Essential Utilities, Inc. (WTRG) is a leading provider of water, wastewater, and natural gas services, serving an estimated 5.5 million people across nine states. With a strong emphasis on sustainability, operational excellence, and customer service, this utility giant has consistently delivered reliable earnings growth and attractive shareholder returns.
Business Overview
Essential Utilities traces its roots back to 1886, when it was founded as the Philadelphia Suburban Water Company, serving the suburban areas north and west of Philadelphia. Over the decades, the company has grown through a series of strategic acquisitions and investments, expanding its footprint across the eastern and central United States. Today, Essential Utilities operates two primary business segments: Regulated Water and Regulated Natural Gas.
The Regulated Water segment is the larger of the two, accounting for 58.6% of the company's total operating revenues in 2024. This segment provides water and wastewater services to customers in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky. Aqua Pennsylvania, the company's largest water subsidiary, serves approximately half of the total water and wastewater customers and accounted for about 55% of the Regulated Water segment's operating revenues and 67% of its income in 2024.
The Regulated Water segment serves a diverse customer base, with residential water customers making up the largest component at around 67% of the segment's water and wastewater revenues over the past three years. Operating revenues in this segment have grown over the past three years primarily due to increases in water and wastewater rates, including infrastructure rehabilitation surcharges, as well as customer growth from acquisitions and organic expansion.
The Regulated Natural Gas segment, acquired through the 2020 Peoples Gas Acquisition, serves around 745,000 customers in western Pennsylvania and Kentucky, with 95% of those customers located in western Pennsylvania. This $4.3 billion transaction significantly expanded Essential Utilities' operations into the natural gas utility business. This segment has been a key driver of Essential Utilities' growth in recent years, complementing the stability of the water business and representing 40.4% of the company's total operating revenues in 2024.
In addition to its regulated utility operations, Essential Utilities maintains a small market-based business that provides utility service line protection solutions and repair services to households, as well as gas marketing and production activities.
Throughout its history, Essential Utilities has faced various challenges, including regulatory oversight, aging infrastructure, and water quality issues. In the early 2000s, the company had to address water contamination issues in some of its service areas, investing in treatment facilities and working closely with regulators to resolve these problems. The company has also had to navigate changes in state public utility commission leadership and policies, ensuring its operations and rate requests align with the evolving regulatory environment.
Essential Utilities has maintained a focus on operational excellence, infrastructure investment, and customer service. The company has a long history of dividend payments, having paid dividends consecutively for 80 years. Essential Utilities has also been recognized for its environmental and social responsibility efforts, being named to Newsweek's list of America's Most Responsible Companies for four consecutive years.
Financial Performance and Resilience
Essential Utilities has demonstrated impressive financial performance and resilience over the past several years. In 2024, the company reported GAAP earnings per share (EPS) of $2.17, up 17% from the previous year. This figure includes a $0.25 gain on asset sales. Adjusting for one-time items and weather-related impacts, the company's non-GAAP EPS reached $1.97, within the guidance range of $1.96 to $2.00 per share.
The company's operating revenues increased by 1.6% in 2024 to $2.09 billion, driven by rate increases, customer growth, and higher water volumes. Despite inflationary pressures, Essential Utilities maintained tight control over its operating expenses, with a year-over-year increase of only 2%. Net income for 2024 was $595.31 million, while operating cash flow reached $770.34 million. However, free cash flow was negative at -$559.40 million, reflecting the company's significant capital investments.
In the Regulated Water segment, operating revenues grew by 5.9% to $1.22 billion in 2024. This growth was driven by $50.64 million in additional revenues from rate increases implemented during the year, as well as $4.18 million in revenues from acquired water and wastewater systems. The segment's net income was $350.31 million in 2024, up 2.7% from the prior year.
The Regulated Natural Gas segment saw a 2.4% decrease in operating revenues to $842.99 million in 2024, primarily due to a $60.32 million decrease in purchased gas costs, which have a corresponding offset in revenues. However, the segment's net income increased 46.4% to $293.62 million in 2024, driven by higher rates and other surcharges, as well as the implementation of a weather normalization adjustment mechanism in Pennsylvania starting in October 2024.
Essential Utilities' strong financial performance is underpinned by its disciplined approach to capital investment and regulatory engagement. The company invested $1.3 billion in 2024 to improve its water and natural gas infrastructure, with plans to invest approximately $7.8 billion over the next five years. This sustained investment has allowed Essential Utilities to enhance service reliability, water quality, and safety for its customers.
The company's focus on constructive regulatory relationships has also been a key driver of its success. In 2024, Essential Utilities secured significant rate increases in several of its operating states, including a $93 million increase in its Pennsylvania natural gas business and a $73 million increase in its Pennsylvania water business. These regulatory outcomes have enabled the company to earn a fair return on its investments and maintain affordable rates for customers.
Growth Opportunities and Outlook
Looking ahead, Essential Utilities remains well-positioned for continued growth and value creation. The company has identified a robust pipeline of potential water and wastewater system acquisitions, representing approximately 400,000 potential customer connections. These acquisitions, coupled with the company's organic customer growth, are expected to drive an average annual customer base expansion of 2-3% over the long term. In fact, the company's water and natural gas utility customer base has grown at an annual compound rate of 1.8% over the past three years, adjusted to exclude customers associated with utility system dispositions.
In addition to its water and wastewater business, Essential Utilities is closely monitoring the development of data centers in its natural gas service territory in western Pennsylvania. The company estimates that data center projects in this region could potentially represent up to 5 gigawatts of power generation needs, presenting a significant growth opportunity for its natural gas operations.
To fund its growth initiatives, Essential Utilities plans to issue approximately $315 million in equity through its at-the-market (ATM) program in 2025, after raising $36 million in 2024. This capital will support the company's infrastructure investments, acquisitions, and maintenance of a strong balance sheet.
For 2025, Essential Utilities has provided guidance for EPS in the range of $2.07 to $2.11, reflecting the company's ongoing commitment to delivering consistent earnings growth. Over the longer term, the company has set a goal of achieving a 5-7% compounded annual growth rate in EPS from the $1.97 non-GAAP base earned in 2024 through 2027, excluding the impact of any future acquisitions.
The company expects its regulated water and natural gas rate bases to grow at compound annual rates of around 6% and 11%, respectively, through 2029. The combined rate base is projected to grow at a compound annual rate of 8% through 2029, supporting the company's long-term earnings growth objectives.
Risks and Challenges
As with any utility company, Essential Utilities faces a range of risks and challenges that investors should consider. These include regulatory uncertainties, environmental compliance costs, the potential impact of weather variability on customer demand, and competition for water and wastewater system acquisitions.
The company's operations are also subject to various federal, state, and local environmental laws and regulations, which could result in increased compliance costs or fines for non-compliance. Additionally, the company's ability to recover capital expenditures and operating expenses through customer rates is dependent on the timely and adequate approval of rate increases by regulatory authorities.
Despite these challenges, Essential Utilities has demonstrated a track record of navigating the regulatory landscape and managing its operations effectively, as evidenced by its consistent financial performance and shareholder returns.
Liquidity and Capital Structure
Essential Utilities maintains a solid financial position to support its growth initiatives and ongoing operations. As of December 31, 2024, the company had $9.16 million in cash and a $1 billion unsecured revolving credit facility, with $570.23 million available for borrowing and $413 million of borrowings outstanding. Additionally, Aqua Pennsylvania has a $100 million 364-day unsecured revolving credit facility, while Peoples Natural Gas has a $300 million 364-day unsecured revolving credit facility.
The company's debt-to-equity ratio stands at 1.25, reflecting its balanced approach to capital structure. Essential Utilities' current ratio is 0.50, and its quick ratio is 0.40, indicating the company's ability to meet its short-term obligations.
Conclusion
Essential Utilities is a well-established and diversified utility company that has consistently delivered reliable earnings growth and attractive shareholder returns. With a focus on sustainable infrastructure investments, constructive regulatory relationships, and strategic acquisitions, the company is well-positioned to continue its long-term growth trajectory and provide essential services to millions of customers across the United States.
As investors seek stable and resilient investments in the utility sector, Essential Utilities stands out as a compelling option, offering a combination of steady earnings, consistent dividend payments, and promising long-term growth prospects. The company's commitment to infrastructure investment, coupled with its strong regulatory relationships and diversified business model, provides a solid foundation for continued success in the years to come.