Essential Utilities - Earnings Call - Q3 2025

Executive Summary

• Solid quarter: rate increases drove revenue and EPS growth; management reiterated full-year GAAP EPS expected above the prior $2.07–$2.11 guidance range due to non-recurring benefits, while reaffirming long-term targets.
• Earnings beat Street: Q3 EPS and revenue were above S&P Global consensus; magnitude and drivers detailed below, with non-recurring tax favorability and rate actions highlighted by management. Values retrieved from S&P Global.
• Strategic catalysts: announced all-stock merger with American Water (pro forma ~$40B market cap) and a $26M convertible-note investment tied to a 18 MGD data center water plant; neither is embedded in near-term EPS guidance, with the Greene County project expected operational mid-2029.
• Balance sheet/liquidity improved: weighted average fixed-rate debt cost rose modestly to 4.12%, credit line availability expanded to $1.138B; ~$300M issued via ATM year-to-date by 9/30 to support capex and strategic initiatives.
• No Q&A this quarter due to merger announcement; management expects to resume normal Q&A with Q4 results.

What Went Well and What Went Wrong

What Went Well

• Rate actions drove growth: Revenues up 9.6% YoY to $476.971M, with ~$34.2M QoQ increase attributable to rates/surcharges; EPS up 32% YoY to $0.33.
• Segment execution: Water revenues +8.8% YoY to $364.1M; Gas revenues +12.1% YoY to $108.5M; O&M in gas decreased YoY due to lower materials, legal, and outside services from capitalization.
• Strategic vision reiterated: “This transaction represents a truly transformational opportunity… creating a combined entity… greater than the sum of its parts,” on the American Water merger. “Our aim is to generate reliable growth in both earnings and dividends,” reaffirming 5–7% multi-year EPS CAGR (normalized).

What Went Wrong

• Cost pressures: Company-level O&M rose 6% YoY (up ~$8.7M), driven by employee-related costs, bad debt normalization, and higher water production costs (power, chemicals, purchased water), partially offset by lower outside services/capitalization.
• Interest expense: Higher interest expense (Q3 $82.269M vs $76.846M YoY) continued to weigh on earnings; depreciation and amortization also higher YoY.
• Seasonal/wet weather headwinds: Management cited wet summer impacts on water consumption; sequential margins compressed vs Q2 as typical seasonal patterns and cost mix weighed on Q3.

Transcript

Brian Dingerdissen (VP of Financial Planning and Analysis, IR, and Treasurer)

Good morning, everyone, and thank you for joining us for our third 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 can also be found on the website along with a webcast of the event. As a reminder, some of the matters discussed today may include forward-looking statements that involve risk, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risk and uncertainties. References 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 with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Then Dan Schuller, our Chief Financial Officer, will provide an overview of the financial results. With that, I will turn it over to Chris Franklin.

Chris Franklin (Chairman and CEO)

Hey, thanks, Brian, and good morning, everyone. Let's begin with the big news from last week, our merger with American Water, detailed here on slide five. This transaction represents a truly transformational opportunity designed to integrate the assets and the expertise of two industry leaders, resulting in some synergies over time and creating a combined entity that is demonstrably greater than the sum of its parts. Now, the combined entity will result in the emergence of the preeminent water and wastewater utility in the United States, anchored by a robust rate base approaching $34 billion. Serving more than 5 million connections and an expanded operational footprint across 17 states and 18 military installations. Now, as outlined on slide six, this strategic consolidation effectively leverages the core operational expertise of both companies, substantially bolstering our combined financial strength and will present a compelling investment thesis to the market.

A low-risk, low-beta stock with a strong balance sheet offering first quartile growth rate of 7%-9% EPS and dividend growth, anchored on the multi-decade need for infrastructure investment in our nation's aging water and wastewater systems, including pipe replacement, PFAS remediation, and lead service line replacements, just to name a few. I think we also have to consider the setting for the combined company. It's still a fragmented water industry, 85% municipal, and the combined company's concentration in Pennsylvania, the state where our highest concentration in water and wastewater exists, is still less concentrated than FPL is in Florida or Oncor is in Texas or even PG&E in California. Maybe just one final thought on the transaction. The combined company is a natural hedge for utility investors who are heavily concentrated in electric utilities.

The demand growth projections associated with AI and data center growth are baked into electric utility valuations, which is just not the case with our new combined company. More to come on this exciting opportunity as we progress through shareholder and regulatory approvals. For now, let's talk about the third quarter results. Slide seven has some highlights for the quarter. We delivered another robust quarter of growth, reporting GAAP earnings per share of $0.33, a 32% increase over the same quarter last year. Both our water and natural gas businesses performed very well and in line with our expectations. My assessment remains the same as I reported last quarter. Both our natural gas and water businesses are firing on all cylinders. I am proud of the results our team has achieved so far this year.

Based on our strong year-to-date performance, we expect to achieve GAAP earnings per share above our guidance range of $2.07-$2.11 due to non-recurring benefits as discussed in August. We're also reaffirming our capital investment plans with a target of approximately $1.4 billion in infrastructure investments for 2025. Now, as of September 30th, we've already deployed nearly $1 billion in critical infrastructure improvements across our footprint. Based on the many calls we received, I know you saw our exciting announcement in late August that Essential has become an investor in a 1,400-acre data center facility in southwestern Pennsylvania. Our real interest in the project, though, is the option we have to design, build, and operate an 18 million-gallon-per-day water treatment plant to service the data center and its dedicated behind-the-meter natural gas power plant. I'll speak more about this in a few moments, but it's a promising opportunity.

Switching to sustainability, we're excited to share with you our updated sustainability report. For years now, we have delivered high-quality, transparent, and detailed information to you on our sustainability performance and initiatives. You've heard me say this many times before, but it bears repeating, and I want to make sure all our stakeholders hear it directly from me. Our sustainability commitments mean much more than checking a box. As stewards of Earth's most precious natural resources, responsible business practices are foundational to who we are as a company. Our dedication to these principles remains steadfast and supports our continued success. Our updated report can be found on our website. Finally, I'd like to follow up on a topic we spoke about on our Q1 earnings call.

We mentioned that our natural gas division had progressed from a successful pilot program to commencing a full implementation plan to install new Intelis gas meters in all residential and small commercial properties within our service area. Today, I am really pleased to share with you that we've already reached our 2025 goal of installing more than 60,000 meters in Pennsylvania. We're also closing in on this year's target of 3,500 meters installed in Kentucky. This brings our installed base of new meters to a total of 93,000, putting us among the industry leaders in adopting this new technology. We are moving forward with a comprehensive program to install Intelis meters for nearly 700,000 customers in the coming years. These new meters, equipped with enhanced safety measures, are a central driver of our ongoing effort to be among the safest and most reliable natural gas utilities in the United States.

All right, turning to slide eight, let's review our recent announcement regarding our data center investment. In August, we announced our investment of $26 million in a project to bring a data center to Greene County, Pennsylvania. For context, this is about 60 mi south of our gas division headquarters in Pittsburgh. We deliver natural gas to customers in that same general area. The location of the project, Greene County, Pennsylvania, draws on Pennsylvania's abundant natural resources, world-class workforce, and strong federal, state, and local support for the project across the political aisle. The data center project, led by International Electric Power, will be powered by 944 MW. That's right, nearly 1 GW, from behind-the-meter natural gas combined cycle turbines, supplemented by battery storage and backed up with an existing interconnection with the electric grid.

Importantly, the project has secured the turbines, which are at a premium given demand in the market. Our $26 million initial investment is structured in the form of a convertible note, and we can take the return on that investment as cash proceeds or instead roll it into the larger project as a formal equity position. The expected rate of return on this investment will be higher than the typical returns of our regulated utility operations. The project will include an 18 million-gallon-per-day water treatment plant that will serve both the gas power plant and the data center's cooling needs. Our initial estimate is that the water treatment plant will cost between $125 million and $175 million. Although we will not be supplying the natural gas to the power plant, Essential will lend its expertise by providing gas consulting and energy management services to the project.

IEP is actively seeking investors for the next stage of the project now that the initial funding has been achieved and the gas turbines have been secured. We'll update you on significant new developments as they occur. This exciting project is not factored into any of our previously announced guidance and, as a reminder, is expected to be fully operational in 2029, which currently falls outside of our three-year EPS guidance. We had previously shared that we are in active discussions with data center developers representing over 5 GW of power demand. The Greene County site is about 20% of that. Plus, we continue to field inquiries related to on-site power generation and data center development to support AI and data center boom. States like Pennsylvania, Ohio, Indiana, and Virginia are among the hot targets for hyperscalers these days.

We operate in all of these states with our water, wastewater, and natural gas assets and expertise. This, combined with our regulatory credibility in these states, makes us believe Essential is particularly well-positioned within our industry to take advantage of this opportunity. All right, now, as we move to slide nine, I'd like to talk a little bit about our consistent approach to delivering shareholder value. Our aim is to generate reliable growth in both earnings and dividends, and we are proud of our long track record. With three quarters behind us now, 2025 looks to be another year reflective of this success. Our business and its economic model have proven resilient through economic booms and downturns, as well as through political and regulatory changes. Consistency underpins our success as a company. All right, now that we're reminded of the context, let's focus on the numbers for the quarter. Dan?

Dan Schuller (CFO)

Thanks, Chris. Let's begin on slide 11 with a high-level view of the third quarter results, and then we'll get into the details on the waterfalls. Our quarterly performance was strong, with revenues up 9.6% due primarily to increases in rates. Corresponding earnings per share are up 32% on a year-over-year basis due to rate increases and a decrease in income tax expense. These are partially offset by increases in depreciation and amortization expense, interest expense, and operations and maintenance expenses. On slide 12, we have the revenue waterfall for the third quarter. Revenues increased $41.7 million, or 9.6%, from $435.3 million a year ago to $477 million this year. Approximately $34.2 million of that increase is a result of rates and surcharges, with approximately $27.9 million of that attributed to water and $6.3 million related to natural gas.

Purchased gas, which represents the cost of the natural gas sold by the company, increased $3.4 million year-over-year due to an increase in commodity prices, partially offset by lower gas usage. The other category of $2.8 million consists primarily of reduced tax repair surcredits to our customers as a result of last year's Peoples rate order. Growth in the water business contributed $1.4 million of incremental revenue. These were offset by a net $100,000 in lower volumes, with water up by $300,000 and gas down by $400,000. Next, on slide 13, our O&M slide, we see O&M expenses up about $8.7 million, or 6% year-over-year. The main drivers include an increase in employee-related costs of $7.2 million compared to prior period. An increase in bad debt expense of $4.2 million.

Relative to lower than normal bad debt expense last year, and an increase of $2.4 million in water production costs, with contributing increases in power, purchased water, and chemicals. These were partially offset by $6.2 million in favorability in other expenses, primarily as a result of lower outside services expenses and capitalization. The increase in employee-related costs includes about $800,000 of expense this year related to a change in our LTI program's RSU vesting methodology. Another item to note is bad debt expense. In 2024, we made an adjustment related to our Pennsylvania Water Customer Assistance Program with a credit to expense, which now accounts for $3.1 million of unfavorability in the year-on-year comparison. If we normalize out these two items, we get to a year-over-year increase of about 3%. In line with our historic norms. Moving to slide 14, our earnings slide, we can see the previously mentioned effects.

A $0.09 positive impact due to increased revenue from rates and surcharges, limited impacts from growth and volume, offset by a $0.02 negative impact from higher expenses, which include increases in depreciation and amortization, O&M, and interest, with all of this partially offset by a decrease in tax expense. Now, let's turn to slide 15. Here, we provide more insight into how our annual EPS breaks out by quarter. So far this year, the three quarters of earnings we have posted have fallen within the ranges that we have provided. As a reminder, these ranges are an approximate representation of the contribution that each quarter's earnings typically make to our annual earnings. On last quarter's earnings call, we stated our expectation that we would achieve GAAP earnings per share above our guidance range of $2.07-$2.11 due to non-recurring benefits. We're reaffirming this expectation today.

I encourage you to continue using the middle of this established range of $2.07-$2.11 to project earnings per share growth from 2025 to 2027 using the 5%-7% CAGR previously provided. I'll conclude my remarks on slide 16 with a brief discussion on regulatory activity. Since our last earnings call, we've not completed any additional rate cases, but I will direct you to our appendix for detail on the two cases completed earlier in the year, which we previously discussed and disclosed. Our water and wastewater business currently has pending rate cases or surcharge filings underway in North Carolina, which you recall is a multi-year case, Ohio, Texas, and Virginia, with total requested annualized revenue increases of $96.5 million. Additionally, our gas business has a pending surcharge in Kentucky with a requested annualized revenue increase of $2.9 million.

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. With that, I'll turn it back over to Chris. Chris?

Chris Franklin (Chairman and CEO)

Thanks, Dan. Let's move now to slide 18 and talk about the long-term growth that we unlock through our focus on expanding our water and wastewater business through acquisitions. For 2025, in total, the company has acquired systems which serve approximately 10,300 customers for approximately $58 million. I'll remind you that progress on our DELCORA transaction continues to be stalled by a stay put in place by a federal bankruptcy judge related to the bankruptcy of the city of Chester. There is really nothing new to report on DELCORA. I'll remind you that DELCORA is not included in our guidance. I also want to point out that we have three additional signed purchase agreements for systems in Pennsylvania and Texas, which we expect to close in 2026. The diversity of our business development opportunities holds great promise for our water and wastewater segment.

Over the long term, the water and wastewater systems within the United States will continue to consolidate given the infrastructure investment needs and the benefits of scale. All right, I'll conclude my remarks here on slide 19. I'll reiterate what Dan said. We are reaffirming our standing expectation that we will achieve our full-year GAAP earnings per share above the guidance range of $2.07-$2.11 due to some non-recurring benefits. Looking ahead, we continue to see strong growth potential in both our water and gas platforms. We expect our combined utility rate base to grow at a compounded annual growth rate of 8%. Breaking this down a little bit further, the regulated water segment is expected to grow at about 6%, and our regulated natural gas segment rate base will grow at about 11%. We are reaffirming our 5%-7% multi-year earnings per share guidance through 2027.

This includes acquisitions expected to close in 2025 and in 2026, but excludes DELCORA. This projection includes the crucial work we're doing to remediate PFAS across our water systems, as well as our work to replace aging water and natural gas pipelines. As Dan noted earlier, this 5%-7% CAGR should be applied to our $2.07-$2.11 guidance range for 2025 EPS, with $2.09 as the midpoint, as this strips out the favorability of non-recurring items. We also remain committed to maintaining a strong balance sheet, improving our cash flow and debt metrics, and delivering consistent dividend growth while keeping our payout ratio between 60% and 65%. Now, one item that did change on this slide from our last call is that we adjusted our expectation of 2025 equity raises through our ATM from $315 million to $350 million.

This additional equity is attributable largely to needs related to our Greene County data center project and to ensure we meet our credit metrics given some merger-related transaction expenses we've incurred so far this year. We've already raised about $300 million in equity. All in all, we see a bright future for our company as we continue to invest in our nation's infrastructure and deliver long-term value to our shareholders. Rate-based expansion in favorable regulatory environments, paired with water and wastewater system acquisitions, will continue to drive consistent growth. Now, with Essential well-positioned to support a boom in data centers across our footprint, we can build on our culture of innovation while supporting our local economy as we have for generations. We thank you for your support.

As a reminder, we will not take any questions on today's call, but we will return to our normal earnings call process for our year-end call in February 2026. If you have any questions, feel free to reach out to our IR team immediately following this call. Thanks again.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.