Essential Utilities Earnings: Near-Term Growth Shifts Toward Gas Utility Investments

We reaffirm our $42 per share fair value estimate for Essential Utilities WTRG after the company reported earning $0.30 per share during the third quarter, up from $0.26 during the third quarter of 2022. Essential remains on track to meet our full-year outlook. We also reaffirm our narrow moat rating.

Rate increases at its water and gas businesses along with lower operating costs drove most of the growth in the quarter, keeping Essential on track to finish the year near our earnings estimate and within management’s $1.85-$1.90 guidance.

Essential’s stock is one of the most undervalued in our coverage, trading at a 16% discount to our fair value estimate after falling 25% year-to-date as of Nov. 7. The stock price decline and a dividend increase in September have resulted in a 3.5% dividend yield, its highest yield in many years.

Essential has mostly used operating cost savings to offset the $0.08 per share first-quarter earnings headwind at the gas business due to lower gas use during a warmer-than-normal winter. We expect Essential’s gas utility will contribute about one-third of consolidated earnings on a full-year, weather-normalized basis.

Essential has completed only $45 million worth of deals this year, well below the $200 million of annual acquisitions that in part underpin our 6% average annual earnings growth estimate. Management continues to target 5%-7% annual consolidated earnings growth with higher growth in its gas business making up for the slower pace of water acquisitions.

We continue to assume slightly more than $1 billion of annual organic capital investment for the next several years, in line with management’s plan. Customer rate increases tied to these capital investments, including a planned base rate increase request at Peoples Gas, drive almost all of our near-term growth forecast.

Essential’s $276.5 million Delcora deal remains stalled. We now assume it closes in 2025.