Essential Utilities, Inc. (WTRG) is a leading provider of water, wastewater, and natural gas services to approximately 5.5 million people across Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky. The company's two main operating segments, Regulated Water and Regulated Natural Gas, have demonstrated strong operational and financial performance, positioning Essential Utilities as a reliable and growing utility player.
Business Overview
Essential Utilities operates through its two primary segments: Regulated Water and Regulated Natural Gas. The Regulated Water segment, which accounts for approximately 55% of the company's total revenue, provides water and wastewater services to customers in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, and Virginia. The Regulated Natural Gas segment, contributing the remaining 45% of revenue, serves customers in Pennsylvania and Kentucky.The company's water and wastewater operations are characterized by high barriers to entry, stable customer demand, and predictable cash flows. Essential Utilities' natural gas business benefits from the growing demand for clean energy and the company's strategic positioning in the Marcellus and Utica shale regions, which provide a reliable and cost-effective natural gas supply to its customers.
Financials
In the fiscal year 2023, Essential Utilities reported annual revenue of 2,053,824,000 and net income of 498,226,000. The company's operating cash flow for the year was 933,587,000, while free cash flow was negative 265,516,000 due to the company's significant capital investment program.On a quarterly basis, Essential Utilities reported revenue of 612,069,000 and net income of 265,772,000 in the first quarter of 2024. The company's operating cash flow for the quarter was 240,713,000, while free cash flow was negative 86,483,000, reflecting the ongoing investment in infrastructure improvements.
Segmental Performance
The Regulated Water segment generated revenue of 279,894,000 in the first quarter of 2024, an increase of 4.7% compared to the same period in the prior year. This growth was driven by rate increases, infrastructure rehabilitation surcharges, and a larger customer base due to utility acquisitions and organic growth. The segment's net income was 63,905,000, a decrease of 17.4% year-over-year, primarily due to higher operating expenses and depreciation.The Regulated Natural Gas segment reported revenue of 324,331,000 in the first quarter of 2024, a decrease of 26.5% compared to the same period in 2023. This decline was mainly attributable to a significant reduction in purchased gas costs, which have a corresponding offset in revenue. The segment's net income was 209,940,000, an increase of 69.9% year-over-year, primarily due to the gain on the sale of the company's interest in three non-utility local microgrid and distributed energy projects.
Growth Initiatives and Acquisitions
Essential Utilities continues to execute on its growth strategy, which includes both organic and inorganic expansion. The company has a robust pipeline of municipal water and wastewater system acquisitions, with six signed asset purchase agreements in 2023 that will add over 215,000 customer equivalents and approximately 385 million in purchase price.The company's acquisition strategy is further supported by the proposed changes to the fair market value framework in Pennsylvania, which could provide a clearer path for closing municipal acquisitions in the state. Additionally, the increasing compliance requirements, such as PFAS regulations, are expected to drive further consolidation in the highly fragmented water and wastewater industry.
Infrastructure Investment and Sustainability
Essential Utilities is committed to investing in its water and natural gas infrastructure to enhance reliability, safety, and sustainability. In 2024, the company plans to invest between 1.3 billion and 1.4 billion in capital expenditures, a record for the company. This investment is expected to drive an 8% compound annual growth rate in the company's water rate base and a 10% compound annual growth rate in its natural gas rate base through 2028.Furthermore, Essential Utilities has set a goal to reduce its Scope 1 and Scope 2 greenhouse gas emissions by 60% by 2035 from a 2019 baseline, demonstrating its commitment to environmental sustainability.
Regulatory Environment and Outlook
Essential Utilities operates in a highly regulated environment, with its water and natural gas rates subject to approval by state utility commissions. The company has been proactive in managing its regulatory activities, seeking timely rate relief to recover its investments and maintain safe and reliable service for its customers.In the first quarter of 2024, the company received authorization to increase water segment revenues by 13.7 million annually in Illinois, North Carolina, Ohio, and Pennsylvania. Additionally, the company's natural gas businesses in Kentucky and Pennsylvania have implemented surcharges that will increase revenues by 1 million annually.
Looking ahead, Essential Utilities expects to file a Pennsylvania water rate case in the third full week of May 2024, its first such filing in nearly three years. The company also has water segment rate cases or surcharges pending in Illinois, New Jersey, Texas, and Virginia, totaling 43.2 million.
Liquidity
Essential Utilities maintains a strong liquidity position, with 35,200,000 in cash and cash equivalents as of March 31, 2024. The company has a 1,000,000,000 unsecured revolving credit facility, of which 725,162,000 was available for borrowing as of the same date.The company's capital structure is well-balanced, with a debt-to-capitalization ratio of 54% as of March 31, 2024. Essential Utilities plans to raise approximately 250,000,000 in equity this year through its at-the-market (ATM) equity program to support its capital investment program and acquisitions.
Risks and Challenges
Essential Utilities faces several risks and challenges, including regulatory uncertainty, aging infrastructure, and environmental compliance requirements. The company's operations are subject to the decisions of state utility commissions, which can impact the company's ability to recover its investments and earn a fair return.The aging water and natural gas infrastructure across the company's service areas requires significant capital investment to maintain reliability and safety. Additionally, the recent EPA regulations on PFAS compounds have necessitated substantial investments by Essential Utilities to upgrade its water treatment facilities, with the company estimating at least 450,000,000 in capital expenditures over the next five years to comply with the new standards.