Essential Utilities (NYSE:WTRG) Q3 2024 Earnings Call

0:01 Thank you for standing by. My name is Ellie and I will be your conference operator for today. At this time, I would like to welcome everyone to the Essential Utilities third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by number one on your telephone keypad. If you would like to withdraw your question press star and 1 again. Thank you. I would now like to turn the conference over to Brian Dingerdissen. You may now begin. Good morning everyone and thank you for joining us for Essential Utilities third quarter 2024 earnings call during which we will provide an update on new long-term guidance. The slides that we will be referencing and a webcast of this event can be found on our website.

0:57 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 implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for description of such risk and uncertainties. During 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 website. We will begin the call today with Chris Franklin, our chairman and CEO, who will provide an update on the company, and then Dan Schuller, our CFO, who will provide an update on the financial results before Chris closes the call with our guidance.

1:42 With that, I will turn the call over to Chris Franklin. Hey, thanks, Brian, and welcome, everyone. We've got some really exciting news to share with you today. I've got some more color, but let me just run through it in a very, very brief summary on top here. We had a great quarter financially. We had a strong capital investment so far this year. And we have an approved Pennsylvania gas rate case that included a weather normalization mechanism. We had a settlement in our Pennsylvania water rate case yielding us $73 million. And we are reinstating our multi-year EPS guidance at a 5% to 7% growth rate through 2027. which, importantly, does not include Del Cora, any earnings associated with Del Cora. And then we're also going to talk a little bit about our strong recovery from the Hurricane Helene that hit North Carolina.

2:40 So a lot of good things to talk about for the quarter, so let me get into the details. First, we posted 25 cents in earnings per share for the quarter, which was above expectations. Our capital spending remains right on schedule this year, We've invested $932.5 million through the end of the third quarter, and we'll spend about $1.3 to $1.4 billion to improve water, wastewater, and natural gas infrastructure this year. Dan will get into more details about the financials for the quarter in just a few minutes. So in September, the Pennsylvania PUC unanimously approved the first rate case for People's Natural Gas under our ownership. The approval included an annualized revenue increase of $93 million and a weather normalization mechanism.

3:33 You probably know this mechanism because others have it. It's designed to provide a greater financial stability and predictability for both our customers and our investors by mitigating the financial volatility associated with abnormal weather impacts. I know you'll recall that Both this year and last year have been unusually warm weather and have impacted our results. However, it could have just as easily gone the other way and we could have had two abnormally cold years, which would have negatively impacted our customers. So this new mechanism will provide the ability to mitigate these abnormalities in weather and should assist with reducing the volatility for all parties going forward.

4:22 I do want to mention that the Office of the Consumer Advocate filed a petition for review of the approval in the PNG case. Dan will talk a little bit more about that in a minute, but I did want to mention that. Let's also talk about the water rate case, the Aqua Pennsylvania rate case. We filed our briefs on October 28th, and in those documents, you'll see that we have a settlement agreement designed to provide a total annualized revenue increase of $73 million from our water and wastewater operations. We expect the settlement agreement to be filed formally on November 7th and available on the PUC website at that time. It's important to note that this settlement agreement, as all settlements would be, remains subject to a recommended decision by the administrative law judges and approval by the PUC.

5:14 I should also mention that East Whiteland You'll recall that acquisition as a wastewater acquisition in Pennsylvania was excluded from the settlement and will be fully litigated in front of PUC with an expected decision on that, coincident with the rate case decision in February. Now, on the next slide, our significant progress on the two Pennsylvania rate cases have provided us the opportunity to re-establish long-term guidance. This guidance which I'll review in more detail later, includes EPS growing at a compound annual growth rate of 5% to 7% for the next three years. That's through 2027. Continued rate-based growth of over 8% combined and our continued commitment to improving and upgrading water, wastewater, and natural gas infrastructure by investing $7.8 billion over the next five years through 2029.

6:11 Importantly, We expect to achieve this EPS growth without including any addition to the EPS from the Delcorra transaction. So to be clear, we remain confident that our valid and enforceable asset purchase agreement will ultimately prevail and that we will close the Delcorra transaction. But we want to remove any potential overhang that might be associated with the delayed closing of Delcorra, so we've taken it out of our numbers. We believe this guidance communicates the right balance of growth for our investors built on the right level of infrastructure investment that ultimately results in rates that are affordable for our customers.

7:00 Truly a win-win. As this slide indicates, we've consistently executed our plan to grow earnings between 5% and 7% every year. We've delivered these results despite elevated inflation, higher interest rates, and some of the warmest weather on record in our natural gas territory. Hopefully, our most recent achievements and the continued strong results indicated on this slide underscore our ability to execute and our regulatory credibility in the jurisdictions where we operate. All right, let's just take a moment. We were hit hard by the hurricane as so many people were in our country, particularly in the south. I want to talk a little about the impact of Hurricane Helene on our North Carolina operations.

7:49 Thankfully, our team was quick to respond, clearing trees and other debris that allowed us to do some damage assessments early on after the storm had passed. We prioritized communications with our customers most importantly, providing regular updates through our disruption map and other forms of electronic communication and physical communication Signage, etc. We also dispatched a special reconnaissance team equipped with drones to inspect damage in areas that were either inaccessible or unsafe, particularly in the more mountainous communities where we serve. Now, in total, 90 of our systems in North Carolina were impacted. But through really strong work by our teams, all but six systems were back up in just five days after the storm. and as of October 19th, everything was back in power and repaired and fully functional.

8:46 We're grateful for the patience of our customers and the understanding they provided and we also appreciate the dedication and extensive work effort of our North Carolina team. With that, let me turn to Dan and he's going to cover our financials for the quarter and some regulatory matters. Dan? Thanks, Chris, and good morning, everyone. As Chris mentioned, we're pleased with the financial results for the quarter. On this slide, I'll discuss high-level Q3 financial highlights, and then we'll get into the details with the waterfalls. Our revenues for the third quarter of 2024 were $435.3 million, marking an increase of about 6% compared to $411.3 million in the third quarter of 2023. This increase was driven by rates and surcharges, increased water sales, An increase in the price of gas and water customer growth.

9:40 These factors far offset the minor revenue decline from lower natural gas sales. The quarterly operations and maintenance expenses decreased for the third quarter compared to the third quarter of 2023. This decrease was primarily due to a reduction in bad debt expense and a decrease in expenses associated with the West Virginia gas utility assets and the Pittsburgh Area Energy Project. both of which we have divested. We achieved quarterly earnings per share of 25 cents, which compared to 30 cents in earnings per share in the third quarter of 2023. So while we had an increase in revenue and a decrease in O&M expenses, last year's EPS in the third quarter was positively impacted by significant one-time tax repair benefits associated with the Natural Gas Safe Harbor, which of course didn't repeat this year.

10:34 Next, let's look through the waterfalls, going to the first, the revenue waterfall. Moving left to right, we have regulatory recoveries of over $11 million, with the vast majority of this increase coming from the regulated water segment, plus over $10 million in increased water segment volumes, and about $4 million coming from an increase in purchased gas costs, as well as acquisitions and organic growth in the water business. This was offset slightly by lower volume of gas sales due to the warmer than normal weather, as well as the other category. Revenues from the regulated water segment increased just shy of 8% for the third quarter of 2024, compared to the same period in 2023. We saw excessively warm and dry weather at various times in the Mid-Atlantic, as well as in Ohio, which in turn led to higher water volume.

11:25 But we experienced lower water consumption in Texas and in North Carolina. Next, let's look at the O&M on slide 10. We saw a relatively modest increase of approximately $1.6 million in water production costs due to the higher volumes previously discussed. And among the smaller increases to O&M were the impact of the customer rider in the gas business, routine increases in employee-related costs, and customer growth in the water segment. The overall reduction to O&M costs was primarily due to a decrease in bad debt expenses and a reduction in expenses related to the now divested West Virginia gas utility assets and the Pittsburgh Area Energy Project. Importantly, our year-to-date O&M performance is quite strong, expenses only up about 1% over the previous year, which demonstrates our continued commitment to operating efficiency.

12:21 Next, let's look at the EPS waterfall on slide 11. Starting on the left of the EPS waterfall, with $0.30 from last year, the next thing we see is the nearly $0.03 increase from regulatory recoveries and close to $0.03 from increased water volume, the benefit of $0.06 from the decline in expenses, and $0.03 in customer growth in the water segments. These increases were offset slightly by decreased gas consumption and then more materially by nearly 11 cents from other, which reflects lower tax repair benefits and increased depreciation and interest expenses. As I noted earlier, the lower repair tax benefits this year are mainly the result of the timing of the natural gas safe harbor impact in 2023.

13:13 In conclusion, we're pleased with the performance for the quarter, given strong results in the water business and slightly lower expenses year over year. More importantly, we remain on track for a year in line with our guidance and investor expectations once we adjust for the sale of the energy project and normalize weather for the gas business. Let's review the guidance we provided in February, updated in May, and reconfirmed in August, as well as today. We provided guidance for 2024 net income for diluted common share to be $1.96 to $2. We expect to achieve this once we consider the gain on sale and weather impact. So think about it this way. Due to the energy project sale, gap earnings per share will exceed our guidance range, but if we subtract the 24 cent gain from that figure, and add back $0.08 to reflect the warmer than normal weather in Q1 and Q2, we'd expect to result into the $1.96 to $2 EPS guidance range.

14:18 As Chris mentioned, in 2024, we expect to invest between $1.3 billion and $1.4 billion. We're on track to do this as we've already invested over $932 million through September. Turning to the next slide, let's look at regulatory activity. The Pennsylvania Natural Gas, or P&G, rate case was filed in December 2023 and we received an order from the Pennsylvania Public Utility Commission back in September. This order included an annualized revenue increase of $93 million, mainly due to the doubling of rate base due to replacing aging infrastructure since the last case, as well as weather normalization, which is good for both customers and investors.

15:03 This order also fully incorporates the repair tax benefit into the revenue requirement, thus benefiting our customers. This case has a fully projected future test year that extends through September of 2025. Rates went into effect on September 27th, so you'll see the increased revenue from the rate case in our Q4 results. Unfortunately, as Chris mentioned, in a highly unusual action, One of the parties that didn't sign on to the settlement agreement, the Office of the Consumer Advocate, has appealed the PUC's order to the Commonwealth Court and has asked for a remand of the PUC, essentially claiming that the PUC needed to include more information to support its findings to approve the rate increase.

15:50 We believe that the order is very sound, and while based on a non-unanimous settlement with all parties except for the OCA, it was supported by both the Administrative Law Judge, and the commissioners who voted 5-0 to approve the order. We'll be supporting the commission and its order on appeal and we're closely monitoring the situation. The company does not expect accounting implications related to this appeal process. Moving on to the next slide, as Chris mentioned, we've reached a settlement for the rate case that we filed for Aqua Pennsylvania in May of 2024. The settlement would be reviewed by the assigned administrative law judges and then the Commission. Once approved, we expect the new rates from this settlement to go into effect in February of 2025.

16:36 This rate case includes a fully projected test year through the end of 2025. The settlement is designed to provide an annualized revenue increase of $73 million on the water and wastewater operations. It's important to note that the East Whiteland wastewater system is excluded from this settlement and thus is being addressed separately, but we'll conclude with the rate case outcome in February. Moving on to the next slide, in 2024, our regulated water segment received rate orders for infrastructure surcharges in several states, including Illinois, New Jersey, Ohio, North Carolina, Texas, Virginia and Pennsylvania, totaling $51 million. This does not include the settled rate amount for the Aqua Pennsylvania case that we discussed a moment ago. Our regulated natural gas segment also received infrastructure surcharges in Kentucky and Pennsylvania, totaling approximately $22 million, in addition to the $93 million that we just discussed, for a total of approximately $115 million in increased annualized revenue.

17:47 Looking ahead, we currently have rate cases or infrastructure surcharges pending in Illinois and Ohio and the pending Aqua Pennsylvania rate case settlement for our regulated water segment. Combined, the revenue request in these cases is $149.2 million. We also have an infrastructure surcharge pending in Kentucky in the amount of $465,000 for our regulated gas segment. And with that, I'll hand the mic back to Chris. All right, thanks, Dan. We'll talk a little bit about growth. As of this call, we have seven signed asset purchase agreements across three states, Pennsylvania, Texas, and Ohio, in which we already have existing water and wastewater operations.

18:33 These agreements are projected to add over 213,000 customers or customer equivalents and total approximately $360 million in purchase price. It's just a reminder that The Federal Bankruptcy Court judge in the bankruptcy of the City of Chester continues to have a stay on all proceedings related to Del Cora, but also remind you that we've said a couple of times we've removed all financial impacts from Del Cora in our new EPS guidance. Now you'll notice that we recently signed a deal with Integra Water to acquire the wastewater system in Los Milagros, Texas. This system is expected to add about 1,100 customers to our network and comes with a purchase price of about $4.4 million.

19:20 We've also entered into an agreement with the Village of Midvale to acquire their water system in Midvale, Ohio. This system is expected to add about 900 customers to our network and has a purchase price of $3 million. Now, although a couple of these most recent systems are on the small side, We continue to have a robust pipeline of potential water and wastewater municipal acquisitions that we are actively pursuing. These potential acquisitions continue to represent nearly 400,000 total customers and result in a significant expansion of our current customer base, assuming we get them completed. Now, since 2015, our growth by acquisition strategy has allowed us to add over $500 million in rate base and more than 129,000 new customers or customer equivalents to our footprint.

20:20 In addition to municipal growth activity, we're seeing great developer opportunities in several of our states, especially in Texas and North Carolina. Really worth mentioning, in the past three years, we've negotiated deals with Texas developers to be the water and or wastewater utility operator and owner for communities that are expected to build over 30,000 homes. Growth like this is as valuable as any acquisition we would do. Texas has been growing significantly over the last 20 years, and you've probably seen the numbers adding roughly a million people every two years. So also of note, is that our service territory is within what they call the Texas Triangle.

21:09 This is the most rapidly growing areas of Texas, including Austin, San Antonio, Houston, and the Dallas-Fort Worth Metroplex. All right, in closing, let me share with you our multi-year financial and growth guidance. You've heard some of it already. We are reestablishing guidance as promised and we believe it will give you a clear line of sight to the opportunities in front of us. 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 in earnings associated with unusual weather should be dramatically reduced.

21:56 We're guiding longer-term EPS. at a compounded annual growth rate of 5% to 7%, and that is for the three-year period through 2027. Once again, this does not include Delcorra. As we look to the next five years through 2029, we plan to make regulated infrastructure investment of about $7.8 billion. We expect our 2025 capital spending on infrastructure to be approximately $1.4 to $1.5 billion. Through 2029, we expect the regulated water segment rate-based growth at a compound annual growth rate of about 6%. This projection only includes the acquisitions listed in the previous slide and are scheduled to close in 2025 and excludes Delcorra.

22:47 This projection does include the crucial work that we're doing to remediate PFAS across the systems we currently own and operate. For our regulated natural gas segment, We expect the rate base to grow at a compound annual growth rate of approximately 11% through 2029. I'll tell you, the team at Peoples continues to amaze us with their ability to execute on their capital plans. And we have the opportunity to continue the important work of replacing aging natural gas pipes well past the next decade. On a combined basis, that's water and gas. We project rate-based growth at a compound 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.

23:42 I would expect that when we look back in five years on what we've done, we will have completed even more given the acquisition pipeline that is not factored into our rate-based growth projections. We believe that the growth we're describing can be accomplished while we keep customer rates at affordable levels. We anticipate that our water customer base will continue to grow at an average annual growth rate of between 2 and 3% over the long term because of the continued consolidation opportunity in water and wastewater and strong organic customer growth, especially in Texas and North Carolina. We expect our regulated natural gas customer base to remain stable.

24:29 Now to support our growth and meet our credit metrics, we plan to raise equity through our multi-year ATM program through 2027. Specifically, between 2024 and 2025, we expect to issue approximately $350 million in equity through the ATM. I know that that's probably smaller than some of you expected, but We believe our strong regulatory outcomes allow us now to do about $350 million between the two years, and we believe that will satisfy our capital needs, fund our growth initiatives, and maintain a strong balance sheet and credit profile. I'll tell you, we remain committed to our sustainability goals as we outlined in our annual sustainability report, and we're just very, very excited about providing all this guidance to you today. We are very optimistic about the future of our company and the opportunities that lie ahead.

25:32 And so with that, I look forward to your questions. And operator, please open the line for questions. Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star and number one on your telephone keypad. Your first question comes from Julianne Dumoulin-Smith from Jefferies. Your line is now open. Hey, good morning team, Chris, Dan, the whole team here, guys. Really incredible outcome here. Really nicely done to get back on that EPS Kager horse. So kudos on that pivot. With that said, guys, a lot of comments here. I want to come back to a couple of them.

26:19 On the equity financing expectations, just want to understand, am I seeing a little bit of a shift here? I mean, you know, in terms of 24 and pushing into 25 a little bit with this 350 between 24 and 25? And how do you think about that fitting with the rating agencies out there? I just want to speak to, you know, having reviewed the new plan with Moody's potentially, how are they reacting? How are you thinking about your equity timing with their outlook as it stands? Yeah, thanks, Julie. It's Dan here. So we're staying quite close to the rating agencies at this point in time just to make sure that we are in sync. And what we put out here is that we would raise 350 between 24 and 25. And so we stood up the ATM back in August. We raised some equity on that already. And then it gives us the opportunity to pick the advantageous times between now and the end of 2025 to raise the 350 that we noted.

27:15 We feel confident that Moody's feels good about our plan. Correct. Thanks, Chris. Got it. Is that any kind of subtle shift from your earlier billion-dollar multi-year equity, just to dig at that a second further? Well, when we talked about the billion dollars and we put the billion-dollar ATM in place, what we said was that we would use that over an approximately three-year period of time, depending on acquisitions and other factors. I don't really see it as a pivot at all or change from what we had indicated before. And we hope if we're raising that kind of equity, we're doing some really nice acquisitions. So, you know, it gives us some optionality, Julian. Yeah, absolutely. In fact, did you want to speak to that a little bit?

28:00 Because I've heard you comment about that, the equity expectations under the base versus your updated thinking about the core of some of these acquisitions, right? I mean, What is sort of that X M&A dynamic on equity versus inclusive? And then, you know, I know you mentioned Delcor here as being kind of incremental and the cherry on top, if you will. Is there a sense that, you know, as far as you're concerned, that you could get this done in a given time or you've got to hold off from providing any more prescriptive timeline at this point? Yeah, the way I think about it is, you know, we have a very strong asset purchase agreement, as you know. and it's been declared by several levels of courts to be valid and enforceable. The frustrating part is this federal bankruptcy court judge, not even on Del Coro, obviously it's on the city of Chester.

28:51 And so we have no control over that. Now there is a hearing later this week and we do believe that the stay will be lifted on the Supreme Court's ability to determine who is the owner of the Chester Water Authority. So that's helpful. We need to get the stay lifted on PUC proceedings on Del Cora. But given the fact that we're not in control, it's difficult for us to have that influence. And so we back that out of our numbers for that reason. But most certainly, if we can get that stay lifted and get it moving at the Public Utility Commission, we feel confident that it'll go. Remember, it's a one time rate base case so that new RRR won't really have any influence.

29:38 and this should fit nicely with it. And if we were to do that, if we could move it forward, call that in late 25, 26, then most certainly we'd need equity and we'd want to be able to have access to ways to raise that equity. But, you know, as I said, it gives us optionality. When we put that ATM in place at that size, we really thought about how do we do this efficiently, how do we save legal costs and how do we set these things up in a manner and so forth. So, we had a lot of success to it, even if we did need to use the entirety of it. And I guess, Julian, what I would add is, you know, when we put that out there, we talked about the three years, so it's a multi-year program, but, you know, it did contemplate at the time that we would have acquisitions in there. So, what I wouldn't do if I were you is say, all right, you had a billion, now you're allocating 350 to 24 and 25, so that means 650 in 2026. I would not go down, you know, sort of on that direction.

30:37 As we've said, it's a multi-year program, and it contemplates having some room for acquisitions as well. Got it. And last clarification here, as you think – yeah, no, it's great. And last clarification, as you pivot out of Delcor, is that kind of the bulk of the Delta here? I know you have the segment rate-based CAGRs of – you move from the 8 to 10 to the 6 and 11, respectively, for water and gas. Is that kind of reflected principally as a function of pulling Delcor out there in terms of the composition mix? Yes, that is, Julian. So we don't have Delcor unless we don't have a follow-on capital related to Delcor either. You know, as Chris said, we remain extremely confident that we will ultimately close Delcor and have that in our future, but it's not in the plan.

31:24 Got it. Excellent. Thank you, guys. Appreciate it. Thank you. Your next question comes from Durgesh Chopra from Evercore ISI. Your line is now open. Hey, Durgesh. Good morning, Durgesh. Hey, Christian. Good morning. Congrats on the settlement in the waterway case. Well done. Just maybe on equity, Dan, can you clarify? So what have you issued year to date? and is that $350 million that you advised? Sorry, it was a little garbled there at the end. You know, we've issued a relatively modest amount of equity between August and now, just given blackout periods and some stock price volatility.

32:16 So, you know, we've taken some off of that $350, but it's not a tremendous amount. okay got it that that's all I wanted to ask thank you and then just um the five to seven percent uh EPS growth CAGR the starting point is just to confirm is it the 2024 guidance midpoint affair yeah I guess I guess the way I would think about that um you know we haven't finished 2024 yet so we don't yet have the final EPS and of course as we've said it's going to be a and a number that is above our guidance range because of the sale of the energy project assets. So we don't know the final EPS, but if you think about it this way, if you think you start with the 2025 EPS guidance range that Chris talked about, the 207 to 211, and then you use the 5% to 7% growth, you can back calculate a 2024 EPS of $1.97.

33:16 or you can go back farther another year and you'd get to $1.86 which was our actual result for 2023. So that should provide you with some insights into how we're thinking about it. Got it. Okay. That's helpful. Essentially it's close to the 2024 EPS kind of midpoint that we just described with $1.97 versus $1.98. Okay. That's helpful. And then finally just Thank you for explaining. I was just going to ask you on the water rate-based delta. It looks like it's just not Delcora, but Delcora plus future investments in Delcora that's driving that rate-based delta. Just one last question for me is just on the Moody's metric basis, Dan, so where do you expect to shake out? I know that they had a negative outlook early in the year and you have this equity plan. Where are you expecting to shake out?

34:12 Are you expecting to shake out on debt and loan rate threshold. As we think about 2025, if you could just clarify that for us. Yeah, no, it's a great question. So, yes, in 2025, when we've got the additional cash flow created by the P&G and Afro-Pennsylvania rate cases and some other things, we'd expect to see FFOs to debt that are above 12%, and then we'd expect ultimately to have the negative outlook resolved probably You know, into 2026 at some point. We got our current level. Correct. Excellent. Well, thank you and congrats again on this solid regulatory process in PA.

34:58 Thanks, Ragesh. Take care. Your next question comes from Travis Miller from Morningstar. Your line is now open. Hey, Travis. Hi. Good morning. Thank you. You answer most of my questions. I appreciate all the information, the guidance and such. A high-level question, timely here. PFAS, if there were to be a Republican administration, what are your thoughts, not necessarily in terms of the limits being reconsidered, but implementation timeline and some of the maybe federal aid that would come your way to help with that? Yeah, I would say, if anything, we would not expect a backing off on the limit. So the four parts per trillion probably stays in place, at least to our best estimate.

35:52 But even if there was a slowing in the compliance period, we would expect to continue to meet the current pace. We've talked to our regulators in the states that are particularly impacted by this. and regulators both on the environmental side and on the economic side have suggested that we stay the course and complete the work and then get it recovered. In the meantime, as you know, we have been in for low interest loans and grants and also sued the polluters and we'll continue to pursue all of the above. In terms of federal money, as you probably know, that flows down through the agencies and the SRS or State Revolving Loan Funds.

36:40 And we don't see a big change there in terms of the federal money flowing through the states. So I guess the matter who's elected today, we don't expect a big change and we fully expect to still invest that, call it roughly $450 million to overcome the PFAS issue. and again that'll be funded a number of different ways here as I just suggested. Okay that's helpful and then one more kind of bigger picture also on acquisitions your big peer kind of is I don't know if I want to put words in their mouth but slowed or at least plateaued acquisitions clearly you have plateaued or slowed acquisitions is there something going on fundamentally over the last year or two in the water business where any acquisitions are now reaching a new level, low level?

37:40 Or I don't know, if you could just characterize kind of what we're hearing from some of the big water utilities on that side. Yeah, I think in Pennsylvania, most certainly that is the case as people figure out how the new regulation will impact them. The new, they call it RRR in Pennsylvania, which is essentially a cap. It's not formally a cap, but it's essentially a cap. I think the transactions that were already in place are being figured out. Can they come across as troubled? Do they have to be renegotiated? So that's a little bit of effort for everybody. And then new, those who are considering selling their systems, thinking about, okay, what's my DOC?

38:27 and what's 1.68 times that DOC and then is that enough for me to sell? We believe from our ongoing discussions that it will be enough for people to continue to sell because it's still a good multiple and we also believe it will have a positive impact on the ultimate rate impact. So I think it's a temporary lull and I think our ongoing discussions, not only in Pennsylvania but the other states, would indicate that. We see some really positive things in Ohio, Illinois, and even down south that hopefully will materialize in the coming year here. Okay. So, yeah, I understand that's structural in PAs, but nothing structural in those other states, like you said, that would indicate something new.

39:18 Yeah, I feel good about it, Travis. I think we're in a little bit of a lull here, but I do think that it will recover nicely. Okay. Great, appreciate the thoughts. Your next question comes from Davis Sunderland from Baird. Your line is now open. Hey, good morning. Thank you for the time. And congrats on a very strong quarter and getting the long-term guidance back out there. Just one from me. I was wondering if you guys could talk maybe a bit about how the PUC is handling the separated estimated costs for PFAS. Maybe just any thoughts on if these will go through a similar rate-based process and eventually be folded into the rate-based or just how we think about those costs could be recovered if through a different mechanism.

40:06 Anything there? Yeah, listen, I guess let's start with we're sure that we will get recovery in each of the states where we've made the investments. And I think there's a couple of considerations here. One, how will The proceeds from the lawsuits, which we expect to be in the $100 million range, how will those be treated when those dollars actually come across? We know generally how they'll be allocated, but will the commissions want that applied to an offset to rate base, or will it be an offset to O&M? And I don't think that's been fully determined at this point. But in terms of our actual capital investment in...

40:54 that mitigation. Dan, happy to get your opinion on that, but I think there are various approaches depending on the state. There are various approaches depending on the state, and what we're working toward in most of our states, Davis, is really the ability to have deferred accounting treatment on these things. So, we would take these investments, we'd put them on the balance sheet, and then we We would either stall depreciation, not start depreciation, or we'd depreciate into this regulatory asset for recovery later. So that's the typical approach is to look for deferred accounting. In other places, we're able to incorporate some of these things into our recovery mechanism in a future-looking year.

41:47 That's super helpful. Yeah, that's all for me. Thank you so much, guys. Appreciate it. You bet. Take care. Your next question comes from Greg Orell from UBS. Your line is now open. Hey, Greg. Good morning, Greg. Hi. Yeah. Thank you. Could you talk about the process or timeline around the People's Gas Appeal? Yeah, it's an unusual one. And so, you know, it's an appeal to the to the Commonwealth Court. And I'll tell you, anytime these things come up, you know, you don't like to see them, but it is certainly not of paramount concern to us. It would probably play out over a year, but there's some moving parts to it as well.

42:40 Today, being Election Day, there is a race for Attorney General here in Pennsylvania, and the two people running for Attorney General, the Democrat and the Republican, would both be a new attorney general. In other words, the existing attorney general is not running again. And so the one who is appealing this is the consumer advocate who is hired by the attorney general. So that's another moving part. Might this consumer advocate not be in place after The two new Attorney General candidates, one of them would be elected and then sworn in. So I think that's another factor in here, but it would probably play out over a year period. I think probably the most important takeaway is that the high probability, even the request of the OCA in this situation, is a remand back to the PUC. And they had a 5-0, very strong decision.

43:41 So I think in all likelihood, there would be some maybe you know more really support support for that decision from the PUC. Right yeah we give it an opportunity thanks for that to document their support of the order effectively. Makes sense congratulations. If you'd like to ask a question, please press star and number one on your telephone keypad. Your next question comes from Jonathan Reeder from Wells Fargo. Your line is now open. Hey, Jonathan. Good morning. Hey, good morning.

44:27 Thanks for taking my questions. First off, is the entire $73 million water and wastewater base rate increase for the settlement to be effective in late February, or is it perhaps phased in at all? No, that would be implemented at one time in February. I think it's February 20th. Okay. So I guess just with the new P.A. rates in 2025 for both electric and gas, I'm a little surprised that the 25 guidance wasn't a little higher, you know, so maybe can you talk about, you know, what the 25 headwinds are to EPS growth that we should be thinking about off of, you know, call it the original 24 guidance range midpoint of $1.98?

45:20 Yeah, I guess I just touched on maybe one area, Jonathan. We're still in the process of finalizing our budget for 2025, but one thing we are seeing is a few areas where we're having O&M headwinds that we haven't had in the past. Let me take you through a couple of those. One is purchased power. So we've had a very advantageous multiyear agreement in our PJM states for purchased power. That agreement comes to an end here, and we have a new contract going into effect and as you know, purchase power prices have increased. And so we're facing that headwind as we go into 2025.

46:06 And then we're seeing things like, another example is chemicals, just some new costs. So we haven't historically had PFAS related chemicals. We're gonna see some costs at our large surface water plants in 2025 to feed powder activated carbon as an O&M expense to reduce PFAS in the water. That's two areas. And then, you know, probably if you've followed some of the news, insurance costs have continued to increase. And so, those are a few of the headwinds that, you know, I would say help to explain our guidance range of the $2.07 to $2.11 for 2025. Okay, great. That's helpful. I was wondering, too, if you could give a breakdown of the five-year, you know, $7.8 billion CapEx budget between water and gas.

47:03 Yeah, so one thing to note is that 7.8 CapEx only includes a few signed acquisitions, and, of course, we've taken Delcor out of that, so any follow-on CapEx for Delcor is not included. If we look at the $7.8 billion, it is slightly biased toward water. And I'd say, you know, it's relatively close to 50-50 biased a bit toward water, but we would expect with acquisitions it biases even more toward water over time. But that's not in our plan at this moment. Okay, great. And then last question. I just saw that parts of Pennsylvania just issued a drought watch.

47:49 How much of a concern is this to you guys right now? I mean, I know discretionary water use is getting lower this time of year, but how should we be thinking about that? Not a great concern to us. I mean, listen, we're conservationists at heart. We're an environmental company. We're guarded against any problems that would happen. But this is unusual weather. It really is unusual to us. We have put some warnings out on our own to our customers, but we're in good state. There's not a major concern that we would run low on water or anything like that. That's not an issue here in Pennsylvania for us, but certainly we'll comply with the warnings and support the warnings.

48:38 As you just indicated, this is not a high consumption period for us either, so we don't anticipate a major impact. Okay, not just the supply side, but also on the revenue side. Shouldn't be too many. Yeah, that's correct. We don't expect a financial impact to speak of. Okay, great. Thanks so much for taking my questions. Thanks, Jonathan. Take care. I'd now like to hand back over to Chris Franklin for closing remarks. Thank you, and thank you all for joining us. We're always available for follow-up calls, Brian. Haley, Dan and I anytime. So thanks for joining us and take care. Thank you for attending today's call. You may now disconnect.

49:23 Have a wonderful day.