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Essential Utilities (WTRG) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Utilities· Aug 5, 2026

Source: earnings call transcript

Executive summary

Essential Utilities Q2 FY26 — Merger Progress and Reaffirmed EPS Guidance

Essential Utilities reported Q2 FY26 non-GAAP EPS of $0.38, reaffirming its 5% to 7% multi-year EPS growth guidance through 2027. The company continues to make significant progress on its merger with American Water, securing three regulatory approvals and advancing other state cases, with an expected close in Q1 2027. Capital investment remains a priority, with a record $1.7 billion planned for infrastructure upgrades this year, alongside a 5.25% dividend increase, despite ongoing regulatory scrutiny in Pennsylvania and inflationary pressures on fuel costs.

Highlights

5

  • Reported non-GAAP EPS of $0.38 for Q2 FY26, excluding merger-related costs.

  • Reaffirmed multi-year EPS growth guidance of 5% to 7% through 2027, anchored to a non-GAAP 2024 baseline of $1.97 per share.

  • Invested a record $662 million year-to-date, on track for $1.7 billion in infrastructure improvements for FY26.

  • Completed the acquisition of Integra Water LLC for $4.9 million, adding 1,100 customers.

  • Increased quarterly cash dividend by 5.25%, maintaining an 80-year track record of consecutive quarterly cash dividends.

Concerns

5

  • GAAP EPS of $0.37 for Q2 FY26 included $0.01 of merger-related costs.

  • Higher operating expenses increased by $0.02 per share, driven by employee-related costs and production costs.

  • Lower gas volumes impacted EPS by $0.02 per share.

  • Increased depreciation and higher interest/lower AFUDC collectively impacted EPS by $0.06 per share.

  • The DELCORA transaction remains stalled by a federal bankruptcy court stay, though it is assumable by American Water post-merger.

Guidance & targets

CategoryTargetConfidence
Merger Finalization Timeline
Q1 2027
high materiality
High
Multi-year Normalized EPS Growth
5% to 7%
high materiality
High
Annual Capital Investment
$1.7 billion
medium materiality
High
Dividend Payout Ratio
60% and 65%
low materiality
High
Aqua Pennsylvania Rate Case Filing
around year-end
medium materiality
High

Deals & partnerships

American Water Merger of two utility companies

Received three regulatory approvals (Kentucky, Ohio, Virginia). Settlement in principle in Texas. Public input hearings scheduled for New Jersey in August. Illinois case with ALJ, statutory timeline ends November 2026. Pennsylvania negotiations ongoing. Significant planning for integration is underway.

Integra Water LLC Acquisition of a water utility $4.9 million

Recently completed acquisition, adding customers to the Texas base.

DELCORA Acquisition of a wastewater system

Progress stalled by a stay from a federal bankruptcy court judge related to the city of Chester's bankruptcy. The fully enforceable agreement of sale is assumable by American Water post-merger.

Several small systems Purchase agreements for small water/wastewater systems $282 million

Signed purchase agreements for systems in Pennsylvania, Texas, North Carolina, Virginia, and New Jersey. Total value and customer count include the DELCORA transaction.

Capital programs

Infrastructure Improvements and Upgrades underway $1.7 billion
Period spend: $662 million
Spent to date: $662 million

Benefit:enhanced service, regulatory compliance, system reliability, safety

Record capital investment planned for the current fiscal year, with a significant portion already invested year-to-date.

Risks & headwinds

Regulatory Scrutiny in Pennsylvania ongoing

Governor's letter instructing utilities to prioritize cost-effective capital and demonstrate necessity for rate adjustments

Mitigation:Engaging constructively with the Pennsylvania PUC and Governor's office; committed to transparency in rate filings and operating within statutory framework.

Merger Approval Delays through Q1 2027

DELCORA transaction stalled by federal bankruptcy court stay; statutory timelines for some states (e.g., Illinois by November 2026) and ongoing negotiations in Pennsylvania

Mitigation:Actively pursuing approvals, engaging in negotiations, and planning for integration. DELCORA agreement is assumable by American Water.

Higher Operating Expenses Q2 FY26

$0.02 per share impact from higher operating expenses; O&M expenses increased by 3.5% ($5.1 million) YoY

Mitigation:Partially offset by insurance recovery, decrease in gas segment bad debt, and customer assistance surcharge costs.

Lower Gas Volumes Q2 FY26

$0.02 per share impact from lower gas volumes

Mitigation:Not explicitly stated, but overall growth strategy aims to offset such impacts.

Increased Fuel Costs ongoing

Impact from Middle East situation driving higher fuel costs

Mitigation:Costs are incorporated into current numbers; expected to continue until geopolitical situation calms down.

What to watch in Q3 FY26

Merger Regulatory Approvals

next quarter / by November 2026
Current 3 approvals (KY, OH, VA); TX settlement in principle; NJ hearings in August; IL with ALJ (Nov 2026 deadline); PA negotiations ongoing
Target Additional state approvals, progress in PA negotiations, IL ALJ decision

Why it matters

Merger completion is a key strategic initiative and driver of future growth and scale.

The merger case in Illinois is now with the ALJ, and that process does have a statutory time line and it finishes by November of this year. Finally, in Pennsylvania, negotiations continue with the parties, even though we are in the evidentiary hearings this week.

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Q&A highlights

How is Essential Utilities planning its upcoming Aqua Pennsylvania rate case filing, considering the Pennsylvania Governor's focus on ROE and capital structure?

Management decided to delay the Aqua Pennsylvania rate case filing to be thoughtful given ongoing regulatory activity. They will file the case similarly to past filings, largely as a capital case, while being respectful of the Governor's position. They believe shareholders and customers deserve a fair return and will let the commission determine fairness, noting the recent American Water case's adjudicated ROE of around 9.7% as a good starting point for debate on capital structure.

“We'll let the commission determine what fairness actually is. And we think that where the commissioners adjudicated American's case, they anchored that around the [ disc ] ROE at somewhere around [ 9.7% ] is a pretty good start.”

asked by Unknown Analyst · answered by Christopher Franklin

2 min read 5 chapters

Detailed narrative

Merger Progress and Integration

Essential Utilities continues to advance its merger with American Water, securing three regulatory approvals from Kentucky, Ohio, and Virginia. Settlement in principle has been reached in Texas, and public input hearings are scheduled for New Jersey in August. The Illinois case is with the ALJ with a statutory timeline ending by November 2026, while Pennsylvania negotiations are ongoing. The company expects the merger to finalize in Q1 2027 and is actively engaged in integration planning to ensure a smooth transition and create a 'top-performing utility'.

Capital Investment and Infrastructure Upgrades

The company is making significant capital investments, having spent $662 million year-to-date and projecting a record $1.7 billion for FY26 in infrastructure improvements. These investments are crucial for enhancing service, ensuring compliance with regulations, and upgrading safety. Management emphasizes balancing these needs with customer affordability, particularly in light of recent communications from the Pennsylvania Governor's office regarding cost-effectiveness and necessity of proposed investments.

Regulatory Environment and Rate Cases

Essential Utilities is navigating a complex regulatory landscape, particularly in Pennsylvania. The Governor's office has issued a letter instructing utilities to prioritize cost-effective capital and demonstrate investment necessity for rate adjustments. The company is engaging constructively with the Pennsylvania PUC and Governor's office regarding its current Peoples gas rate case and an anticipated Aqua Pennsylvania water rate case filing around year-end. The company aims to expand the Distribution System Improvement Charge (DSIC) mechanism to include more capital items, which would lengthen the period between rate cases.

Financial Performance and EPS Drivers

Q2 FY26 GAAP EPS was $0.37, with adjusted non-GAAP EPS at $0.38, excluding $0.01 of merger-related costs. Positive drivers included a $0.06 increase from regulatory recoveries and surcharges, $0.02 from higher water volumes, and $0.01 from water customer growth. These were partially offset by $0.02 in higher operating expenses, $0.02 from lower gas volumes, and $0.06 from other factors including increased depreciation and higher interest/lower AFUDC. O&M expenses, excluding nonrecurring merger costs, increased by 2.6%, aligning with historical norms.

Acquisition Strategy and Pipeline

The company completed the acquisition of Integra Water LLC for $4.9 million, adding 1,100 customers in Texas. It also signed purchase agreements for several small systems across multiple states, totaling approximately 200,000 customers with a purchase price of $282 million (including DELCORA). The pipeline for potential water and wastewater municipal acquisitions remains strong at approximately 400,000 customers, and the company is optimistic about leveraging combined resources post-merger to accelerate business development.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.