Essential Utilities Inc Aktie

Hello, everyone. Thank you for joining us, and welcome to Essential Utilities, Inc. Q1 2026 Earnings Call. [Operator Instructions]

I will now hand the conference over to Brian Dingerdissen. Brian, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2026 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 the webcast.

As a reminder, some of the matters discussed today may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. References may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted in the Investor Relations section of our 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.

All right. Thanks, Brian, and good morning, everyone. Let's begin with a few updates on Slide 5. First, on the merger. As you likely saw in a press release we put out 2 weeks ago, we accomplished our first milestone regarding regulatory approval. The Kentucky Public Service Commission officially approved our merger request. This is our first regulatory green light, and it's a big step toward bringing our two companies together. Now this momentum follows the clear yes we received from both sets of shareholders back in February where the transaction was approved by an overwhelming margin, 95%.

Now for the quarter. We reported GAAP earnings per share of $0.79, which includes about $0.04 of merger-related costs. While the quarter itself was up against a difficult comp with the previously discussed nonrecurring items from the first quarter of last year and merger-related costs this year. Now when we look at the 2026 overall, we're very confident that we will meet our 5% to 7% annual growth in earnings per share compared to the non-GAAP 2024 earnings per share of $1.97. And Dan is going to cover this in a lot more detail in a few moments.

While the quarter was a bit challenging, largely due to extreme weather we faced in some parts of our service territory, we're continuing to invest capital prudently and where it matters most. This quarter, we invested $269 million in our water, wastewater and natural gas infrastructure. These investments help us to meet federal and state regulations, things like PFAS and lead and boost reliability and safety for our employees and our communities. Our current trajectory indicates that we'll meet our plan this year to make $1.7 billion in critical improvements by year's end.

Our customer rates remain affordable and our planned investments and associated financing are built to meet our affordability goals. I have to tell you, I'm really proud of the team in both gas and water for maintaining service for our customers during what were pretty challenging winter weather conditions this year, especially in January and February. Lastly, in March, we closed the Greenville Water acquisition. You may recall that we closed Greenville wastewater in 2025. I'll provide an update on our overall acquisition program in a few moments.

If you turn to Slide 6, you'll see a road map of what's ahead for completing our merger with American Water, which, by the way, is still on track to close by the end of the first quarter of 2027. Once we cross the finish line, the combined company will serve more than 4.7 million water and wastewater customers and more than 740,000 natural gas customers. It really is an exciting path forward, and we're moving full steam ahead.

Slide 7 shows the heavy lifting behind the scenes. Integration planning efforts are continuing with both Essential and American Water employees involved as part of the integration management office, the core integration teams as well as subject matter experts. The focus is simple: ensuring we're ready to hit the ground running as a world-class organization the day after we close this transaction. These work streams and the partnership between leaders and subject matter experts from both companies are meant to ensure that the best practices of both companies are melded together in the combined company. We'll have a lot more to say on this as we make progress.

Now let's shift to the next slide, Slide 8, to provide an update on our utility operations this year. Our continued mantra internally here is to employees and everyone else is that we will conclude our time as an independent company with the same level of operational excellence we've enjoyed for nearly 1.5 century. If you reviewed our proxy statement, you've seen the strength of our operating metrics, meeting and exceeding our targets and achieving many first and second quartile rankings versus our peers. I'll mention that extreme cold causes challenges for both natural gas and water utilities.

For gas utilities, it can cause increased leaks and more difficulty completing capital projects. And in the water business, it can cause treatment issues, especially in wastewater, increased main breaks, and then across the board, there is the added cost of things like snow removal. But despite all of these challenges, our year-to-date water quality, safety, gas leaks, among other metrics are all on track for another strong year. Through the first quarter of 2026, 5 more PFAS projects have been completed and another 45 PFAS projects are under construction. We are on track for 106 PFAS project completions this year.

A company-wide, in our water division, the 15 operational metrics we track, which include things like construction, safety, main breaks, leaks and average time to address unplanned disruptions, 12 have a green status and only 3 are in yellow. The team is, of course, focused on moving the 3 that are yellow over to green.

On the gas side, we're installing Intelis gas meters, which are advanced meters designed for enhanced safety. Last year, we installed 71,000 Intelis meters, and this year, we have a target to install at least 80,000 more. Our gas division is focused on metrics associated with safety, construction, responsiveness, leaks and damages. Of the 16 metrics we focus on, all but 3 are green, and we'd expect them all to be green by year-end. Now despite winter weather and potential distractions associated with the merger with American Water, I remain very proud of our team's continued focus on operational excellence.

And with that, Dan will now take us on a deeper dive into the results for the quarter.

Thanks, Chris, and good morning, everyone. Today, I'm going to focus our conversation on our earnings performance and its drivers. There's some complexity due to nonrecurring items, both in Q1 last year and in Q1 this year, so I'll discuss those items to provide clarity.

Let's turn to Slide 10 to walk through the bridge from last year. We're starting with our Q1 2025 earnings of $1.03 per share, which includes some positive onetime items. In terms of revenue drivers, earnings per share this quarter were positively impacted by $0.07 in regulatory recoveries and surcharges, $0.01 from higher water volume and $0.01 due to a larger customer base, thanks to both our recent acquisitions and organic growth. This was partially offset by a $0.01 impact from lower gas volumes, but overall, the top line drivers remain solid.

Now looking at the $0.10 decrease in earnings per share due to expenses, O&M increased by about $38 million, with the largest driver being $16.3 million in merger-related expenses. Also, last year, we had $5.6 million of insurance proceeds that positively impacted earnings for the quarter, which did not recur this year. In terms of operational expenses, due to the extremely cold weather early in the year, we incurred about $2 million in incremental outside services costs and an additional $1 million in overtime related to water main breaks, snow removal and call-outs in our gas business.

Cold weather also resulted in a slower start in our capital work, which resulted in less capitalization in Q1 of this year versus Q1 of last year. For the full year, though, we expect to achieve our capital targets for both water and gas totaling $1.7 billion. And when adjusting for nonrecurring items and abnormal weather, we expect our year-over-year O&M expense increase to be in line with historic norms.

Finally, we have the other bar with a $0.22 negative impact on earnings per share. This bar reflects the impact of a $22.6 million favorable tax reserve adjustment in the first quarter of last year due to the conclusion of the Aqua Pennsylvania rate case as well as increases in depreciation and amortization due to additional rate base and some higher depreciation rates, increases in interest expenses due to higher borrowings and some weather normalization and tax impact.

Together, this takes us to $0.79 for the quarter on a GAAP basis. If you back out the nonrecurring merger-related costs for financial advisory, legal and other fees, our adjusted non-GAAP earnings come out to $0.83. And you can find the full reconciliation on our website or in the appendix of this deck. As Chris mentioned earlier, the big picture hasn't changed. We're fully committed to our long-term goal of 5% to 7% EPS growth from our non-GAAP 2024 base of $1.97 through 2026 and 2027.

I'll wrap up on Slide 11, touching on our regulatory activity. So far this year, we've completed regulatory recoveries totaling $15.1 million in annualized revenue with about 1/3 of that coming from water and wastewater and the rest from our gas business. Looking forward, the pipeline is active. Our water and wastewater segment has 5 cases pending for roughly $102 million in annualized increases. A few of these cases are nearing completion, and we'll have updates on those in August if you're not watching the state regulatory dockets directly.

Meanwhile, our gas subsidiary has a base rate case pending here in Pennsylvania for $163.2 million, which is critical for supporting our Long-Term Infrastructure Improvement Plan, thereby enhancing the safety and reliability of our system and further reducing emissions. As always, our focus is on balance. We're maintaining these filings to ensure we're providing safe, reliable service and earning a fair return on our capital, all while keeping a very close eye on affordability for our customers.

And with that, I'll turn the call back over to Chris. Chris?

Thanks, Dan. Let's move to Slide 13 to recap our growth through acquisition program. On March 4, we closed on our $18 million purchase of the Greenville Municipal Water Authority in Mercer County, Pennsylvania. The system serves 3,000 customers in Greenville Borough as well as Hempfield Township and West Salem Township right here in Pennsylvania. We remain excited about our continued growth in Pennsylvania and welcome our new customers in Greenville.

Now aside from the selected opportunities on the slide, looking forward, we have signed purchase agreements for several small systems in Pennsylvania, Texas, North Carolina and New Jersey, many of which we expect to close in 2026. Including these signed purchase agreements, in total, we are adding about 201,000 customers with a purchase price of approximately $285 million. This includes our DELCORA transaction. I'll remind you again that the progress on our DELCORA transaction continues to be stalled by a stay put in place by a federal bankruptcy court judge related to the bankruptcy of the city of Chester. The pipeline of potential water and wastewater municipal acquisitions stands at approximately 400,000 customers, and we remain very optimistic about the consolidation of water and wastewater systems in the United States and look forward to leveraging the combined resources of Essential and American Water to accelerate our business development work.

And I'll wrap up our prepared remarks here on Slide 14. As we've discussed before, we are reaffirming our 5% to 7% multiyear earnings per share guidance through 2027. Upon announcement of the transaction with American Water, we informed investors that we would continue growing EPS by 5% to 7% annually using our adjusted 2024 earnings per share of $1.97 as the base. As a reminder, this outlook includes the acquisitions we expect to close this year, but does not include DELCORA.

Beyond the numbers, our priorities have not changed. We're focused on keeping the balance sheet strong, improving our cash position and growing the dividend while keeping our payout ratio between 60% and 65%. As part of our strong focus on customers, we're investing $1.7 billion in regulated infrastructure this year.

With that, I'll wrap things up and hand it back to the operator so we can take your questions.

[Operator Instructions] Your first question comes from the line of Paul Zimbardo with Jefferies.

First, I just wanted to check in, Pennsylvania has been very topical and you guys sit locally. So curious if you have any thoughts on the latest kind of affordability headlines and feedback on the Pennsylvania Governor's letter. Do you think that impacts your pending rate case? And just overall thoughts would be useful.

Yes. So first of all, I think we probably all agree, we're aligned with the Governor on the issue of affordability. Clearly, every utility is trying to accomplish pretty significant capital improvements while figuring out strategies to keep rates affordable for our customers. So noble work, and we're aligned on that.

Now in terms of the Governor's specific initiatives in his letter, I would say, Paul, we're in ongoing conversations with the Governor's team. Dan and I were on the phone with them as recently as yesterday. The conversation continues. We're trying to get, I would say, real direction on how they're thinking about these issues. We know the issues. We outlined them pretty specifically in the letter, but how they'll be applied and how they'll actually materialize in terms of the Public Utility Commission, I think, is still being worked out.

And so I would say, in terms of our filed case at Peoples, so far, we're proceeding as though there's no change given we are already filed. We have a water case yet to file this year. And so we're working through that case -- preparation of that case as we digest this new information from the Governor.

And then the other one, just again, smaller detail, but with the adjusted EPS to exclude the merger charges, prospectively, should we think about the adjusted EPS just adjusting out the merger items or like anything else that you'd think about adjusting like gains and things of that nature?

So at this point, when we look at the $0.79 going to $0.83, the only thing in there, Paul, is merger-related expenses. And you'll see that non-GAAP table. But so think of that as like bank fees, legal fees, filing fees, things of that nature.

Okay. So prospectively, just got those type of items adjusted out?

Yes.

Your next question comes from the line of Travis Miller with Morningstar Inc.

Just following up here real quick on the Pennsylvania thing. I understand that in terms of your rate cases. What about the merger approval? Have you had conversations with the Governor's office, or does that come up? How do you think that might impact the review of the merger?

Yes. I mean I would say ongoing dialogue, I can't say we're in the specifics on the merger. I would expect the Governor would let the commission adjudicate that case as they see fit. But I would say, Travis, we just got through -- well, today is the last day of 14 hearings throughout Pennsylvania. And I would position those as very positive. Very few people actually had anything to say and the several that came, a number of them were positive. So I would say, very successful hearings in Pennsylvania, and for that matter, in North Carolina, where we've largely completed the hearings there, too.

So I wouldn't expect the Governor to give specific thoughts on the merger at this point. But generally, I think people seem to think it makes sense, but I don't want to pigeonhole anybody into a position because nobody has actually staked out a position at this point.

Sure. Okay. I understand. And then also more generally, how is the pending merger discussions around that impacting the discussions you're having with municipalities? And perhaps, are you having discussions with municipalities along with the American Water Works colleagues?

No. Unfortunately, there's legal rules that would prohibit us from doing that. As a matter of fact, interestingly, Travis, at least in two places, we are still competing with American, which is sort of a strange thing given the circumstances. But until the transaction is completed, we both have to do business as usual.

I think just from general discussions, sellers, municipals in large case, understand that we will be one within about a year. And so they recognize that, and I think it's in the considerations. But we're business as usual out there knocking on doors and trying to do as many transactions as possible. I can't say that the transaction has inhibited our ability to turn over those rocks and look for opportunities in any way. And I haven't sensed any negativity at all from potential sellers. So I think it's generally business as usual.

And Travis, to recall, we're in some states that American is not in. And then certainly, in some states, we're in different geographies. So as Chris said, we're doing everything we can to continue to drive this acquisition growth.

Your next question comes from the line of Davis Sunderland with Baird.

Maybe if I could just ask kind of a follow-up, I guess, to Travis' first question, just about the merger and the backdrop in Pennsylvania. I'm sure as far as states go, this will obviously be the heaviest lift. But wondering, Chris, if you could just expand a bit more on what there is still to be done in the back half of this year, and if it's just time or if there are any other potential road bumps or things that we should just consider as the process moves forward.

Yes. I would say, Davis, the regulatory process is generally one that we have to kind of address as we go. And so we know who the parties to the case are at this point. We've seen filings already, and we'll work through those through this summer. We've got -- as we conclude the public hearings today and then move to a more formal commission process over the summer, we'll get a good sense of where we can settle. And I think we're still optimistic that we'll be able to settle with most of the parties. We'll see how people come to the table.

But so far, I would say there has been nothing that we would put in the unexpected category. It seems to be proceeding as normal, plenty of interrogatories and questions that are being asked and answered by the company and by the intervenors. But I don't want to paint an overly rosy picture, but I would say there's nothing that has come up that we would thought this is unexpected.

That's super helpful. Maybe just as a second question, I guess it's a two-parter for you, Dan. But just I appreciate the details on the earnings bridge as per usual. I'm just wondering if you could talk a bit through the shaping for Q2, I guess, really through the rest of the year, just how we think about that? And then any considerations for equity issuance or other source of capital through the year?

Yes, for sure. And you probably saw it, we did do a debt offering earlier in the year, $500 million debt offering. And then we'll look to continue to raise equity when it's opportune using our ATM program. As we think about earnings for the year, in terms of that, as we said on the call, in our prepared remarks, both Chris and myself, we do expect to hit our target level of earnings per share. And the way we've determined that is based on that 2024 adjusted baseline of $1.97 with 5% to 7% growth off of that.

In terms of the quarters, probably difficult to give you a lot on that. I would look to the same sort of quarterly percentages that we provided in the past. Last year, we had a chart that had kind of the 4 quarters with a percentage of annual earnings sort of a range for each of the 4 quarters. I'd really go back to use that as your guide here.

We have reached the end of the Q&A session. I will now turn the call back to Chris Franklin, CEO, for closing remarks.

Thanks, everyone, for joining us today. And as always, Dan, Brian and I are available for questions and follow-up afterwards. Thanks for joining us today.

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

Ladies and gentlemen, thank you for standing by. My name is Jericho, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essential Full Year 2025 Earnings Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Brian Dingerdissen. You may begin

Thank you. Good morning, everyone, and thank you for joining us for our full year 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 risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties.

References may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted on our website. We will begin with Chris Franklin, our Chairman and CEO, who will provide an update on the company and Dan Schuller, our CFO, will provide an overview of the financial results.

With that, I will turn it over to Chris Franklin.

Thanks, Brian, and good morning, everyone. I want to start today's call off on Slide 5 by thanking our shareholders. Last week, we received the final tally from the special meeting to approve our merger with American Water.

And I am just so proud to report that nearly 95% of the shares voted were in favor of the transaction. This overwhelming mandate confirms what we have believed from the start that this combination creates a premier multistate utility with low risk or beta and first quartile growth.

I also want to note that our research indicates that we secured shareholder approval in record speed compared to similar deals over the years, and we're very proud of that.

As we move to Slide 6, you can see that by year-end 2025, we completed the 7 filings in the states required. This was another substantial accomplishment in an incredibly short period of time, and I truly appreciate the efforts of our teams involved. Now at this point, we've received the initial procedural schedules in most of the states, and based on those schedules, we continue to believe that we will close the transaction in the first quarter of 2027.

As you may recall, 3 states have statutory time lines, but the others do not. Now I may not be able to promise this regulatory approval phase will proceed in the same record speed as our shareholder approval, but I can certainly say I'm proud of the constructive regulatory relationships that we've built over the years, and I firmly believe that this mutual trust that we've built will lead to a constructive outcome.

So let's turn our focus to reviewing the past year's successes on Slide 7. 2025 was truly a banner year for Essential and I am very proud of what our team across every function has accomplished. I'd like to highlight some of these as I think they speak to the drive for consistency and excellence I've emphasized in our calls over the years.

Financially, we delivered 2025 earnings per share of $2.20, above our guidance range of $2.07 to $2.11. Even without some of the nonrecurring, I'll call beneficial items noted in our 10-Qs and 10-K throughout the year, we would have ended up above the guidance range.

This represents our continued commitment and legacy of delivering on the guidance that we provide investors. And Dan will discuss this outperformance in more detail, but suffice it to say, we delivered another strong year of earnings.

Now alongside growing earnings per share -- we also increased the quarterly dividend by 5.25% in July. That's 35 increases in 34 years for anybody keeping score and 80 consecutive years of paying dividends. I'm also happy to report that this earnings per share and dividend growth was achieved while we increased capital investment for the benefit of our customers.

In 2025, we invested a record $1.4 billion in regulated infrastructure, helping to improve reliability and resiliency for our communities. Also contributing to our growth were 3 municipal acquisitions we completed in 2025. We showcased the diversity of our growth strategy, which includes opportunities in Western Pennsylvania, and adding more municipal wastewater systems to our platform.

Operationally, 2025 saw our water business continue executing on our $450 million PFAS capital plan with over 50 advanced treatment systems deployed across Pennsylvania and North Carolina. This is yet another marker of our industry leadership on this issue. We're also pleased to mark for our natural gas segment, our 100,000 Intellis meter installation in 2025.

The hard work and technical expertise of both our water and natural gas businesses have promoted the health and resilience of our communities, and I'm just so proud of what the team accomplished in 2025. Of course, both businesses have continued robust main replacement.

Throughout the year and across both segments, we replaced or retired over 400 miles of main in 2025. We -- now it's really worth noting that these successes demonstrate that our work on the merger did not distract us from our core operational goals and obligations to our customers and that will most certainly continue through 2026.

Now regarding sustainability, I'm delighted to share that Essential has been named as 1 of Newsweek's America's most responsible companies for the fifth consecutive year. In 2025, we were also named to USA TODAY's Americas climate leaders for the third consecutive year. I've been consistent and stay fast in my message to you over the years. Our focus on the environment, our focus on the community, our focus on people -- these are fundamental to our success as a company and our fidelity to its mission. American Water shares a similar commitment, which makes our combination only more compelling. Another central area of focus for us tied to sustainability is maintaining our commitment to delivering high-quality, affordable service for our customers. Amid ongoing national and state discussions around affordability, particularly the impact on customer bills, I want to reiterate that our approach is grounded in making responsible investments in replacing aging infrastructure, sustaining high-quality water and strengthening system reliability, while carefully managing our operating costs. By balancing these priorities, we work to support customer affordability, while at the same time sustaining our financial performance.

And with that, let me turn the call over to Dan to review our financials for the year.

Thanks, Chris, and good morning, everyone. Let's begin on Slide 9 with a high-level view for the full year results, and then we'll get into the details on the waterfalls. As Chris described, our 2025 was very strong, with revenues up 18.6% and -- the year-over-year favorable drivers are partially offset by O&M, depreciation, interest and taxes. .

Let's recall that this year-over-year GAAP EPS comparison includes previously disclosed prior year items related to the gain on sale of the Pittsburgh area energy project as well as the unanticipated weather we experienced in 2024. The $2.20 for 2025 represents significant growth over the $1.97 of non-GAAP income per share in 2024. On Slide 10, we have the revenue waterfall for the year.

Revenues increased $388.5 million or 18.6% from about $2.1 billion a year ago to nearly $2.5 billion this year. Approximately $177.6 million of that increase is the result of regulatory recoveries. Purchased gas, which represents the cost of the natural gas sold by the company increased $126.8 million year-over-year due to both an increase in gas commodity prices and higher gas usage.

Air gas volumes contributed $57.2 million, while the other category of $30 million consists of reduced tax repair sir credits to customers as well as impacts the Pennsylvania Gas business' Universal Services Rider. These favorable impacts were partially offset by weather normalization credits to our gas customers due to colder-than-normal weather in 2025.

And finally, customer growth added $5.6 million. However, lower water volumes due primarily to wetter weather led to an $8.6 million offset to the company's revenue growth for the year. Next, on Slide 11, our O&M slide. We see O&M expenses up about $52.3 million or 8.9% year-over-year. The main drivers include an increase in employee-related costs of $26.9 million compared to prior year, an increase in the gas business's Universal Services rider of $17.5 million, which has an offset in revenues and an increase of $8.5 million in water production costs with contributing increases in power, purchased water and chemicals.

Operating expenses related to newly acquired water and wastewater systems added $1.7 million. The other category reduced O&M by $2.6 million including the positive impact of higher capitalization in the gas business, lower spending on materials and supplies and some insurance-related benefits, offset by expenses related to the merger with American. If we normalize out the merger expenses, insurance proceeds and growth, we get to a year-over-year increase more in line with historic norms.

Moving to Slide 12, our earnings per share waterfall. We begin with 2024 GAAP EPS of $2.17. As a reminder, we made a few adjustments to arrive at a non-GAAP income per share of $1.97 for 2024. These adjustments included the removal of the onetime gain from the sale of the Pittsburgh are energy projects and adjustments for unanticipated weather, along with the associated tax impacts.

You'll find the reconciliation in the Investors section of our website and as an appendix to this tech. In 2025, we picked up $0.46 from regulatory recoveries, an additional $0.15 from higher gas volumes and an incremental $0.01 from water growth.

These are partially offset by $0.02 from lower water volume, $0.09 from higher expenses and $0.48 from other. Now other includes $0.24 from the prior year gain on sale from the energy project as well as increased depreciation, amortization, interest and taxes.

As we've discussed in the last couple of earnings calls in 2025, our expectation was that we would achieve GAAP earnings per share above our guidance range of $2.07 to $2.11 due to nonrecurring benefits. And indeed, we finished the year with full year GAAP EPS of $2.20. Let me point out a few nonrecurring items from our 10-Qs and the upcoming 2025 10-K that contributed to this favorability.

Based on the February 2025 Aqua Pennsylvania rate order, we had the release of an income tax reserve regulatory liability, and we had a favorable regulatory asset adjustment that decreased bad debt expense. Second of those, that was actually tied to a COVID-related reserve. And in the first quarter, we had a benefit from insurance proceeds.

And then in the second quarter, we had a benefit related to the closure of the P&G sales and use tax audit. Finally, as you'll see in the 10-K, these were partially offset by merger-related expenses for banking, legal and other matters.

However, even excluding these onetime items, both good and bad, we still had strong financial performance that would have exceeded our range. We remain committed to our long-term goal of delivering 5% to 7% EPS growth for the 3-year period of 2024 through 2027.

Given the impact of onetime items in the 2025 results for a better sense of 2026, I would use that long-term CAGR of 5% to 7% and off the non-GAAP income per share of $1.97 in 2024.

I will conclude my remarks on Slide 13 with a discussion on regulatory activity. In 2025, Essential completed regulatory recoveries that totaled $101.5 million of incremental annualized revenue, with $92.6 million of this related to our water and wastewater business and the remainder to our gas business.

Thus far in 2026, Essential has completed regulatory recoveries that totaled $12.4 million across our water, wastewater and natural gas businesses. Looking ahead now, our Water and Wastewater segment has filed for regulatory recoveries with a requested annualized revenue increase totaling $101.9 million.

We continue to manage our regulatory activity to maintain safe and reliable service, earn an appropriate return on the capital we invest and minimize regulatory lag while always considering affordability for our customers. This will, in a similar matter to the past continue throughout 2026 as we approach our anticipated combination with American Water. And with that, I'll turn it back over to Chris. Chris?

All right. Thanks, Dan. Let's move to Slide 15 to recap our water, wastewater acquisitions for the year and take a little look forward. During 2025, Essential completed 3 acquisitions of water and wastewater systems were approximately $58 million, which, along with the organic growth in existing systems represent over 12,700 new customers.

I want to touch on some recent news, you may have heard, the Supreme Court in Pennsylvania communicated its decision regarding the city of Chester and the Chester Water Authority. We respect the court's ruling and the judicial process, and we're closely monitoring the receivers next move now that there does not appear to be an asset to sell in that city.

We stand ready to participate in any process where our company can be part of an overall solution that assists the city of Chester to exit bankruptcy and ensure utility customers in the region received quality water at affordable rates. Now looking forward, we have 3 signed purchase agreements for systems in Pennsylvania and Texas, which we expect to close in the first half of 2026. Notably, last month, the Pennsylvania Public Utility Commission approved Aqua Pennsylvania's acquisition of the assets of the Greenville Municipal Water Authority without modification.

I'll remind you that progress on our Del core transaction, the fourth pending item listed here continues to be stalled by a stay put in place by our Federal bankruptcy court judge related to the bankruptcy of the city of Chester.

Hopefully, we'll see some movement on Del Core now that the Supreme Court has ruled, we remain optimistic about the consolidation of water and wastewater systems in the United States and look forward to leveraging the combined resources of Essential and American Water to accelerate our business development work.

All right. Let me conclude my remarks on Slide 16. As we noted in November, on our third quarter 2024 earnings call. We are reaffirming our 5% to 7% multiyear earnings per share guidance through 2027 from the adjusted non-GAAP 2024 and earnings per share of $1.97.

This includes acquisitions expected to close in 2026, but excludes Del Cora. As Dan noted earlier, this 5% to 7% CAGR should be applied to our 2024 non-GAAP income per share of $1.97 as this strips out the favorability of nonrecurring items in 2025.

We also remain committed to maintaining a strong balance sheet, improving cash flow and debt metrics and delivering consistent dividend growth. while keeping our payout ratio between 60% and 65%. In 2026, regulated infrastructure investments are expected to be $1.7 billion.

And finally, I want to reaffirm our PFAS commitments that I touched on earlier, we are continuing to execute our multiyear plan to ensure that finished water does not exceed the federal maximum contaminant level of EPA-regulated PFOS chemicals.

Essential is committed to providing finished water that will meet EPA time lines and standards. Listen, all in all, I commend the entire Essential Utilities team for an excellent 2025 performance, and I reiterate our company's commitments to all of its stakeholders as we embark on what I anticipate will be another strong year and productive lead up to our anticipated merger with American Water.

And with that, I'm going to conclude the formal remarks for the day, and we'll open it up for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Zimbardo with Jefferies.

I'm good. The first was -- and I apologize if I missed it. Did you quantify what the non-GAAP 2025 would be if you made those adjustments. I know you said favorable versus the guidance range. I apologize I missed that number.

No, we didn't specifically, we just gave you kind of the nonrecurring items there, both sort of positive items and then we noted the transaction costs as well. So if you go to that exercise, you can find all those numbers in the Qs and then in the 10-K that will be released later today, you'll see that we still sit favorable to our guidance range really as we projected throughout the course of the year. .

Okay. I understood on that. And broadly, on the regulatory strategy. Could you describe what's the timing for the next round of Pennsylvania rate cases? .

Yes. So the way I think about it, we've not announced it officially. But as you know, both for PNG and Bronco Pennsylvania, we've been on a 2-year cadence historically. So I would use that same cadence. So -- so that would have us filing relatively quickly here. .

Okay. Okay. That's my thought. And then the last 1 I had was just -- I noticed that the small tweak on the language on the the credit metrics 12% plus versus the prior range. Anything to read into or things that you're trying to communicate from that?

I guess, we'd probably say as we finished out the year and concluded our financial reports, it looks like we are in a nice position there in terms of FFO to debt. So that's probably really what we were saying there is we should be above that 12% threshold for Moody's and for S&P. So we feel good about those credit metrics. .

Our next question comes from Travis Miller with Morningstar. .

On the merger, is there any chance that you could combine some of your plans, regulatory activity with regulatory sign-off for the merger? Or would those be 2 separate filings in any of the states. .

You're talking about rate cases? .

Rate cases or surcharges any kind of rate related type of regulatory activity. Is that something you could combine somehow either settlement or through the proceedings .

We consider, yes, they are separate dockets and will be adjudicated separately in each case. .

We don't see those being combined Travis. .

Okay. Okay. I thought I'd check there. And then when you talk about the overall solution to the bankruptcy exit for Chester, taking you through some of the options there, how do you think about what might develop or what you could participate in along those lines.

That's such a great question. So now the Supreme Court has ruled and said that Water Authority, the Chester Water Authority is actually owned by itself, right? The city argued that it should be owned by the city. And in that case, the city could sell the asset and exit bankruptcy with the proceeds. Now that the city doesn't have an asset to sell, somebody had to figure out, obviously, the receiver in this case, along with the bankruptcy court judge has to figure out how are you going to exit bankruptcy or declare bankruptcy. And I think that's what is happening in the background.

Where I think it's important for us is for Del Cora -- you'll remember that there is a small reversionary portion of the contract that says, if Del Cora sold in this case to us, that the city assets, the Chester City assets that were subject and in place in 1972 when the contract was when this addendum was put together, would revert to the city.

I think there's an opportunity here for us to pay something for those assets, maybe a little bit above our current purchase price, which was at rate base and helped the city exit. Well, it's not going to nearly cover bankruptcy. This is we're talking a minor amount in comparison to the almost $350 million they owe, but it could be help in some way.

And so I think at this point, what we would like to see, we would like to see the bankruptcy or judge allow the PUC proceeding to take place on Del Cora and then we could be in this negotiation on this stub piece, if you will, the reversionary portion of the contract. Is that clear? .

As clear as I suppose it could be. .

Yes. .

I appreciate it. So sounds like fun for all of us type of option. But Yes. No, that's all I wanted. That's all I had. Thanks so much. .

This concludes the question-and-answer session. I would now like to turn the call back over to Chris for closing remarks. .

Thanks for joining. As always, we're available for follow-up questions that you might have. Have a great day. Thanks for being with us.

This concludes the call. Thank you for joining. You may now disconnect.

Thank you for standing by, and welcome to the Essential Q3 2025 Earnings Conference Call. [Operator Instructions]

Thank you. I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Thank you. 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 the webcast of the event. .

As a reminder, some of the matters discussed today may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties. References may be made to certain non-GAAP financial measures.

Reconciliation of any non-GAAP to GAAP financial measures is posted on 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.

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 5. This transaction represents a true transformational opportunity, designed to integrate the assets and the expertise of 2 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 6, 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% to 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 replacement 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, state where our highest concentration in water and wastewater exists is still less concentrated than FPL is in Florida or Encore 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 is 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 7 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 to $2.11 due to nonrecurring 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 30, 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 is 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 dated 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 remain 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 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 8. Let's review our recent announcement regarding our data center investment. So in August, we announced our investment of $26 million in a project to bring a data center to Green County, Pennsylvania. For context, this is about 60 miles south of our Gas division headquarters in Pittsburgh. We deliver natural gas to customers in that same general area.

The location of the project Green 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 megawatts. That's right, nearly a gigawatt.

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 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 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 3-year EPS guidance.

We have previously shared that we are in active discussions with data center developers representing over 5 gigawatts of power demand. The Green 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 visioned within our industry to take advantage of this opportunity.

All right. Now let me move to Slide 9. I'd like to talk a little bit about our consistent approach of 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 3 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?

Thanks, Chris. I'll 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 sur credits to our customers as a result of last year's people's 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 and other expenses primarily as a result of lower outside services expenses and capitalization. The increase in employee-related costs includes about $800,000 of this year related to a change in our LTI programs RSU vest methodology. Another item to note is bad debt expense. In 2024, we made an adjustment related to our Pennsylvania water customer assistance program with credit to expense, which now accounts for $3.1 million of unfavorability in the year-on-year comparison.

If we normalize out these 2 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 in 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 3 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 to $2.11 due to nonrecurring benefits. We're reaffirming this expectation today, and I encourage you to continue using the middle of this established range of $2.07 to $2.11 to project earnings per share growth from 2025 to 2027, using the 5% to 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 2 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 multiyear 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. And with that, I'll turn it back over to Chris. Chris?

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 3 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, we'll continue to consolidate given the infrastructure investment needs and the benefits of scale.

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 to $2.11 due to some nonrecurring 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% to 7% multiyear earnings per share guidance through 2027.

This includes acquisitions expected to close in '25 and in '26, 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% to 7% CAGR should be applied to our $2.07 to $2.11 guidance range for 2025 EPS with $2.09 as the midpoint as this strips out the favorability of nonrecurring 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 Green 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 base expansion in favorable regulatory environments paired with water and wastewater system acquisitions will continue to drive consistent growth. And 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. And as a reminder, we'll 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.

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

Ladies and gentlemen, thank you for standing by. My name is Desiree, I will be your conference operator today. At this time, I would like to welcome everyone to the Essential Q2 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Brian Dingerdissen. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for the second quarter 2025 earnings call. If you did not receive a copy of the press release, you can find it by visiting our website. The slides are also found on the website.

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 from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties.

During the course of this call, references may be made to certain non-GAAP financial measures. Reconciliation of any non-GAAP to GAAP financial measures is posted on our website.

We will begin the call with Chris Franklin, our Chairman and CEO, who will provide an update on the company. Then Colleen Arnold, the President of our Aqua business will provide an update on the Water business. Dan Schuller, our Chief Financial Officer, will then provide an overview of the financial results before Chris closes the call and opens it up for questions.

With that, I will turn the call over to Chris Franklin.

Thanks, Brian, and good morning, everyone. Let's just jump right in on Slide 5 there with some highlights from the quarter.

We delivered another strong quarter, reporting GAAP earnings per share of $0.38. That's a 35% increase over the same quarter last year. Both our Water and Gas businesses performed very well and in line with our expectations. And simply put, both divisions are firing on all cylinders. Our Gas business continued its impressive trajectory with net income for the quarter of $17.5 million. I'm not going to steal any thunder from Colleen. She is going to share a little bit more about the Water business in a few minutes. But as you come to expect, we are executing nearly flawlessly in both our Water and our Natural Gas segments.

Based on our strong year-to-date performance, we expect to achieve GAAP earnings per share above our guidance range of $2.07 to $2.11, largely due to several nonrecurring benefits. We're also reaffirming our capital investment plans with a target of approximately $1.4 billion in infrastructure investment for 2025. As of June 30, we've already deployed $613 million in critical infrastructure improvements across our footprint.

Now let me take a moment to highlight some exciting developments happening in our home state of Pennsylvania. Earlier this month, we participated in the Pennsylvania Energy & Innovation Summit, which was hosted by our new United States Senator, Dave McCormick, energy leaders from around the country gathered to share thoughts, breakthroughs and energy and technology. In our Gas division President, Mike Huwar, showcased our ongoing hydrogen pilot project. This is a cutting-edge technology developed in partnership with HQuest in the University of Pittsburgh.

The comparatively low price of energy in Pennsylvania makes it such a logical choice for hyperscalers looking to locate data centers, and we continue to have active discussions with some of those hyperscalers as we speak.

Now moving from Pennsylvania to Texas. We serve customers in the Kerrville area of Texas. You'll recall the terrible flood that took place just several weeks ago. Fortunately, all of our employees and their families made it through the storm and one of our employees and his family had 9 feet of water in their home and at some absolutely harrowing moments, but thank God, they're healing from their injuries and working to reestablish their home. During the height of the event, we had some customer outages but restored service to most customers within 24 hours in all customers within 48 hours, a really exemplary job done by our Texas team.

Speaking of employees, last month, we wrapped up our most recent employee engagement survey under the theme Better Together. And I know employee engagement is becoming a common topic for investors. Now our results reflected the impact of our focused efforts to enhance our work environment. In fact, participation in the survey increased 23%, which was fantastic. Satisfaction scores rose by 6% and on average, survey scores improved by 7 points. These results reflect our continued focus on creating an engaging, inclusive and supportive workplace.

Each year, we take great pride in reminding shareholders that for more than 30 years in a row, we've increased our dividend. And as an expression of continued confidence, yesterday, the Board of Directors approved a 5.25% increase in the dividend. We remain committed to delivering long-term shareholder value through dividends and share price appreciation.

So let's take a look at Slide 6. I'm going to touch on a couple of community engagement issues. In April, we successfully concluded our fourth annual Essential Earth Day, and this is a 30-day campaign dedicated to environmental stewardship and community engagement. The slide showcases our efforts in recent years, which include volunteer events, environmental programs, and a significant investment from our essential foundation. Recognition for our community engagement and leadership, we were recently honored as one of Greater Philadelphia's Most Community-minded Businesses, this is a recognition that we really appreciate and take to heart.

Modeled after the Points of Light national program, the award recognizes companies that set the standard for civic engagement through using their time talent and resources. This commitment to community engagement is something we do in all of our states where we have businesses.

And finally, on a personal note, I am thrilled and honored to be named the Chairman Elect of the Philadelphia Chamber of Commerce. I look forward to partnering with leaders from around the region to promote economic growth and regional priorities, which hopefully end up with more utility customers.

Moving to Slide 7. Let's talk about the shareholder value. We continue to deliver steady, reliable growth in earnings and dividends. 2025 is shaping up to be another strong year with core earnings per share expected to grow this year between 5% and 7%. Most of this growth is driven by investments in water and natural gas infrastructure. Of note, since we started providing annual guidance back in 2016, we have consistently met or exceeded market expectations. This consistency has enabled strong dividend growth, underpinned by the outstanding execution of our operations team and their commitment to communities we serve.

I have to tell you, I continue to be impressed by what our team has achieved. And I'm honored to continue to be a steward of this great company with its 140-year history. Today, I want to continue the tradition of spotlighting our business segment leaders. Last quarter, you heard from Mike Huwar, President of our Natural Gas division. And today, we welcome Colleen Arnold, President of our Water division, will share some thoughts on our Water business. Colleen?

Thanks, Chris. I'm happy to be here today and especially appreciate the opportunity to highlight the important work that the team at Aqua is doing. As a reminder for our investors, Aqua, as Chris just mentioned, has a strong 140-year history and has grown from a small water company in suburban Philadelphia to serving more than 1 million customers with over $7 billion of rate base in 8 states.

Notably, as shown on Slide 9, we are expecting annual rate base growth of 6% through 2029, not including acquisitions. And the need for infrastructure investments has never been greater. The DPA estimating $1 trillion of need in water and wastewater infrastructure, that growth rate and easily grow with acquisitions. Now I've worked in the water industry for over 30 years, including as a consultant for municipalities and for a large city itself. Between the increasing complexity of PFAS, cybersecurity, wastewater and declining funding, the conditions have never been more opportune.

Now highlighting our operational excellence on Slide 10. As you see on the left, our O&M efficiency performs in the top quartile and has done so for over a decade. We take pride in ensuring that we are spending our customers' dollars efficiently. But equally important is that it is not at the expense of safe, reliable service. The top right-hand side chart show that we outperformed water systems nationally with 5x to 9x fewer health base and aesthetic violations. The bottom chart also shows our strong safety record, the top quartile performance with respect to severe safety incidents.

Also, as we move to Slide 11, we are tremendously proud of our industry-leading PFAS commitment. We have been working on this for our customers since 2016, well before the EPA and state MCL because it was the right thing to do for our customers. Our laboratory in Pennsylvania was one of the first certified and we sampled all of our sources proactively, enabling us to be where we are today. At this point, we have over 50 of our 300-plus sites mitigated and approximately another 50 under construction. This level of execution was made possible by the ingenuity of our engineering team. designed a proprietary modular system with applicability for groundwater systems.

We've recently signed a distribution agreement with [ Chart ] Water to sell this patent-pending solution called PFAS Guard community water systems. It is generating a lot of interest. While we expect increased regulation to enhance acquisition opportunities, municipal systems speaking from my experience having worked with one are slow to meet regulatory requirements, and many are just beginning to do the initial monitoring for PFAS now. The extension of regulatory deadlines may enable them to delay longer. However, we remain optimistic that as the monitoring results come in, with our strong leadership, proven track record and partnerships, this will be a strong avenue for acquisition growth.

Lastly, speaking of growth, I wanted to spend a little bit of time on Aqua Texas, where we have grown by nearly 250 connections to over 100,000 connections over the last 10 years. And currently, have another 90,000 under contract or negotiations. This is in line with the impressive growth the state has seen with 16% population increase and corresponding 30% GDP growth or economic expansion. Our 3 core operational areas outside [ Spring ], Austin and Fort Worth, Texas grew from 20% to 40%. Most notably, Austin Metro, our area of highest developer growth through 40%. Based on customer growth and infrastructure needs, we expect to nearly double the $1.1 billion in Texas by year-end 2029.

And now it would be a good time to mention that we recently read with the Texas Association of Water Companies passage of future test year legislation. This will enable us to recover that capital investment and minimize regulatory lag. I would like to thank our amazing employees who really made that possible. We are excited for our future in Texas.

And with that, I will turn it to Dan for a review of the financials.

Thanks, Colleen. Let's begin on Slide 15, a high little view of the first quarter results, and then we'll get into the details on the waterfall. Our quarterly performance was strong with revenues up 18.5% due primarily to favorable rate case outcomes in Pennsylvania, both for our gas and water subsidiaries, higher purchase GAAP costs and increased gas volume.

Corresponding earnings per share were up 35.7% on a year-over-year basis due to those drivers, partially offset by higher O&M, depreciation, interest and taxes. On Slide 16, we have the revenue waterfall for the first quarter. Revenues increased $80.5 million from $434.4 million a year ago to $514.9 million this year. Approximately $44 million of that increase is a result of rates and surcharges, with $31 million of that attributable water and $13 million from natural gas. Purchased gas, which represents the cost of the gas sold by the company increased $23 million year-over-year due to an increase in debt commodity prices and higher natural gas usage.

The other category of $9.8 million includes $4.6 million in weather normalization and $4.1 million in reduced tax recurs to our credits to customers as a result of last year's people's rate order. Increased gas volumes ride at $4.3 million in increased revenue, while growth in the water business contributed $2.1 million. These were offset by $2.6 million from lower water volumes. Due to wet weather, we saw decreased consumption in a number of our states.

Next, on Slide 17, our O&M slide, we see O&M expenses up about $6 million or 4.2% year-over-year. The main drivers include an increase in employee-related costs of $6.1 million compared to prior period, an increase in bad debt expense of $2.2 million and increases in legal expenses, partially offset by favorability in other expenses, primarily as a result of capitalization. The increase in employee-related costs includes about $650,000 of insurance reserves as we move the people employees from a fully insured health plan to a self-insured health plan. If we normalize out the growth, the universal services rider increased and the higher-than-normal employee expenses, such as the insurance reserves due to a year-over-year increase of less than 3%, which is in line with our historic norms.

On Slide 18, our earnings slide, we can see the previously mentioned effect, an $0.11 positive impact from rates and surcharges, a $0.01 increase due to higher natural gas volume and a $0.02 negative impact due to lower water volume and increased expenses. Then turning to Slide 19. As you remember, this is a slide we introduced last quarter that provides more insights into how our annual EPS breaks out by quarter. We've now added the 2 quarters as reported with both at the high end of the shaded ranges.

For the third quarter of 2025, we expect our EPS to be between 10% and 20% of our annual guidance, we expect our fourth quarter to be between 20% and 30% of our yearly guidance. We have some nonrecurring items this year that benefit earnings. So on a normalized basis, we continue to target $2.07 to $2.11. And as Chris mentioned, we currently expect GAAP EPS to exceed $2.11.

Lastly, let's move to Slide 20 to provide an update on regulatory activity. On July 1, 2025, our natural gas operating subsidiary in Kentucky received an order from the Kentucky Public Service Commission. This order approved the settlement agreement that allows base rate increases designed to increase total annual operating revenue by $7.7 million or 11.2%. New rates in Kentucky went into effect on July 1. We currently have 3 pending rate cases or surcharges in North Carolina, which is a 3-year forward-looking rate case, Ohio, Texas and Virginia with requested annual revenue increases of $96.6 million. So it's a busy year on the regulatory front.

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.

Before I conclude, we wanted to take a moment to recognize Bob Rubin. Bob has been with the company for 36 years, and he's been our Chief Accounting Officer for 20 years. During this time, Bob did an ultimate responsibility for our financials and SEC filings, and he's played a critical role in our earnings call press. Thanks for your contribution to the company, Bob, and for your friendship. You will be missed. Fortunately, over the past few quarters, Bob has worked to transition his role to Brad Palmer, our new Chief Accounting Officer, so we won't miss a beat. Welcome to that new role, Brad.

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

All right. Thanks, Dan. Now let's move to Slide 23, where we touch on our long-term growth through acquisition strategy that for many years and really continues to be focused on growing our water and wastewater business.

Last week, we finalized our $37.75 million purchase of the City of Beaver Falls wastewater system in Beaver County, Pennsylvania, serving about 7,000 customers. That's out near Pittsburgh. We plan to invest $10 million in the system focused primarily on improving both operational efficiency and environmental compliance. We're very excited to welcome our new customers and bring their system up to our standards. Now for 2025, in total, the company has acquired systems, which serve approximately 10,300 customers, for approximately $58 million. We also have another 4 signed purchase agreements for relatively small systems in Pennsylvania and Texas.

I'll remind you that progress on DELCORA continues to be stalled by a stay put in place by a federal bankruptcy court judge related to the bankruptcy of the city of Chester. Now there's really nothing new to report on DELCORA, but I'll remind you that DELCORA is not included in our current guidance numbers.

Now turning to Slide 24. I'll close by reiterating some of our goals and aspirations, both short term and long term. We continue to see strong growth potential in both our water and gas platforms and expect our combined utility rate base to grow at a compounded annual growth rate of about 8%. Breaking this down a little further, the regulated water segment is expected to grow about 6% and our regulated natural gas segment rate base will grow about 11%. We are reaffirming our 5% to 7% multiyear earnings per share guidance through 2027. This includes acquisitions expected to close in 2025 and 2026. But as we've said before, excludes DELCORA.

This projection includes the crucial work that we're doing to remediate PFAS across our water platform as well as our work to replace aging water and natural gas pipes. We 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%. All in all, we see a bright future for our company as we continue to invest in our nation's infrastructure and continue to deliver long-term value to our shareholders.

And with that, I'm going to conclude the formal remarks for today, and we'll open it up for questions. Let me send it back to you, operator.

[Operator Instructions] And our first question comes from the line of Julien Dumoulin-Smith with Jefferies.

Maybe actually just to break it down, a bit of a nuanced question, but has implications here, you guys provide this timing through the year in terms of quarterly earnings. If you take the midpoints from those and kind of look what's implied, kind of implies maybe high end or better, if you look at implied third quarter and fourth quarter here. Again, I don't mean to nitpick too much, but if you have any comment there, I have to kind of [indiscernible] there if there's anything you'd say.

Yes. So what we said in the call here, both Chris the point and I did as well, that we're going to come out on a GAAP basis, above our guidance range, so above that $2 [Technical Difficulty]

All of a sudden, we had some strange music going on. So let me give you a little bit of detail there. So as I said, we're going to come out above the GAAP guidance range. And we had strong revenue in gas this winter with more gas usage than weather alone would have predicted. And then this year as well, we benefited from some tax items and the reversal of the regulatory reserve as a result of the Aqua Pennsylvania rate order, and we had some insurance proceeds as well. Those are on the positive side.

We've also had some headwinds this year. We've had wet summer in several of our states, which has impacted us in Q2, it's currently continuing to impact us in the early part of the third quarter. Interest rates, of course, remain higher than expected. Inflation is still impacting some areas like chemicals, and we're still in the investing stage on our lean initiative. So -- and of course, it's still early in the year relative to the gas business. We've had -- half of last year's heating season. We still have November and December to go this year. So things can still move around and thus, we're not being overly specific on where we'll end, but we're saying on a GAAP basis, it will be above the guidance range.

Yes. Got it. Just wanted to elaborate a little bit there. And then just on the cash flow front, I mean, just where are you trending on FFO through the year here? And then specifically within that, how are you thinking about PFAS here? And some of the tailwinds from the settlements here and the timing of the collection of those, if you will?

Yes. So you'll see -- let me touch on those in pieces. So our focus really for this year is to be above that 12% downgrade threshold that really put some distance in there, call it like a 12.2% target area. We've obviously been in close conversations with Moody's, and we'd like to see that negative outlook removed in early 2026 once they see full year 2025 results. And then in terms of PFAS settlement dollars coming in and being helpful from a cash perspective, you'll see when we file the Q on Monday next week, you'll see that we received just about $7.1 million in PFAS proceeds from those lawsuits already, and we expect a number this year that's kind of in the $45 million, $46 million range in total.

Our next question comes from the line of Ryan Connors with Northcoast Research.

Couple of big picture questions on Pennsylvania and then a housekeeping for you, Dan. I know you're out of rates in Pennsylvania at the moment. But obviously, we have the new consumer advocate there. And I assume your team watches other matters going on really closely. So curious whether you've gotten -- been able to get any feel for the approach that he's going to take and how that will differ from the prior consumer advocate. And then secondly, been hearing some chatter about the offices small business advocate being tougher to get to the settlement table on various matters and maybe being the next fly in the ointment, if you will. So I wonder if you have any perspective on that as well.

Yes. Listen, I think our engagement with Darryl Lawrence and the OCA has been very positive. And I would expect that Darryl and his team will continue to do their job as advocates for the customers. and we'll do our job. But I do think that there is maybe an enhanced desire in that group to figure things out, put this puzzle together in a way that's constructive and that all parties feel like they've come out of it with a win, if you will, or at least not with a loss.

And so I do expect a more constructive relationship there at the OCA. That's been our observation so far. Listen, the small business advocate, she has a role as well, and these are statutory parties, and they've got their priorities. I would say this, the Advocate has been very open to conversations. She's visited us here at the company in Bryn Mawr, and she has been open to a conversation on all the topics. So listen, I'm hopeful that we can have constructive relationships with all of the advocates and that's been our experience so far.

That's a very helpful color. And then secondly, on the fair market value front, I've been hearing that there are some municipal sellers out there holding out for a price above the reasonable review ratio that was set in the reform to [ FMV ] in Pennsylvania. And I guess the reasoning is that the PUC does have the ability to approve something above that level on a case-by-case basis. Is that something you've seen? And would you be willing to go take that risk over the cap? Or would you just be staying kind of at or below the RRR?

Yes. I can't say that we've seen that yet. But I will say that on occasion, we might pay more than the RRR if we thought that, for example, there was a huge rate base growth, and we could grow into it. I'd like to think that the RRR is a target for both seller and buyer given impact on rates, right? I think that was the Chairman and the commission's primary goal here was to minimize impact on rates from transactions. And we're big believers that that's important. And so I'm not saying it would never happen, but we'd like to see both buyer and seller be closer to that RRR than above it.

Got it. Okay. Very helpful. And then, Dan, yes, just on the tax rate, it really continues to kind of jump around. And at least for us, we found it very difficult to model. So any perspective you can give us on where -- how should we think about the landing zone there, not only for the balance of '25, but even into next year, like what's your advice here on trying to model that tax line because, it really seems to be kind of a random spin?

Yes. So the way I think about that is for the full of 2025, think of a low single-digit benefit and then for the whole of 2026, at this point, of course, we haven't finished our budget or plan. But I think of that as a low single-digit expense. So think of a crossover from -- at year-end from small benefit this year to small expense next year.

[Operator Instructions] And we have a question comes from the line of Davis Sunderland with Baird.

Two questions from me. Maybe first, just jumping back, Chris, to your comments about the hyperscalers and obviously, a lot of activity going on in Pennsylvania right now. Could you maybe just talk a bit more about the potential opportunity here and specifically the time line for ultimately folding some of these into rate base?

I just -- I guess I'm trying to square the stable customer count through '27 makes me think maybe beyond that would be the opportunity, but just wanted to clarify some of the thoughts there. And then I have one more.

Yes. I think listen, most of the hyperscalers that are talking about really short-term turnaround they want to build and get in service. And as I said, I think Pennsylvania, a prime location for that particularly Western Pennsylvania, where there was low-cost energy. I have to be careful in what I say. There are some NDAs in place. And I can't really talk much about the opportunities we're engaged with right now. But I will say quick turnaround. And I would also just maybe position it to think about, as you think about these things. Maybe not all rate base or all regulated, but some unregulated opportunities as well.

That is super helpful. And then maybe second one. Colleen, I appreciate the comments on PFAS, maybe just wanted to ask about this potential EPA pushout and the rule may be coming on later this fall. I would assume no change to how you guys are thinking about it and plowing ahead with the upgrades. But maybe just more about what you're thinking the munis might do? Is this any change in maybe the acquisition pipeline, if there's maybe a push out in some opportunities related to that or any thoughts?

Yes. Thanks for the question. And as I said in my comments, there's no change to our program at all. We're full steam ahead. I do think really in terms of the acquisition and the growth opportunities, there's no change there either. Most municipalities are going to wait till the last possible minute, they're just starting monitoring. And so they'll -- this gives them a little bit more time to keep their head in the sand, but the opportunities are going to be there. Like I said, with our position, with the amount of experience we have with systems operating, operating well, we're going to be really well positioned to help them.

And Colleen, as you think about it. Yes, they might have a couple of more years to comply. But given the fact that we have a resource, a solution, maybe we can help accelerate some of those solutions with our filtration system. And who knows, maybe that starts some conversations [indiscernible].

Yes. And when I was at the American Motor works annual conference this year, generating a lot of interest, a lot coming up to me, the engineers coming up to me, asking about it and as they -- like I say, get their heads out of the sand and know they have to comply. I know our solution is going to be a great fit.

That concludes the question-and-answer session. I would like to turn the call back over to Chris Franklin for closing remarks.

Thanks, folks. Appreciate you joining us today. As always, the team is ready to answer questions or follow-ups if you have them. Thanks so much. Have a great weekend.

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