schuller Yeah. So that rate case, we haven't filed it yet. We we're looking to file it at the end of this month. That's our target at this point. You'll see when we file that -- you'll see what that revenue ask is and also, equity layer and ROE, but yeah, I'd say an equity layer in our ROE, expect to see something consistent with what we ask for in our other states. Christopher Franklin And I would say just to add to that, we work very hard to build a reputation in all the states where we operate with strong operating results, try to be very, very accommodating to regulators when they need to do things. And we've done the same thing in Texas. Now anytime you come in for rates after 20 years of being out, there's going to be some things to get over and figure out because we haven't been in for so long. And so I would just say, we'll work really closely with Texas regulators to adjudicate that case. But certainly, there may be some things in that case that we'll figure out as we go. Got it. That's very clear. And congrats again. Thank you. Christopher Franklin Yeah, thank you. Operator Durgesh Chopra, Evercore ISI. Christopher Franklin Good morning, Durgesh. Michael Huwar Good morning, Durgesh. Durgesh Chopra Good morning, Chris. and thank you for giving me. Hey, just a little bit more color, and I'm just looking for some reaffirmation here. It looks like you started the year really strong in terms of EPS. And when I sort of do some high-level math and take the midpoints of the ranges you've highlighted in terms of earnings contribution for quarter second, third and fourth, that will put you ahead of your top end of the guidance range. So maybe just talk to the -- is that you've started strong, but there's a long year to go, so you're kind of not raising guidance here, but you're starting strong or the strategy is to move costs from '26 into 2025 and derisk '26. Maybe just talk to that as to how you're seeing that play out. Daniel Schuller Yeah, great question, Durgesh. I think that first point you made, right, that we're four months into the year here and the financials really reflect the three months. So it seems premature to do much in terms of adjustment of our guidance range. And I'll acknowledge, we did have some nice tailwinds in the first quarter, but we've got three more quarters to go, and we may have some headwinds there that we encounter. So our thought was really just to wait and provide clarity really as the year goes on. Durgesh Chopra Got it. Okay, I appreciate that commentary. And then just kind of wanted to ask you on the EPA announcement here late April on PFAS they were kind of announced specific targeted actions. Just wondering how that impacts your operational strategy in tackling that forever chemical. And then any implications for the capital that you have in the five year plan, please? Thank you. Christopher Franklin Durgesh, we're full speed ahead. I've mentioned on previous calls that we've sat with regulators, both economic and environmental regulators in our key states. And the orders that we've received from them is full speed ahead, mitigate this, meet the timelines and we're -- so we're still on our projected budget of $450 million will be complete by 2028. And there is no hesitation here at all. We're going to spend it, and we're going to mitigate the affected wells and sources. We continue to test our system. So there are occasions where that could grow a little bit as we continue to test the various locations around the company's footprint. But there is no -- we've seen nothing from EPA or this administration that would suggest that we should slow in any way. So we're full speed ahead. Michael Huwar Got it, thank you. Christopher Franklin Thank you. Operator Travis Miller, Morningstar. Christopher Franklin Hey, Travis. Travis Miller Good morning everyone. Thank you. Just a little follow up there on the PFAS discussion. In terms of the financing, I got those numbers that you were talking about for Pennsylvania specifically, since you had some success there, how much is left, would you say of the $450 million that's allocated to Pennsylvania then net those low interest loans to the $55 million if you get that? Christopher Franklin Well, I would say that the spend in Pennsylvania is still largely to come. We have not spent much because in Pennsylvania, we have some larger plants that need mitigation. And so that takes much more planning, permitting and testing. So Travis, most of that spend is yet to come. We continue to look at the low interest loans and grants in Pennsylvania. And we're hopeful that we can get more. We've already been, as you said, successful, but we've got applications in for additional dollars to offset what our customers need to pay. I don't have exact numbers on the applications that we're in right now, but we're happy to take that offline and get you some more numbers. Travis Miller Okay. And that'd be incremental to the $69 million, the $10 million, and in the $59 million. Christopher Franklin Yes. Travis Miller Okay, great. Christopher Franklin Of what we've all received. Travis Miller Okay. Okay. And then a question for Mike, data centers, I'm sure you weren't surprised that there would be a question on data centers. When you talk about the opportunity there, is that just simply more gas flowing through the distribution center? Or are you thinking more direct contracts to like on-site generation. I heard a couple of gas companies talking about projects. essentially behind the meter. Is that a supply source that you'd think about? Or are we just talking about more distribution volume? Michael Huwar Thank you for the question. I mean I think it's a variety of things. I think team Pennsylvania, the economic development entity in Pennsylvania has indicated there is somewhere around 72 projects in various forms of development. What I'm describing is some form or fashion of all the things that you talked about. We believe in behind the meter generation not only for data centers, but large volume customers as well, but it is very fluid at this particular time. And of the projects that we're currently in discussions with it's very clear that there are different approaches to how this might happen. It's also very clear that the PJM grid does not have the adequate generation as you look out into 2030 and beyond to support virtually many of these projects. So natural gas will play a huge part in that. There's certainly latency within our system load factor that can be extrapolated to the benefit of customers, not only new customers, but our existing customers. And there's also potential investment that we might look at with potential partners. So we have a team that's been working on this for quite some time. we're thinking about it every day and how we can support these efforts not only to the benefit of the region, but to our customers and specifically Peoples and Essential. Travis Miller Okay. Great, I appreciate all the details. That's all I have. Thanks. Daniel Schuller Thank you, Travis. Operator (Operator Instructions) Gregg Orrill, UBS. Daniel Schuller Hey Greg. Christopher Franklin Good morning, Greg. Gregg Orrill Hey, good morning. Congratulations. Just maybe a follow-up there, with regard to the discussions that you're having with business opportunities on the gas side with data center customers. How do you see that evolving? When do you think those discussions would reach terms of agreements? What -- kind of what sort of update should we be looking for as the year progresses? Michael Huwar So again, I appreciate that question. As mentioned, with the vast number of projects that are currently in play. It's really hard to say specifically what the timing of any announcements would be. You've seen fairly large data center campuses that have already been announced. Those are not anything that we have portrayed in any of our analysis. I would also say that the state of Pennsylvania and any economic development packages they would put together those are going to have tremendous influence on who locates here. The unique potential of where individuals would locate data centers is something that we continue to look at. a really strong, robust delivery system. So I would hesitate to present the timing of when we would announce any type of deal and as I mentioned, the ones that we're looking at, they all come in various forms, shapes and sizes. So what we do know is that the speed to market influence is going to be really important for these developers. So I would suggest that as we develop deals and sign deals, we would come to the table with us immediately. Christopher Franklin There's so many contributing factors to state government here. Pennsylvania has really got to play a major role as well. If we think about site location, site readiness in addition to everything that the company is doing provide the adequate supply. Mike, I think the one you mentioned that got completed already Bedford, right? Michael Huwar Homer city. Christopher Franklin Homer, city. I'm sorry. Yeah, and so we have had some successes here in Pennsylvania. That one was not in our service area, but we're hopeful to see more of those, whether it's throughput or combinations. Sort of like we've done, Gregg, with the energy products that we sold last year. Those are always a possibility. But it's hard to say what form these ultimately will take the load timing. Gregg Orrill Okay, thanks. Operator Ryan Connors, North Coast Research. Christopher Franklin Hey Ryan, good morning. Daniel Schuller Good morning, Ryan. Ryan Connors Yeah. So Dan, one for you, Dan. On the O&M expenses. It seemed like that was a big surprise for us. And you mentioned the bad debt kind of a good guide there. Can you kind of give us frame a little bit for us what the core growth rate was in kind of core O&M and where we should be thinking about that over the balance of the year? Is that bad debt benefit going to continue? Or is that -- will that tail off? Daniel Schuller It that bad debt -- sorry, that benefit that I mentioned, that will continue, meaning it doesn't get any better. It was sort of a onetime nonrecurring item that's coming through the balance sheet here as a result of the conclusion of the Aqua Pennsylvania rate case. But if we look and we had the same question. So we look end-to-end here and say, well, if we didn't have some of these onetime-ish effects, including the customer assistance rider, that $8.5 million bar that you see at the beginning of the waterfall, if you kind of normalize this from last year's emission here, you'll come to about 2% -- call it, 2% -- between 2.5% and 3%. I think our quick math gave us 2.8% or so there. So that about O&M expenses. And as you know, we spent a lot of time really focused on keeping our O&M expenses under control, kind of remaining below 3% or closer to 2%, 2.5% is really our objective. Christopher Franklin Yeah. Dan, the work that we're just beginning here at the company, much like other utilities around lean should bear fruit over the next few years. Although we're in the investment stage of that at this point, just getting our People trained up and getting People focused on that kind of an approach to -- but that next level, Ryan, for us, is really on that lean approach and then seeing results over the next few years. Daniel Schuller Yeah. So I think kind of probably a bit year and first part of next year, Ryan, we'll be investing in that program and spending some money in order to get People trained up. And then beyond that, we look for some efficiencies to come out of that is really you've got the whole of the employee base looking at doing things efficiently, eliminating waste and taking action on those items. So we're really excited about. Ryan Connors Got it. Now Mike, one for you on -- has the company disclosed a rate base dollar value associated with that Intelis meter rollout? Michael Huwar No, we have not, at this point, no. Ryan Connors No. Okay. Got it. Okay. And then lastly, Chris, I wanted to just get your take on the Beaver Falls, I know it's not a massive deal, but interesting sequence of events there. I mean, you reached a settlement OCA was on board and then you get an adverse recommendation from the ALJ. So just curious what you can give us your take on that? Why we seem to continue to see these ALJ decisions go sometimes the wrong way and then also, when do you think we could expect to see Beaver Falls, actually come before the PUC. Because, could it be as soon as this month? Or would it be further out than that? Christopher Franklin Yeah. All good questions, Ryan. I wish I had a good answer for you as to why the ALJs in Pennsylvania continue to put the commissioners in a place where they need to return it. I'm hopeful that there was a philosophy emerging here that will make this a little bit easier to process because I think -- in some cases, that's what it is. It's a philosophy. Now I do think given the settlement negotiated. I do think we have a favorable chance at the commission level. We expect this to be on an agenda in June this year, so about a month away, maybe and listen, we're hopeful we're going to do all the work, and we've done all of our filings and everything to support this case. This is one is a primary example of a troubled system that needs assistance. The mayor came back lowered her price. We're taking a little bit of goodwill. The OCA got comfortable with it. This is one that should get done. This is -- we need to make sure that deals like this get done in Pennsylvania for the water supply in this state. Ryan Connors Got it. Thanks for that. Helpful. We'll definitely keep an eye on it. Thanks for your time. Christopher Franklin You got it. Daniel Schuller Yes, thank you. Operator This concludes our question and answer session. I will now turn the call over back to Mr. Chris for closing remarks. Christopher Franklin Thanks everyone for joining us this morning, and as always we stand ready to answer any of your follow-up questions. Look forward to hearing from you and have a great day. Operator Thank you for joining today. You may now disconnect.
Yahoo
28-02-2025
- Business
- Yahoo
Q4 2024 Essential Utilities Inc Earnings Call
Daniel Schuller; Executive Vice President and Chief Financial Officer; Essential Utilities Inc Christopher Franklin; Chairman of the Board, President, Chief Executive Officer; Essential Utilities Inc Ryan Connors; Analyst; North Coast Research Durgesh Chopra; Analyst; Evercore ISI Institutional Equities Travis Miller; Analyst; Morningstar Inc. Operator Thank you for standing by. My name is Elina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essential Utilities full year 2024 earnings call. (Operator Instructions)I'd now like to turn the call over to Dan Schuller. You may now begin. Daniel Schuller Good morning, everyone, and thank you for joining us for Essential Utilities fourth quarter and full year 2024 earnings call. This is Dan Schuller, Chief Financial Officer at Essential. I'm stepping in for Brian Dingerdissen who welcomed twins this past you did not receive a copy of the press release, you can find it by visiting the investor relations section of our website at The slides we will be referencing and the webcast of this event can also be found on our website.I did want to take a moment to introduce our new IR director, as you may have seen his photo on the deck that is posted. Ed Vallejo, with whom most of you are familiar from his time in the industry, joined our team just last week. Ed hit the ground running and will fully engage in our IR activities right away. Welcome, move to the forward-looking statement. 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 the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of any non-GAAP to GAAP financial measures is posted in the investor relations section of the company's the call today with Chris Franklin, our Chairman and CEO, who will provide an update on the company, and then I'll provide an overview of our financial results before Chris closes the call with our guidance. And with that, I'll turn the call over to Chris Franklin. Chris? Christopher Franklin Hey, thanks, Dan. Ed, welcome aboard. Nice to have you with us and good morning, everyone. Thanks for joining us. Hey, listen, as I reflect on 2024, I have to tell you I'm really proud of the performance of the company, the team that leads it, and all of those that did the work to make the year so 2024 is another year in a string of years we have reported earnings per share in line with our 5% to 7% guidance. In fact, on a GAAP basis, we delivered $2.17 per share. The GAAP earnings, of course, include the gain on sale from the Pittsburgh energy projects. When you think about repeatable earnings, I'm talking non-GAAP would think about finishing the year at about $1.97 earnings per share. Dan's going to provide more detail on this in just a few these outcomes would not be possible without the discipline of our operating teams. They held operating expenses this year to only 2% growth year over year and completed our $1.3 billion capital plan right on operating expense control is key to keeping rates affordable, and our timely capital investments improve water quality, gas safety, and service reliability, all while building rate-based and of course earnings for the course of the year, we responded to investors who wanted to get to know our operating team leaders a little bit better in both water and natural gas. And so Colleen Arnold, the Head of our Water Business, and Mike Huwar, the Head of our Gas Business, spent time on the road with us in investor meetings throughout 2024, and that will continue into the future, as I know you enjoyed the interaction with both Mike and when we think about our accomplishments and our consistency, consider that the Board raised the dividend by 6% in 2024, and that's consistent with our 30+ year track record of growing the dividend at a healthy rate. In fact, it's sort of amazing to consider that we've grown the dividend approximately 40% in just five short years, and we've paid a dividend now for 80 straight the accomplishments that we're most proud of in 2024 are the successful water and natural gas rate cases in Pennsylvania, the state that contains, 75% of our cases were black box settlements. But most of you could easily estimate the approximate equity layer and ROE that were granted in those cases. We believe these strong regulatory outcomes combined with the recent changes at the Office of the Consumer Advocate are reminders that Pennsylvania continues to be a constructive regulatory also believe that our strong regulatory reputation of doing the right thing should continue to facilitate positive regulatory outcomes that are both good for customers and fact, since the recent change in leadership at the OCA, the agency has withdrawn its protest of the people's rate case, a really good sign that a more moderate approach to regulatory relations may be coming to that of the key accomplishments in the people's rate case was the establishment of weather normalization. This regulatory solution has already proven to be beneficial to both shareholders and customers. In January of 2025, just last month, because of abnormally cold weather, the company will give back about $8.2 million to customers. But shareholders will also reap some benefit from this cold line is that in that short time since October, when the weather normalization was first put in place, the smoothing of weather volatility and the associated revenue is working exactly as while we're talking about regulatory accomplishments, I want to mention that in 2024, there was some reform of the fair market value statute that was passed by the PA Public Utility Commission. As I think you already know, we were actively engaged in that solution with the believe that this reform will bring greater certainty to the process and should also help keep rates at affordable levels. Already we're seeing increased activity for municipals that are interested in selling their right, when we think about 2024, I have to mention the progress that we've made in PFAS mitigation. We spent about $27 million in capital and completed the mitigation work in 13 plants. This is toward our four-year goal to mitigate approximately 300 plants at an overall estimated capital spend of $450 solution we're applying to most of our plants is a patent pending approach that we're also marketing to other utilities as a solution to their PFAS issues. Now it's too early to predict whether our solution will be additive to earnings or not, but I'm proud of the team for engineering the solution and for the pace of our of our top priorities in the natural gas business will always be risk reduction. In fact, in 2024, we focused on several key risks. First, we installed 30,000 Intelis meters. These are the meters made by Itron. We believe that these meters are literally a game changer for safety. The meters are a lighter weight, slightly smaller and more accurate, but most importantly, they prevent you consider the catastrophic incidents that have occurred within the gas industry, over the past decade, if these meters had been installed, they hadn't been invented when those incidents happened, but had they been installed, many of these fires could have been prevented. Now, we'll install at least 60,000 more of these meters in 2025 as we ramp up this new potentially life-saving think about risk in the gas business particularly, we also think about underground storage wells. That's why we reconditioned some of our older wells and abandoned some others. Overall, the work we did on underground storage wells in 2024 reduced our risk scores by 50%, a significant part of our capital plan in 2024, we replaced more than 370 miles of water and natural gas mains, which is key to the continued reduction in our carbon footprint. Our expectation remains that we will spend nearly $7.8 billion in capital over the next five years. So in preparation for that work, we continue to deepen our bench of talent by creating development opportunities for members of the team so we can continue the long-term consistency of results that has been our we had our challenges in 2024 as well. In Pennsylvania alone, we were named receiver for 10 water and wastewater systems. These are systems that the former owners neglected and they were undercapitalized. We responded quickly when the Pennsylvania Public Utility Commission asked us to operate these systems. We invested capital and made I got to tell you that receiverships are not the best solution. We will be, in all of our states with the environmental agencies to push the improved enforcement. This deferral of investment and ultimate dilapidation did not occur overnight, and we'll use this example to encourage environmental agencies to enforce earlier which could provide us an opportunity to rescue these systems before they reach a critical other macro challenge that we face in the water industry is stock performance. Now, we're no exception, and I'll say that we were pleased to be the strongest performing water stock in 2024, but still disappointed in not seeing our successes reflected in our overall current moving to 2025, I already mentioned the successful Pennsylvania rate case. It did receive final approval on February 6 by unanimous vote of the Public Utility Commissioners in look forward, our theme this year is Leading Today, Shaping Tomorrow, which captures our dual focus. Solving today's issues with urgency or building a foundation for tomorrow through a focus on sustainable business to facilitate this work, a key theme in 2025 will be to focus on lean practices across our footprint and throughout our corporate functions. Operational excellence has always been a cornerstone of our company, and we're going to lean into that even further beginning this year. Some of the best performing utilities across the country have adopted lean practices, and we believe that Essential will benefit from this approach in the coming last issue I'll mention is probably the hottest topic in the utility industry right now. Low growth generated by data centers. This creates a challenge and an opportunity. See, some investors see greater growth in the electric utility industry compared to the stability and more measured growth of water and natural our company and investors are uniquely positioned to benefit from both growth and stability. Our investors have the stability and growth of the second largest investor-owned water utility in the United States. We're also benefiting from the potential low growth from data center construction within our natural gas service is important. As of today, we're in discussions with data center developers that represent up to 5 gigawatts of needed power generation in the Pittsburgh region if the data centers are built. Well, all of that may not be built, and the exact financial implications for us aren't known, it is exciting to see the state of Pennsylvania is engaged in these opportunities, and we would welcome both the increased throughput and any capital improvements that would be associated with that growth because of the potential benefit to customers and the listen, we were really pleased to reinitiate long-term growth guidance in November with expected annual EPS growth of between 5% and 7% through 2027 off of the $1.97 non-GAAP base we earned in 2024. This does not include any potential earnings associated with the pending acquisition of DELCORA. Additionally, we'll spend between $1.4 billion and $1.5 billion in capital in 2025. And will invest nearly $8 billion in infrastructure improvements over the next five years. That will lead to 8-plus percent annual rate-based growth before accounting for any right. With that, let me pass it to Dan to get into the financials from 2024. Daniel Schuller Thanks, Chris, and good morning again, everyone. This first slide, let's talk high level on full year 2024, and then we'll get into the details on the waterfalls. During the year, we had exceptional execution on two large rate cases, Pennsylvania Gas and Pennsylvania Water, which actually just concluded earlier this month, and we reached a great outcome with the sale of our non-core Pittsburgh area energy projects which allowed us to reduce our financing needs in continue to see the merits of our long-term strategy of providing outstanding service to our customers, investing in needed capital improvements, managing our day-to-day O&M expenses, and maintaining our disciplined regulatory practices to deliver long term shareholder revenues were up due to rates and surcharges and increased water volume. This was offset by the decline in natural gas commodity prices year over year, which positively impacted our customers' bills and due to weather, which was warmer than normal for the gas business as compared to the prior as a reminder, we now have the weather normalization mechanism that provides customers better certainty and alleviates the volatility associated with extreme weather. While we continue our focus on managing O&M expenses, the full year O&M shows only a slight increase, reflecting our long-term focus on operating efficiently and the sale of our West Virginia and energy project Chris mentioned, on a GAAP basis, we achieved EPS of $2.17 for the year, which is up from $1.86 in 2023. These results include the gain on sale, plus the impact of warmer than normal weather in the first half of 2024 for the gas business, and drier than normal weather in the mid-Atlantic and Ohio for the second half. If you adjust for these factors, you'd be squarely in the 2024 guidance range of $1.96 to $ let's walk through the full year waterfalls. At slide 11, we have the revenue waterfall for the year. Moving left to right, we have rate increases and surcharges of nearly $83 million, with about $51 million of that coming from water and $32 million from in water volume of 11.6 million and then other, which is mainly the weather normalization adjustment and the gas customer assistance program rider offset by the loss of revenue from both the West Virginia utility assets and the energy projects of $8.4 million plus acquisitions and organic growth in the water business of $8.2 million. Offset by lower gas consumption, as well as the impact of the lower purchase gas costs of approximately $75 a reminder, we experienced dry -- warm weather over the summer and into the fall in Pennsylvania, New Jersey, and Ohio, which led to increased water talk about the natural gas business for a moment. Through June, each of the months of 2024 was warmer than normal, and this had a significant impact on our financial results. This is exactly why we asked for the weather normalization adjustment in our people's rate case. Now we've already seen the benefit of weather norm, both for the company in the fourth quarter and for customers in early let's look at the O&M on slide 12. ONM increased just 2% or under $12 million year over year in 2024. Increase included additional costs from the gas segment Universal Services rider, which is recoverable through a revenue surcharge, as well as employee-related expenses, increased water production costs, so mainly purchased wastewater, power, and purchased water offset by lower chemicals, and expenses related to serving acquired water and wastewater increases were offset by lower bad debt costs and lower expenses due mainly to the sale of the West Virginia utility assets and the energy projects. So overall, a good story on O&M consistent with our long term let's look at the EPS waterfall on slide 13. So the left side of the waterfall with GAAP earnings per share of $1.06 from last year, the next thing we see is the nearly $0.22 increase from regulatory recoveries. $0.05 from other, which includes the approximately $0.25 gain on sale of assets and related transaction activities, plus weather normalization adjustment revenue offset by increased depreciation, interest and taxes other than income, as well as lower income tax we see the $0.03 gain from water volume and nearly $1.50 gained from water gross, which were then offset slightly by higher expenses and lower gas volumes. That gets us to the $2.17 of GAAP EPS for thought it was important to clarify that the $2.17 includes $0.25 of gain on sale of assets, which includes the energy project and a true up for post-acquisition activities on the previously closed West Virginia gas utility assets. And then if we normalize the weather impact of $0.05 of EPS for the year, we get to $1.97 of adjusted earnings per share, which is a non-GAAP that $1.97 dollars is our weather normalized results without the asset sale impact. That $1.97 dollars is nicely in the original $1.96 to $2 guidance range for the year, and above the current full year 2024 consensus of $ the $0.05 weather impact incorporates both the positive impact of the dry summer and fall on our water segment sales and the larger unfavorable weather impact you may recall from the first half on our gas you may be aware, we're currently experiencing drought conditions in the mid-Atlantic that we've not seen in about 20 years. Given our water supplies and the resiliency of our systems, this is not having much of an effect on us now, but we'll keep you posted as the year let's move to the slide on rate activity. This slide highlights our regulatory activity during the past year and into 2025. We continue to manage our regulatory activity to maintain safe and reliable service, earn a fair return on capital that we invest, and minimize regulatory lag while always considering affordability for our you can see on the slide, 2024 was a significant year for regulatory activity. We completed rate cases or surcharges in many of the water states to raise annualized revenue by nearly $54 million. This included the late 2024 settlement in Illinois. And as we previously discussed, in September, we completed the first rate case since the merger at People's Gas, which included a $93 million revenue increase and the weather norm adjustment we mentioned total, we had annualized rate or surcharge increases of about $148 million in 2024, which I believe is the most significant year on this month, the PA PUC voted 5-0 to approve the settlement previously announced for the Aqua, Pennsylvania rate case, increasing revenues by $73 million on an annualized basis. In total so far in 2025, we've received rate cases or surcharges to increase annualized revenues by $86.5 million in the water we have pending rate cases or surcharges totaling approximately $16 million across the company. Today, with the majority of that being an ongoing rate case in our Kentucky gas business. And later in 2025, we expect to file rate cases in Texas, North Carolina, Ohio, and Virginia. And as a reminder, we expect to file a people's rate case early next year. And with that, I'll turn it back to Chris. Christopher Franklin All right, thanks, Dan. Let's touch briefly on our acquisition program. I want to point out the recently closed Greenville wastewater acquisition in Pennsylvania. This is the first municipal acquisition we've closed since the PA PUC C-motion was published. It's a pretty important milestone for us. As of this call, we have six signed asset purchase agreements in three states in which we already have existing acquisitions will add over 210,000 customer equivalents and total approximately $344 million in purchase price. I should note that nearly 70 million of that rate base are deals other than we continue to see a strong and healthy pipeline of opportunities for additional growth, and we currently have activities, and engaged discussions with municipalities that have over 400,000 potential water and wastewater our Board meeting just this past week, we spoke about several potential transactions where we have submitted bids and well, we don't know that we'll get all those deals, we are seeing increased levels of and in closing, we were pleased to share our new multi-year financial guidance and growth guidance back in November. This guidance provides a clear line of sight to the opportunities in front of the company. In 2025, we expect earnings per share to be between $2.07 and $2.11. Importantly, now that we have a weather normalization mechanism in place, the volatility of earnings associated with unusual weather should be dramatically the three year period through 2027, we're guiding to a compounded annual growth of EPS at a rate of 5% to 7%, and this does not include DELCORA and is based off of the $1.97 non-GAAP 2024 EPS that Dan we look to the next five years through 2029, we plan to make regulated infrastructure investments of about $7.8 billion. And notably does not include unsigned acquisitions or associated follow-on capital from those expect our 2025 capital expenditures on infrastructure to be approximately $1.4 billion to $1.5 billion. And through 2029, we anticipate that the regulated water segment rate base will grow at a compounded annual growth rate of approximately 6%. This projection only includes the acquisitions listed on the previous slide, which are scheduled to close in 2025 and in 2026, and again, excludes DELCORA. This projection does include the crucial work that we are doing to remediate PFAS across the systems we currently own and for our regulated natural gas segment, we expect the rate-based growth at compound annual growth rate of approximately 11% through 2029. We plan to continue replacing aging natural gas pipes well past the next a combined basis, water and gas, we project rate-based growth at a compounded annual growth rate of over 8% through 2029. This growth will be driven by our ongoing investments in infrastructure and our commitment to operational excellence.I'd expect that when we look back on these five years, we will have done even more given the acquisition pipeline that is not factored into our rate-based growth projections. We believe that the rate base and earnings growth we've described could be accomplished while we keep customer rates at affordable anticipate that our water customer base will grow at an average annual growth rate of between 2% and 3% over the long term, largely because of the continued consolidation opportunity in water and wastewater and the strong organic customer growth, especially in Texas and North support our growth and meet our credit metrics, we plan to raise equity via our multi-year ATM program through 2027. Specifically, in 2025, we expect to issue approximately $315 million in equity through the ATM. And that's after raising about $36 million previously that we guided to in believe that $315 million will satisfy our capital needs, fund our growth initiatives, and maintain a strong balance sheet for our credit profile. Now, that concludes our formal remarks for the day, and we look forward to answering any of your questions. Operator, if you'll please open the line for any questions. Operator Julien Dumoulin-Smith, Jefferies. This is [Spark Owen] for Julian. First off, congrats on closing your first fair market value acquisition in Pennsylvania. With M&A activity picking up, how do you think about the cadence of your $1 billion long term equity plan? Is it still closely tied to wrapping up DELCORA, or there are some new factors now driving it? Daniel Schuller Yeah, it's a good question, Paul. I mean, as we indicated on this call is very consistent with what we said in the last call, which the last call we said $350 million between 2024 and 2025. We raised about $36 million in 2024, so that that leaves us with that $315 million that Chris mentioned. So, that obviously is for 2024, so 2025 I should say this point we DELCORA is not expected to close this year and as we've told you, we've taken it out of our five-year plan, we certainly are committed to it and we believe it will close, but when we think about the program that we have and said that the $1 billion program would likely last us something like three years, but if we have an accelerated acquisition program and DELCORA comes into that, then we could exhaust that $1 billion program inside of that three years that we wasn't set in stone when we said it initially, so you have some flexibility there depending on how the acquisition program develops. And as you know if the acquisition program accelerates, that'll be a good problem to have. Got it. Appreciate the call there. I will jump back to the queue. Daniel Schuller Thanks, Paul. Take care. Operator Ryan Connors, North Coast Research. Ryan Connors Hey, good morning. Yeah, thanks and welcome back to the to the water space there, Ed. Good to see that. I wanted to ask update, Chris, you kind of gave a little bit of color on the OCA, Consumer Advocate situation in Pennsylvania. I wonder if you can expand on that just in terms of what kind of timeline are we looking at to a permanent nomination?I know we've got a sort of an acting or an interim person there. Do they have the same powers legally that the permanent person does, or are there other things that they can and cannot do in terms of, on East Whiteland, for example, I know that's a kind of a pending matter out there. So just kind of looking for some color on when we get a permanent nomination in your view and what happens in the meantime, that we're kind of limbo here. Christopher Franklin Yeah, good question, Ryan, and really important question for the utility space in Pennsylvania. Tanya McCloskey, who was a terrific consumer advocate was never confirmed by the Senate. She sat in that seat for many years, not being confirmed. So yeah, the power of the consumer advocate even on an acting basis is still very strong and I think largely the same power as a fully listen, the acting consumer advocate Darryl, terrific guy, been there 25 years. We've worked with him for many years, so we enjoy a relationship much like we did with Tanya and Tanya's predecessor before that Sonny timeline is sort of undetermined. I think the Attorney General has a lot of things to set up in the space of Attorney General and then to look at this sort of niche regulatory aspect of his role, I think he's going to take his time and that's what he's indicated and make up his mind. I know he's doing interviews over the next couple of weeks and we'll see what he comes up with in terms of his ultimate pick for a consumer advocate, but obviously we're watching it very closely. Ryan Connors Yeah, and then as a follow on to that, I mean you talked about this sort of potential re-acceleration of firm market value transactions in Pennsylvania now that the C-motion is complete and the consumer advocate change at least to the interim has been made. I mean, is that something where if you're a buyer or even a seller, are people still going to kind of wait around and see who that permanent person is or do you think that could kind of open up right away? Christopher Franklin Well, listen, I hate to read signals, so I think probably if you're a seller, you may say, okay, let's see what the first one through is. Now Greenville's through already and so that was very positive and, I felt like that was handled listen, I think these transactions have greater certainty since the C-motion was passed, and I think they have even notched up in certainty with the change of the OCA. Listen to -- there's plenty of opportunity to between utilities and the various advocates to argue over I think what we need to guard against is an overly litigious atmosphere. I think that's what we had. I think we're moving away from that fortunately into something where compromise is more part of the solution. I think that's where the consumers are best served. Ryan Connors Yeah, and then one more if I could just sneak in, the data center comments you made, very exciting there and but I wonder if you could just explain kind of the fundamental nature of those deals. We've done a little bit of reading on that, and my understanding was it was more I guess with these so called behind the meter deals which are with more upstream from an LDC. So you just kind of give us some general characterization of of what those look like for a company like People's. Christopher Franklin Yeah, and Ryan, I think you probably would think about this like we would and this could take many shapes and forms and so it's hard to know. But listen, I think if we just got the throughput, increased use of natural gas, that's a help to our customers, right? It keeps rates down. So that's there was an opportunity for us to do something where we would build some extension of lines, a capital project that could facilitate obviously that builds rate base, and then finally, if we were to look at opportunities like we did at the airport and some hospitals out there to build some kind of on-site generation. And that would be, largely in the non-regulator or unregulated it could be a lot of different forms and I think what we look at here and, I think about, generally in the electric industry is these developers, if you will, are talking to multiple cities at the same time, so it's hard to know if there's a lot of double counting going out there, but we think, just given the the volume of the interest in Pennsylvania, Western Pennsylvania where we are, that it's a really interesting opportunity potentially for us and just sort of undefined at this point. Ryan Connors Great. Well, hey, thanks for your time. Christopher Franklin You bet. Operator Durgesh Chopra, Evercore ISI. Christopher Franklin Hey, Durgesh. Good morning, Durgesh Durgesh Chopra Hey, good morning, Chris and Dan. Congrats to Brian, and then also congrats on getting Ed on board the team. Double congratulations. Okay. one question from me. On this PFAS stuff actually two part question. First, are you seeing any, with all the noise coming from DC, any change in your strategy, any change in your capital plans on this investment? I believe you said $450 million is in the plan. Just wondering if any of that is at risk. So that's part one of the two, Chris, I think you mentioned some the patented technology that might be earnings accretive, maybe just a little bit more color on that. What are you thinking there? Thank you. Christopher Franklin Yeah. Well, let me take PFAS first because I just came back from Washington, spoke on a panel as did Colleen Arnold, our segment President for water on this issue of PFAS, and I think what regulators, is this was largely PUC Commissioners from all over the country. And what they really wanted to know is how we were seeing what we were hearing from the federal government on so. Listen, the way we think about it today is it's a health MCL, right? And so at four parts per trillion, we don't see a rollout. We're not hearing about a rollback in that MCL. Might there be some easing of the time to comply? Maybe we haven't actually even seen that I think I've mentioned on the calls before, but just let me remind you that we met with the Chief Environmental Regulator and the Chief Economic Regulator, the PUC in each state where we're putting these units in and what they've told us is full speed ahead. And so, number one, we don't anticipate any slowdown in our installation. Number two, we don't expect any challenges in the recovery of or on those I'll remind you, we continue to focus on the lawsuits. We still think we're going to get about a little over $100 million for the -- to offset some of our capital costs, and we're very aggressive. In fact, we received a number of compliments from Public Utility commissioners in Washington this week for our aggressive nature on getting state and federal funds to offset the cost of the PFAS really proud of the patent pending solution we're putting out there. What Colleen's team continues to do is drive down the per unit cost of these. So while we're still guiding to about $450 million spend. The hope is between the proceeds from the lawsuits, the proceeds from, any loan funds or grants and the driving down of the overall cost that we can come in less than that. But, at this point what we're comfortable with those estimations. Daniel Schuller Yeah, I guess I just add that this patent pending approach we have, it's really a modular approach that we can implement in small systems. These are cost effective both to install and then to maintain as you think about changing the media in the initially what we're doing here is we're rolling these out across all of our small systems, so basically accounts for all of those systems that we have in North Carolina they're kind of in the right size and our systems in Virginia and Pennsylvania as then as Chris noted on the call, we're talking to other utilities about these if it's something they're interested in, and we certainly like to have those discussions. We do think that these systems could be helpful in a lot of applications and so that could become a revenue generator for us, but happy to have conversations about the technology that we've developed and Kelly and her team have really spent a lot of time perfecting. Durgesh Chopra Awesome. Okay, that's all I have. Thank you. Operator Travis Miller, Morningstar. Travis Miller Hello, everyone and thank you there. Christopher Franklin Yeah, good morning, Travis. Travis Miller You nearly answered my PFAA question, so I'll ask this and see just clarification wise. That $450 million does that include, so would you deduct then in terms of your cash outlay, the $100 million lawsuits and any grants, or is it $450-plus million the $100 million lawsuits and other grants in terms of total cost? Does that make sense? Daniel Schuller Yeah, no, that does make sense. So we started the $450 million as being net of the proceeds that we received from the lawsuits and low-income loans and grants that we're getting and really I should say grants because if it's a loan, we obviously still get the rate basis instead of proportion that is supported by lower cost think of that as the net investment that we'll make and of course, we're doing everything we can to help moderate the impact for our customers. So if we can get more in terms of lower cost financing or grants, we'll do that in order to help our customer affordability. Christopher Franklin Travis, I would think about this too as we continue to test our systems, we find new wells that need to be treated and so it's a little bit of a moving target over a period of years. We're trying to drive costs down and get loans and grants the same time, the number of systems tends to trend up, and so that's why we're pretty confident in guiding to that $450 million. Travis Miller Okay, so that's a true kind of rate-based, incremental rate-based type of number. Christopher Franklin That's how we think about it. We'll continue to guide each year as we adjust. Daniel Schuller Yeah, that's pretty (multiple speakers) good at this time, Travis. Travis Miller Okay, yeah, that makes sense. And then I think in the past you've talked about maybe some more creative ways rather than just traditional base rate cases to get that number in the rates, get the return on, return off. Any updates there in terms of writers or something else that might be more creative than just simply general case for that treatment PFAS specific. Daniel Schuller We have looked -- we are having conversations with our regulators around deferred accounting related to these types of systems. I can give you an example, like in North Carolina where we have a three-year forward-looking rate case in this first one, we've had discussions around deferred accounting and we filed this next rate case this spring. For the next three years, we'll have our PFAS investments in each of those three years, so they trying to cover as much of this in rates on a ongoing basis as we can. Travis Miller Okay, great. Makes sense. And then one other -- you since you brought up the data center, we appreciate the other details you gave there. Just another clarification or follow on from that. So would you potentially anticipate doing an on-site type, I hate to say co-located, but the great word of the year, but something along those lines like a water and gas type facility that would ultimately serve power, is that -- the way I'm interpreting your earlier comments. Christopher Franklin I would point you to -- we've got a little history of building CHPs, and so -- and we obviously partner with entities that do that work. So I would say that the possibilities are open and we just at this point, we need to see what those developers are specifically looking then as you know from covering it across the country, they're looking for lowest rates. So, I think the solution would be, how can we get them the lowest cost power. Daniel Schuller It's certainly a region like that we serve in Western Pennsylvania, we've got access to gas from the Marcellus and the Utica. That natural gas does tend to be priced lower than what you see on Nimax. I call it a $1 dekatherm on an ongoing basis. Christopher Franklin Yeah, it just be like going to the electric utility. They want to come to one place for the solution. That's how we would think about it as we did with CHPs, we would come up with a solution that works for them. Travis Miller Okay, sure, that makes sense. That's all I had. Appreciate it. Christopher Franklin You got it. Daniel Schuller Thanks, Travis. Take care. Operator We have reached the end of our Q&A session. I'd now like to hand back over to Chris Franklin for final remarks. Christopher Franklin Thanks for joining us today, folks. We, as always, are available for questions afterwards. Please feel free to reach out to Brian, Ed, and the rest of the team. Thanks so much. Operator Thank you for attending today's call. You may now disconnect. Goodbye. Sign in to access your portfolio
