Essential Utilities, Inc. (WTRG) is a Pennsylvania-based holding company that provides regulated water, wastewater, and natural gas distribution services to approximately 5.5 million people across nine states. With a rich history spanning over a century, the company has established itself as a leading utility provider, known for its commitment to infrastructure investments, operational excellence, and strategic growth initiatives.
Business Overview and History: Essential Utilities, Inc. traces its roots back to 1886 when it was founded as the Philadelphia Suburban Water Company, serving the suburbs of Philadelphia. Over the decades, the company has grown significantly through strategic acquisitions, expanding its footprint beyond Pennsylvania into other states such as Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky. In 2019, the company completed a transformative acquisition of Peoples Natural Gas, a major natural gas utility serving customers in western Pennsylvania and Kentucky. This acquisition diversified the company's business model by adding natural gas distribution to its existing water and wastewater operations. To reflect this expanded scope, the company changed its name from Aqua America, Inc. to Essential Utilities, Inc. in 2020.
Throughout its history, Essential Utilities has faced and overcome various challenges. In the early 2000s, the company successfully navigated regulatory changes in Pennsylvania that impacted its ability to recover infrastructure investment costs. Working closely with state regulators, Essential Utilities implemented mechanisms that allowed for more timely recovery of these costs. The company has also had to address environmental compliance issues, such as the presence of per- and polyfluoroalkyl substances (PFAS) in some of its water systems. In response, Essential Utilities has proactively invested in treatment technologies and pursued legal action against PFAS manufacturers to mitigate the financial impact on customers.
Today, Essential Utilities' regulated water segment serves customers in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky, with Aqua Pennsylvania being its largest operating subsidiary. The company's Peoples Natural Gas segment provides natural gas distribution services primarily in Western Pennsylvania and Kentucky, serving over 740,000 customers.
Financial Resilience and Growth: Essential Utilities has demonstrated consistent financial performance, with a strong track record of delivering shareholder value. In the fiscal year 2023, the company reported revenue of $2.05 billion and net income of $498.23 million, representing a net profit margin of 24.3%. The company's water segment contributed approximately 71% of total revenue, while the natural gas segment accounted for the remaining 29%.
Financials: The company's balance sheet remains solid, with a debt-to-capitalization ratio of 55.8% as of December 31, 2023. Essential Utilities has a proven track record of consistent dividend payments, with a current dividend yield of 3.21%. The company has increased its dividend for 31 consecutive years, underscoring its commitment to shareholder returns.
For the most recent fiscal year (2023), Essential Utilities reported operating cash flow of $933.59 million and free cash flow of -$265.52 million. In the most recent quarter (Q3 2024), the company reported revenue of $435.25 million, representing a 5.8% increase compared to Q3 2023. This growth was driven by higher rates and increased water volumes, partially offset by lower natural gas sales volumes due to warmer weather. Net income for Q3 2024 was $69.40 million, with operating cash flow of $229.08 million and free cash flow of -$175.42 million.
Liquidity: Essential Utilities' liquidity position is robust, with $4.61 million in cash and cash equivalents and access to a $1 billion revolving credit facility, providing ample financial flexibility to fund ongoing operations and strategic investments. As of September 30, 2024, $824.23 million was available for borrowing under the revolving credit facility. The company also has $400.0 million in short-term lines of credit, of which $256.98 million was available. The company's debt-to-equity ratio stands at 1.20, with a current ratio and quick ratio both at 0.55.
Growth Strategies and Regulatory Environment: Essential Utilities' growth strategy is centered on two key pillars: strategic acquisitions and organic infrastructure investments. The company has a strong pipeline of potential water and wastewater municipal acquisitions, with agreements in place to add over 213,000 customer equivalents across Pennsylvania, Texas, and Ohio. These acquisitions are expected to contribute to the company's long-term rate base growth.
In addition to acquisition-driven growth, Essential Utilities is dedicated to investing in its existing infrastructure. The company plans to invest approximately $7.8 billion in capital expenditures over the next five years to upgrade and expand its water, wastewater, and natural gas networks. These investments are crucial in ensuring the reliability and resilience of the company's systems, as well as meeting evolving regulatory requirements.
The company operates in a highly regulated industry, with its rates and infrastructure investments subject to approval by state utility commissions. Essential Utilities has demonstrated its ability to navigate the regulatory landscape effectively, evidenced by the recent approval of a $93 million revenue increase for its Peoples Natural Gas subsidiary in Pennsylvania, as well as a settlement for a $73 million revenue increase for its Aqua Pennsylvania water and wastewater operations.
Environmental Stewardship and Sustainability: Essential Utilities is committed to environmental stewardship and sustainability, which is reflected in its operations and long-term strategies. The company has made significant investments to address emerging environmental challenges, such as the treatment of per- and polyfluoroalkyl substances (PFAS) in its water systems. Essential Utilities has also set ambitious sustainability goals, including reducing greenhouse gas emissions and increasing the use of renewable energy sources.
Risks and Challenges: While Essential Utilities has demonstrated resilience, the company faces various risks and challenges inherent to the regulated utility industry. These include regulatory uncertainties, infrastructure maintenance and replacement costs, and the potential impact of extreme weather events and climate change on its operations. The company also faces competitive pressures from other water and natural gas providers, as well as the ongoing threat of cybersecurity attacks.
Outlook and Guidance: Looking ahead, Essential Utilities has provided guidance for 2024 earnings per share (EPS) to be in the range of $1.96 to $2.00. The company has also reinstated its long-term EPS growth guidance of 5% to 7% annually through 2027, excluding any potential impact from the DELCORA acquisition. For 2025, WTRG expects EPS to be between $2.07 and $2.11. This guidance reflects the company's confidence in its ability to navigate the evolving industry landscape and continue delivering value to its shareholders.
Essential Utilities plans to make $7.8 billion in regulated infrastructure investments over the next 5 years through 2029. The company expects its regulated water segment rate base to grow at a CAGR of around 6% through 2029, and its regulated natural gas segment rate base to grow at a CAGR of around 11% through 2029. On a combined basis, WTRG projects its rate base to grow at a CAGR of over 8% through 2029.
To fund its growth initiatives and maintain its balance sheet and credit profile, WTRG expects to issue approximately $350 million in equity through its ATM program between 2024 and 2025.
Segment Performance: Essential Utilities operates in two main reportable segments: Regulated Water and Regulated Natural Gas.
The Regulated Water segment comprises eight operating segments representing the company's water and wastewater regulated utility companies across various states. In the third quarter of 2024, this segment's operating revenues increased by 23.89% compared to the same period in 2023, driven by increases in water and wastewater rates, higher volume consumption, and additional revenues from acquisitions and organic growth. Operations and maintenance expenses for this segment decreased by 2.4% in the third quarter, while depreciation and amortization expense increased by 5.8%.
The Regulated Natural Gas segment sells gas directly to customers at approved rates or transports gas through pipelines at approved rates. In the third quarter of 2024, this segment's operating revenues increased by 2.0% compared to the same period in 2023, primarily due to increases in purchased gas costs and higher rates, partially offset by lower volumes due to asset sales and warmer weather conditions. Operations and maintenance expenses decreased by 2.0%, while purchased gas expenses increased by 22.2%.
Conclusion: Essential Utilities, Inc. (WTRG) has established itself as a resilient and forward-looking utility provider, committed to strategic growth, operational excellence, and environmental stewardship. With a robust financial position, a proven track record of regulatory success, and a clear vision for the future, the company is well-positioned to capitalize on the opportunities within the regulated water and natural gas sectors. As Essential Utilities continues to execute its growth strategies and navigate the industry's challenges, it remains a compelling investment proposition for those seeking exposure to a well-managed, diversified utility company.