Good day, and welcome to the Essential Utility, Inc. 2nd Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen.
Please go ahead, sir.
Thank you, Cassie. Good morning, everyone, and thank you for joining us for Essential Utilities' 2nd Quarter 2021 Earnings Call. I am Brian Dingerdissen, Head of Investor Relations.
If you did not receive a copy of
the press release, you can find it by visiting the Investor Relations section of our website at essential.co. The slides that we will be referencing and the webcast of this event can also be found on our website. Here is our forward looking statement. As a reminder, some of the matters discussed during this call may include forward looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different For 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. During the course of this call, reference may be made to certain non GAAP financial measures.
A reconciliation of these non GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the website. After the presentation, we will open
the call up for questions.
Here's our agenda for the call today. We'll start with Chris Franklin, Our Chairman and CEO, who will discuss highlights and provide a company update. Next, Dan Schuller, our CFO, will discuss our financial results. Chris will then provide an update on our municipal acquisition program and conclude the presentation portion before opening the call for questions. With that, I will turn the call over to Chris Franklin.
Hey, thanks, Brian, and good morning, everyone. Thanks for joining us. Let's start the call with a look at the 2nd quarter highlights. We had another strong quarter with net income growth of 8.4%. Dan is going to discuss that in detail in just a moment.
We invested over $404,000,000 in infrastructure improvements throughout all of our systems in the first half of the year as compared to $346,600,000 in the Q2 of 2020. You might recall that in May, our long term board member and former CEO, Nick Benedictus, stepped down, Creating a vacancy on the Board. Then in July, the Board appointed Dave Ciesinski to join the Board of Director. Dave currently serves as President, CEO and Director of Lancaster Colony Corporation and serves as President of T. Marzetti and Company.
It's a food company based in Ohio. At Essential, Dave will serve on our audit and corporate governance committees, where he brings extensive experience developing and implementing plans for growth and with a very successful leadership team. The addition of Dave Ciesinski along with Edwina Kelly, who was appointed earlier in the year, has brought our Board back now to 9 members. Also last month, the Board approved the 7% increase to the quarterly dividend, which is now nearly $0.27 marking 3 decades of dividend increases. Our municipal acquisition strategy remains strong as we announced the closing of Our first fair market value transaction in Texas and we have 7 pending acquisitions totaling about 458.5 $1,000,000 in purchase price.
And finally, we published our 2020 ESG report that fully incorporates Our natural gas segment, I'll talk a little bit more about that in just a moment. The first, the 7% Dividend increase we announced in July marks the 31st increase in 30 years and the 76th At a consecutive year of quarterly dividend payments, we're very proud of that. Following the increase, the annualized dividend rate Will be just over $1.07 per share. We're really proud of not only our commitment to providing Safe and reliable access to natural resources for our customers, but also our long and consistent record of delivering shareholder value. Now you might recall that last October, we launched our new ESG microsite, which included our 2019 results for our legacy water and wastewater operations.
I'm excited to tell you today that we are launching our 2020 ESG report on the microsite. We just published it in the last couple of days. And in the new report, gas operations are fully included for the first time. In fact, we provide the same level of depth for both our legacy water wastewater business and our natural gas business. We also share information at the enterprise level in the new report.
Now we didn't simply add gas operations to the report. We also included some new topics and some more extensive information on some of the topics that I know are important to many of you as investors. I think you'll find the ESG microsite makes the experience even sharper, more dynamic and even more user friendly. So I hope you take a look at it. Now this enhanced site covers our continued commitment to our mission despite our COVID-nineteen challenges.
It also covers our excellence in water quality, including our 7 time outperformance of the average in the United States. It further discusses our 7% increase in diversity hiring year over year along with More detailed workforce composition data as many companies are now doing. This progress on ESG during a difficult year in 2020 Helped us earn recognition as one of the 100 best corporate citizens in the Russell 1,000, again, something we're very proud of. While we're talking about ESG, I want to update you on our progress on the ESG commitments we announced at the start of the year. We set a multiyear employee diversity target to reach 17% of our employees of Color.
Currently, we're at 14% of our essential employees are people of color. We also set up another multi year target Of 15% of our suppliers would be diverse. We've made strong progress since the beginning of the year. In fact, we currently stand at about 9.6%. We've also achieved a 5% Scope 1 and Scope 2 emissions reduction.
This is a strong start toward our Our 2,035 goal of a 60% reduction in greenhouse gas from a 2019 baseline And achieving that target will put us more than halfway toward our ultimate goal of net zero emissions. We're confident that we have the programs and the plans in place to achieve our targets and look forward to continuing to share our progress with you over the coming years. We know that our commitment to environmental stewardship, sustainable business practices, Employee safety, diversity and inclusion, customer experience and community engagement is also very important to our investors. And with that, let's talk about the Q2 financial results. Dan?
Yes. Thanks, Chris. Good morning, everyone. We ended the Q2 with revenues of $397,000,000 up about 3.3% from last year. Our regulated water segment contributed 248,200,000 And our regulated natural gas segment contributed $141,600,000 O and M expenses remained relatively flat for the quarter, decreasing to 127 $5,000,000 in the 2nd quarter, down from $128,600,000 in the 2nd quarter of last year.
Net income was up 8.42 percent year over year from $74,600,000 to $80,900,000 and GAAP Earnings per share increased by $0.03 from $0.29 to $0.32 Next, we'll walk through the waterfall slides starting with revenue. In the Q2 of 2021, revenues increased $12,600,000 or 3.27 percent on a GAAP basis. You'll see that rates and surcharges were the largest contributors at $9,200,000 with the primary driver being the regulated water segment. Increased volume and growth from our regulated water segment provided an additional $5,700,000 towards the revenue increase, while the price of Purchased gas added approximately $1,500,000 and other added $1,200,000 These revenue increases were offset by decreased volume From the regulated natural gas segment of $4,900,000 due to the warmer weather than last year. Next, Let's look at the water consumption by customer class.
We had favorable conditions in the Q2 and water consumption increased in every state except Texas. In aggregate, water usage was up 4.2% in the 2nd quarter. However, it's worth noting that for the first time since COVID started, Residential usage declined. As you recall, commercial water consumption has consistently been down since COVID began, But with many businesses reopening and customers returning to the workplace, commercial usage increased 20% for the quarter and our other segments were favorable versus last year as well. When compared to the 1st 6 months of 2020, The overall usage was up 3% in 2021 as almost all customer classes increased their usage year over year.
Operations and maintenance expenses were $127,500,000 for the 2nd quarter, down 0.85% compared to $128,600,000 for the Q2 of 2020. Employee related costs were up $4,600,000 for the quarter, which included $3,200,000 of increased medical costs. This increase was expected as many people delayed non emergency medical visits during COVID and then recently began to return to their healthcare providers. Production costs and growth for the regulated water segment added another $2,200,000 However, these increases were offset by $4,300,000 in other $3,500,000 in COVID-nineteen costs when compared to Q2 of 2020, resulting in the overall decline in O and M expenses. Next, we will review the earnings per share waterfall.
GAAP EPS for the Q2 increased by $0.03 from $0.29 in 20.20 to $0.32 Rates and surcharges added $0.025 Volume and growth from our regulated water segment together contributed $0.01 5 and O and M added nearly a $0.01 These were offset by lower volume from our regulated natural gas segment of $0.014 and another penny from other items, including depreciation, which brought us to GAAP EPS of $0.32 for 2020 for the Q2 of 2021. When we rolled out our formal guidance earlier this year, we provided relatively large ranges for our quarterly breakdown. For Q2, we saw warm dry weather across much of our water service territory, resulting in stronger than expected water sales and more favorable than expected expenses including O and M tax and other, which led to the strong $0.32 of EPS. This built off of what was expected and largely reflected by many of you to be a flat to down performance versus the same quarter last year, largely due to the way the Peoples Repair benefit was reflected in our condensed year of ownership in 2020. While I know most investors are not particularly focused on quarterly estimates and are instead more focused on annual earnings, we want to bring additional clarity to what we see for the 3rd and 4th It's not our intention to permanently provide quarterly guidance, but we thought it might be helpful to provide some additional details this year.
Specifically, when you look at our year to date performance and add current consensus for Q3 and Q4, You might assume that we have a very big year for earnings. But keep in mind that there are expenses that are expected to come through during the second half, including expenses related to Peoples acquisition commitments, certain maintenance items and increased health care costs that will keep us within our full year guidance range. Additionally, there are an incremental 6,700,000 shares from the August 2020 forward offering that we expect to settle next week and those additional shares will impact the EPS calculation. For clarity, we'll have those incremental shares for more than 4.5 months in the second half of the year. Specifically for Q3, the gas business does not generally make money.
When you look at Q3, you should expect something in the lower end of the 10% to 20% net income And for Q4, the gas business then starts to generate meaningful revenue again as the heating season begins, but we'll be waiting on new water rates in Pennsylvania and therefore would expect to result in the lower end of that range as well. Realigning these quarters and considering the expenses noted earlier, if we experience normal weather, our full year results Should be around the midpoint of the stated guidance range of $1.64 to 1.69 Moving on to rate activity and other matters. So far in 2021, we've completed rate cases or surcharge filings for our regulated water segment in New Jersey, North Carolina, Ohio, Pennsylvania, Illinois, Indiana and Virginia with total annualized revenue of $16,700,000 In our regulated natural gas segment, we've completed rate cases or surcharge filings in Pennsylvania and Kentucky with total annualized revenues of $1,300,000 We currently have 2 base rate cases underway, 1 for Delta Gas in Kentucky and 1 for Aqua Ohio. Importantly, we expect to file a rate case through Aqua, Pennsylvania later in the month in line with the 3 year rate case cadence that we have outlined previously, and we will provide additional details related to that case once it is filed.
And with that, I'll hand it back over to Chris.
Thank you, Dan. Let's take a few minutes and review our municipal transaction Matt Roach and his team, along with our state presidents and their teams, have been busy at work on our growth projects. Earlier this week, we announced the closing of the Commons Water in Texas. You may recall this water system serves about 1,000 customers in the Houston suburbs and is our 1st fair market value acquisition in Texas. We've signed we have 7 signed asset purchase agreements pending closing, including the recent addition of an agreement to purchase The wastewater I'm sorry, the wastewater assets in the borough of Shenandoah, Pennsylvania for 12,000,000 The system serves approximately 3,000 customers.
These 7 pending transactions Plus the one closed transaction will add close to 234,000 customers or customer equivalents And approximately $462,500,000 of rate base when closed. We remain confident That we will close the DelCor transaction. I want to make that clear. This is one of the most frequent questions we get. While we continue to wait for the state court to decide on the Case, we want to reiterate that we continue to have positive and productive conversations, both internally and externally.
We remain focused on closing this transaction and continue to believe that we are the best solution for the operation of the DelCora system, its customers and our investors. I think it's also important to note and mention to you that Our valid and enforceable contract with DelCora includes a provision that makes the contract valid until 60 days after all litigation is concluded. I think that's an important factor to remember as we continue to pursue Now in addition to the signed municipal transactions mentioned on the previous slide, We have a healthy pipeline of potential municipal opportunities as we look at the second half of twenty twenty one and beyond. This table includes acquisition opportunities where we are engaged in active discussions with municipalities. As the slide demonstrates, we are actively pursuing approximately 390,000 potential new customers.
We continue to believe that fair market value legislation and favorable regulatory environments provide municipalities with the ability to pursue solutions So I'll wrap up the call, at least the formal part of the call, with a reaffirmation of our 2021 guidance. And despite the very strong first half of the year, as Dan mentioned, we continue to expect earnings to be between 1.64 to $1.69 a share. Our capital plans remain on track as we anticipate spending approximately $1,000,000,000 On regulated infrastructure this year, the final mix of this capital spending may be more weighted towards the regulated water segment. We anticipate investing nearly $3,000,000,000 across the Essential platform by 2023, driving rate base growth to be 6% to 7% in water and 8% to 10% for gas. Customer growth is expected to be between 2% 3% on average for our Regulated Water segment.
And finally, we continue to make progress with our ESG targets to ensure the strength of our company is not only measured by our financial performance, but also our commitment to the environmental stewardship, Sustainable Business Practices, Employee Safety, Diversity and Inclusion, Customer Experience and Community Engagement. With that, I'll conclude my formal remarks and open the line for questions.
And we will take our first question from Ryan Connors with Boenning and Scattergood.
Hey, good morning, Ryan.
Good morning. Thanks for taking my question. Chris, I wanted to get your take on the noise out there on fair market value FMB. Obviously, there are some detractors, which include some of your peers, your smaller peers. There's pretty public debate going on there.
So my question is twofold. Number 1, do you see any of that having any tangible impact legislatively or regulatory wise in terms of any kind of a rollback of FMV? And then number 2, more tactically on discrete deals, do you think that could complicate things if people sort of hold those peer Arguments and comments in your face as you try to move deals forward?
That's a good question. I think there is some noise For some of the smaller companies who maybe have less ability to use fair market value. Having said that, There was a very interesting op ed in today's, one of the New Jersey publications, happy to share that around, but It was authored by 3 former public utility commissioners, 1 from Illinois, 1 from Pennsylvania and 1 from New Jersey, indicating how favorable they view fair market value and how they think it's been a nice step forward for the consolidation Of an industry that is, as we all know, balkanized and very fragmented across the country. So I think that although there are different views, I would say the prevailing thought among regulators and legislators for that matter is a very positive view of fair market value. So I don't see any rollback either on the regulatory side or on the legislative side.
I actually see it picking up momentum as more and more Municipals are looking for options to deal with their capital constraints and also the ongoing and probably growing Environmental constraints.
And what about the second part was just on so Understood. You don't see any real impact legislatively or real tangibly on the regulatory side. But how could that or could not or maybe not impact Individual deals, I mean is that something you're hearing that stuff come up as you try to move things forward? Or is that sort of Not on the radar of those constituencies and individual deals.
Yes, I haven't seen it come up in any of the discussions we've had. Most people don't know that there might be an industry leader out there who's not in favor of fair market value. So It hasn't come up in our discussions. And I think, given what I mentioned before with corresponding, very positive Op edge and pieces out there, I think we could easily match some of the detractors with Probably the more favorable and majority of the people who are saying favorable things in writing.
Understood. Now my second one was just staying on the legislative side. The water quality accountability legislation in Pennsylvania, SB597, we had thought that maybe we would get some movement on that by now, but it looks like that's been Pulled back and some of the municipal interest groups are out there sort of claiming victory on that saying that their lobbying You know, had the desired effect and got that pulled. Is that what's your response to that? Is that still moving forward?
Should we see that move ahead this year, do you think?
Yes, I've seen no pullback. In fact, as you're probably aware, it was moved out of the Senate Committee. I think there was only one dissenting vote as it moved out of the Senate Committee. I think it will continue to be negotiated. This one has enforcement provisions, right, and that's where it all comes down.
What we're asking in the Water Quality Accountability Act in Pennsylvania Is unbelievably fair, right? Create your replacement cycle, put cybersecurity plans in place. These are all things that if, even if they were never to sell their systems, these are things that people should expect of their water systems anywhere in the country, especially anywhere in this country. And so, I think the municipals, as you mentioned, or some Municipals, as you mentioned, Ryan, will continue to oppose and try to negotiate this. But ultimately, this bill will be a difficult bill for them to stop.
And I do think something moves
We'll take our next question from Travis Miller with Morningstar.
Hey, Travis. Good morning. Hey, Travis. Hi.
I was wondering on that Texas deal, I know it's small, but wonder if you could elaborate a little bit on the process you went through. Is it Smooth was a timely, any points of friction as you went through that thinking mostly about the first one under the FMV. Your thoughts there and how that went?
1 year.
Yes, I think It took 1 year. So I would call that relatively smooth in the scheme of things. As you know, the Texas Commission is distracted a bit at this point dealing with the events Last winter. And so, I would say relatively smooth process.
Okay. Does that I guess, so there's ask in terms of your pipeline, how much in Texas is in your pipeline? Or alternatively, how much opportunity do you see in Texas given that this went smoothly and Perhaps give support to doing more deals.
Yes. We don't typically break our pipeline down by state, but I will say that there are a Number of opportunities and I would suggest that even sizable opportunities in Texas that we see and have on our radar there. So, it's developing. So I'll concede that it's not galloping at this point, And there certainly is competition in Texas, but I think there's also opportunity that as you know, Once you get 1 or 2 of these deals done, others start to take note, especially if the prices are considered to be fair, which I think this one was very fair. Okay.
And by the way, yes, and Travis, you should think about this too. In Texas, fair market value applies also to investor owned utilities, not just municipals. So it's an interesting twist to the legislation that we've seen in other states.
Okay. Okay.
Great. No, that's helpful. Thank
you. Yes.
Good. Take care.
We'll take our next question from Jonathan Reeder with Wells Fargo.
Hey, Jonathan. Hey, good morning, Chris. Hey, Dan. Just wondering what the latest is on Pennsylvania Commissioner Appointments. I thought last we spoke, you said that there might have been some sort of kind of 2 for 1 deal between the governor and The Senate Republican, anything more on that front
or? Yes, I guess, it would be more informal than anything. I guess, What we know as fact, right, there are 4 seated commissioners currently. Commissioner Suites' term ended on April 1 this year, And then he's required to vacate the seat on October 1. So if nothing else changes between now and the 1st October, Which we don't anticipate, the legislature doesn't even go back until the 2nd week in September.
So we would anticipate then on October 1, Commissioner Suite would step down And then the commission would be 2 Republicans, that's Commissioner Yanora and Commissioner Coleman and 1 Democrat, The Chairman, and so you would be a 2 to 1 Republican majority, which is really unheard of to We'll be down to 3 commissioners and have the majority flip. And listen, this is informal now the rest of this, but the debate appears to be Framed around the regional greenhouse gas initiative, right, the RGGI. And the governor is Intent on staying as a part of RGGI and the Pennsylvania Senate has said We're not going to appoint any new commissioners as long as that's the case. And so that's a bit of a stalemate. How that gets ends up being negotiated out, I don't know.
But Certainly, the chatter in the state capital is that we could end up finishing this year With that 2 to 1 Republican majority, but time will tell.
Okay. And if there is that 2 to 1, I mean, do you think they're prepared to Still act on your pending DelCora application in some form or fashion, whether it's conditioned on the appellate court process or whatever?
Well, I can't say for certain what they're going to act on, but what I can say is they are empowered To continue to do the business of the commission, in other words, they don't need a full commission, ceded commission in order to continue to complete the business of the PUC. So whatever comes before them, they do have the power to act on.
Got it. Any Any thoughts on the timing of the evolution of the quarter field?
Yes. I mean, we're saying 2022 now, Jonathan, the Pennsylvania State Court, Commonwealth Court, That just takes time as we grind through the process. And so, I would think that that would be the case. I mean, just a little bit of color on this. There is an election in Delaware County.
2 of the seated commissioners or councilmen as they call them in Delaware County are up for election. One of them is not running again. He was the Chairman, Mr. Zydic. And so he'll be replaced absolutely.
And then there's another Commissioner or Councilman named Madden who is also up. So there could be a change in the makeup of Delaware County Council, there will absolutely be a makeup of at least a change in one seat, maybe 2, when we come into January and they're seated immediately in January. It's January 3 or something. So we will see some change there. Might there be an opportunity with a new look and a new set of counsel people to find a settlement?
You never know.
Okay. But if the court has to fully play out, I mean, it's somewhere in the mid-twenty 22 or kind of Earlier in the year.
It's really hard to put a gauge on how quickly The Commonwealth Court will move. We said maybe in that 6 month timeframe, so could that be by mid year? I just I don't want anybody to put numbers on it because it's just hard to tell how quickly the court will move.
Okay. Got you. No, that's fair enough. And then, Dan, I think you said you still you haven't filed the PA water Chase, did you indicate how soon that's going to be filed or like what kind of timing we should think of?
Yes. Chas, I think of that just in the coming weeks,
it will be filed. It will
be filed later this month and which keeps us on that 3 year cadence that we've talked about.
Perfect. Okay. So weeks, yes. Yes. Okay, great.
Second half of the year, I mean that eliminated I think a lot of the questions we had. So that was perfect. Appreciate you anticipating that.
Good. Thank you. We'll
take our next question from Verity Mitchell with HSBC.
Hi, Verity. Hey, Verity.
Good morning. Good morning, everybody. I've just got two questions. One is about the gas customer count being stable for 2021. I mean, is that in line with your expectations?
Or do you want to give us a bit more color on that? And then the second question is, as I'm not local, if you want to give us a feel for What the weather has been like in July August? Because clearly, I wouldn't know where I'm calling from.
Thank you.
Yes. So gas customer count will be relatively stable year on year. It's interesting. We tend to pick up a few customers with new connections, But we lose a few customers as well. So that business is pretty close to stable, whereas in several of the water states we continue to add on the organic Growth tends to be in Pennsylvania, North Carolina, Texas, the places that you can you would imagine that there's building going on.
In terms of the weather, I would say, kind of differs by part of the country. Generally, it's been pretty nice, but we have seen spots With some more rain, Texas had kind of a rainy start of the summer and it started in the kind of mid July timeframe to warm up and we're seeing the hot weather again in Texas. Yes, we've had a bit of rain here in Pennsylvania on and off. So kind of we're just getting the July numbers in here and kind of taking a look at it. But that's Probably the color I can give at this point.
Chris, any further color
on it? Yes. I think that's right. Verity, and particularly in this area where we have a lot of water customers In Pennsylvania, you want the summer to be dry, but not too dry that people give up on their grass. And so I think that's where we are right now.
People continue to water. We're thinking it's looking pretty normal, but We'll see what the next couple of weeks bring there. They're predicting here in Philadelphia on the morning news today that we could get our 5th heat wave of the season. I guess that's 5 days in the 90s coming up this week. So maybe we'll sell some water.
Great. Thank you.
Yes. Thanks,
Verdi. We will take our next question from Ben Kallo with R. W. Baird.
Hey, guys. Hey,
Ben. Good to
talk to you. I hope you're doing well. Maybe just on the biz dev front, there was a flurry of military bases And I haven't seen one, maybe I've missed it lately. Can you talk to that? And then just maybe more on, I saw the Texas announcement And I've seen some other movement there.
Could you just talk about the Texas market and how appealing that is to you versus all the other stuff on your plate? Thank you. Yes.
On the military front, as you know, we haven't played there. That really hasn't been We've been largely focused on municipal market, which is very open in the states where we are. So, and I haven't much on military of late, although I do know that there are continue to be some opportunities moving forward. We've just not played there. And so I guess then focusing on Texas, listen, we're always high on Texas.
When you look at the population numbers alone in Texas, you say, boy, the growth in population should then show some growth in Housing starts and then obviously, be more water sales and on and on. We've been very active there. We've got a very active state team and very active in the legislative front, as you know, on the fair market value. And so we're optimistic about Texas, but I think we're at the opening stages for municipal. But as we just reminded everyone a minute ago, the new fair market value In Texas applied not only to municipals, but also to investor owned.
So the market is pretty wide open there and it's a matter of Continuing to till the soil and really opening that market now that we have the legislation we need.
Great. And then on the ESG front, Could you just talk about maybe if there is a interaction between your ESG profile And your local utility commissions yet or and how that works, How they look at that or if it hasn't evolved to that yet? Thank you.
Sure. I think there are aspects of ESG, call it Diversity, Equity and Inclusion, certainly, Greenhouse Gas Emissions, Environmental, they don't always call it ESG, but certainly the elements are there and those are widely discussed as we talk with regulators. But I do think that The overall ESG platform is here to stay and I think it will continue to be a topic with not only investors but regulators. The interest level, as I said though, seems to be forming up More around individual issues as opposed to the overall ESG. I'll point to Renewable natural gas, and how those if we were to go there, how those costs might be recovered.
Other utilities have already begun to test mechanisms and we're watching those very carefully. So as we think about Environmental aspect of ESG, I think that's where it will form up for us at least on the gas side.
And then Chris, maybe the other place would just be Customer Assistance Programs. Yes, good point. There's an overlap there.
Yes, yes, yes. And we're doing a lot of work around customer assistance, particularly in Pennsylvania right now.
Okay. That's helpful. Thank you, guys. Congrats on the floor.
Yes. Thanks, Buck.
It appears there are no further questions at this time. I would like to turn the
Great. Thank you. Dan, Brian and I are always available for follow-up questions if there are any. But in the meantime, thank you for joining us and appreciate the questions and your attention. Be well.
And that concludes today's presentation. Thank you for your participation. You may now disconnect.