Executive Summary / Key Takeaways

• Essential Utilities (WTRG) is executing a focused strategy of significant infrastructure investment and strategic water/wastewater acquisitions, complemented by operational efficiency initiatives and constructive regulatory engagement, driving projected rate base growth exceeding 8% annually through 2029.
• The company reaffirmed its 2025 EPS guidance of $2.07 to $2.11 and multi-year EPS growth target of 5% to 7% CAGR through 2027 (excluding DELCORA), supported by recent favorable rate case outcomes in key states like Pennsylvania and the implementation of weather normalization for its natural gas business.
• WTRG is deploying differentiated technology to enhance safety and address environmental challenges, including Intelis smart meters for natural gas safety and a patent-pending modular solution for PFAS mitigation, reinforcing its competitive position and regulatory relationships.
• Strong operating cash flow generation and a planned $315 million equity issuance in 2025 via its ATM program are expected to fund the substantial capital plan and acquisitions while maintaining investment-grade credit metrics despite macroeconomic pressures.
• While facing ongoing legal proceedings related to significant acquisitions (DELCORA, East Whiteland) and environmental matters (Illinois advisory, PFAS lawsuits), management expresses confidence in the eventual resolution and the underlying strength of its regulated utility business model.

Setting the Foundation: Essential Resources, Strategic Pillars, and Competitive Footing

Essential Utilities, Inc. stands as one of the nation's largest regulated utilities, forged through the 2020 integration of Aqua America and Peoples Natural Gas. This union combined a long history of providing essential water and wastewater services, dating back 140 years with an 80-year dividend streak, with a significant natural gas distribution footprint. The result is a diversified utility platform serving an estimated 5.5 million people across nine states.

The company's core strategy is built on several interconnected pillars: disciplined, significant capital investment in its regulated infrastructure, strategic growth through the acquisition of fragmented water and wastewater systems, maintaining operational excellence, and fostering constructive relationships with state regulators. This approach aims to deliver safe, reliable service to customers while generating consistent, predictable growth for shareholders.

Within the competitive landscape, WTRG operates in a sector characterized by high barriers to entry dueably to extensive infrastructure requirements and stringent regulatory licensing. Its direct competitors are primarily other investor-owned water and natural gas utilities. While larger peers like American Water Works (AWK) possess greater scale and potentially higher operational efficiency in some areas, WTRG differentiates itself through its unique combination of water, wastewater, and natural gas services, particularly in its core Pennsylvania market. This diversification offers potential cross-selling opportunities and a broader base for capital deployment compared to pure-play water utilities like California Water Service (CWT), SJW Group (SJW), or Middlesex Water (MSEX). However, WTRG faces competitive pressures related to cost efficiency and the pace of technological adoption compared to some rivals, necessitating a focus on operational improvements and strategic technology deployment.

A key element of WTRG's strategy and competitive positioning lies in its commitment to leveraging technology to enhance safety and address critical environmental challenges. For its natural gas operations, the company is rolling out Intelis solid state gas meters. Following a successful pilot, WTRG is moving towards full implementation across nearly 700,000 residential and small commercial accounts. These meters offer significant safety enhancements, including automatic shutoff capabilities in cases of over-pressurization, uncontrolled flow, or fire, aiming to position Peoples Gas among the safest utilities in the U.S.

In the water segment, WTRG is at the forefront of addressing PFAS contamination, a major industry challenge. The company is deploying a patent-pending modular treatment solution across its affected systems. This technology is designed to be cost-effective for installation and maintenance, particularly for smaller systems. WTRG estimates a total capital spend of approximately $450 million by 2028 to achieve compliance with the 4 parts per trillion MCL. The company is actively pursuing cost offsets through lawsuits against polluters, expecting around $100 million in settlements, and securing low-interest loans and grants (already receiving approximately $10 million and on track for another $59 million in Pennsylvania). This proactive and technologically-driven approach to PFAS mitigation not only ensures regulatory compliance but also strengthens WTRG's standing with regulators and positions it as a potential provider of solutions to other utilities.

Performance Reflecting Strategy and Investment

Essential Utilities' recent financial performance underscores the impact of its strategic focus, particularly the benefits derived from infrastructure investment and regulatory rate adjustments. In the first quarter of 2025, consolidated operating revenues increased significantly by 28% to $783.6 million compared to $612.1 million in the same period of 2024. This substantial growth was primarily fueled by additional revenues from regulatory recoveries across both segments, higher purchased gas costs (which are passed through to customers), and increased natural gas volumes due to colder weather conditions compared to the prior year.

The Regulated Water segment saw revenues increase by 7.5% to $300.8 million, driven mainly by approved rate increases, including infrastructure rehabilitation surcharges, and growth in the customer base from recent acquisitions and organic development, partially offset by lower volume consumption. The Regulated Natural Gas segment experienced a robust 45.2% increase in revenues to $470.8 million, largely reflecting the pass-through of higher purchased gas costs and the impact of colder weather on volumes, alongside benefits from higher rates and surcharges implemented following its recent rate case.

Despite the significant revenue growth, consolidated operations and maintenance (O&M) expenses remained relatively flat, increasing by only 0.7% to $137.8 million. This was a notable achievement, reflecting management's focus on cost control. While certain costs increased, such as customer assistance surcharges (offset by revenue), employee-related expenses (including merit increases and overtime from cold weather), and water production costs, these were largely counterbalanced by an insurance recovery related to the Illinois advisory, a decrease in bad debt expense (partially due to a favorable regulatory asset adjustment), and lower materials, supplies, and outside services costs in the Natural Gas segment attributed to higher capitalization of work.

The company's capital investment program continues to be a primary driver of value. In the first three months of 2025, WTRG invested $270.5 million in infrastructure improvements across its water and natural gas systems. This ongoing investment is crucial for replacing aging assets, enhancing reliability, improving water quality, and supporting customer service. The increase in depreciation and amortization expense by 10.7% reflects the growing asset base resulting from these capital expenditures and recent utility system acquisitions.

Liquidity and capital resources remain a key focus for funding the capital-intensive business. Net cash flows from operating activities saw a significant increase of $58.8 million in Q1 2025, reaching $299.5 million, primarily due to the strong operating income performance driven by regulatory recoveries and higher gas volumes. To support its substantial capital plan and acquisition strategy, WTRG utilizes a combination of internal cash flow and external financing. The company established a $1 billion at-the-market (ATM) equity sales program in August 2024 and successfully raised approximately $63 million under this program in Q1 2025, with an additional $145.5 million raised in April 2025. This equity issuance, alongside borrowings from its revolving credit facility and a newly established commercial paper program, is intended to fund capital expenditures, acquisitions, and manage outstanding debt, while aiming to maintain investment-grade credit ratings.

Strategic Trajectory and Forward Outlook

Essential Utilities is positioning itself for continued growth and stability, guided by a clear long-term vision. The company has reaffirmed its 2025 earnings per share guidance range of $2.07 to $2.11. Looking further ahead, WTRG is targeting a multi-year EPS compounded annual growth rate of 5% to 7% through 2027. This guidance is based on the company's $1.97 non-GAAP EPS from 2024 and includes the impact of signed acquisitions expected to close in 2025 and 2026, but notably excludes any potential contribution from the pending DELCORA acquisition.

A cornerstone of this growth outlook is the ambitious capital investment plan, projecting approximately $7.8 billion in regulated infrastructure spending from 2025 through 2029. This investment is expected to drive combined utility rate base growth exceeding 8% annually, with the natural gas segment anticipated to grow at approximately 11% and the water segment at about 6%. This capital deployment is critical for addressing infrastructure needs, including the significant PFAS mitigation efforts and ongoing natural gas pipeline replacement programs, which are expected to continue for well over a decade.

Strategic acquisitions remain a vital component of the growth strategy, particularly in the fragmented water and wastewater sector. WTRG continues to actively pursue opportunities, with a pipeline of potential municipal acquisitions representing over 400,000 customers. Recent completed acquisitions, such as the Greenville wastewater system in Pennsylvania and the Midvale water system in Ohio, demonstrate the ongoing execution of this strategy. The company also has several signed purchase agreements pending closure, including the large DELCORA wastewater system in Pennsylvania, although its closing timeline remains subject to ongoing legal proceedings. Organic customer growth, particularly from developer activity in rapidly growing regions like Texas and North Carolina, further contributes to the water segment's expansion, with the natural gas customer base expected to remain stable.

The regulatory environment is crucial for WTRG's ability to recover its investments and earn a fair return. Recent successes, including favorable rate case outcomes in Pennsylvania for both water and natural gas (which included the implementation of a weather normalization adjustment mechanism expected to reduce earnings volatility), as well as legislative progress in states like Texas, Ohio, and Virginia aimed at improving regulatory processes and infrastructure recovery, are positive indicators for the company's ability to execute its plan.

While the outlook is positive, WTRG faces inherent risks. Macroeconomic conditions, including inflation and interest rate volatility, can impact operating costs and financing expenses. Regulatory risk persists, including the potential for lag in recovering costs and the outcomes of pending rate cases and appeals (such as the PA OCA appeal of the Peoples Gas rate case). Ongoing legal proceedings related to acquisitions (DELCORA, East Whiteland) and environmental matters (Illinois advisory, PFAS lawsuits) introduce uncertainty, although management believes the final resolutions will not have a material adverse effect. The capital-intensive nature of the business requires continuous access to capital markets, and maintaining investment-grade credit ratings is essential for managing borrowing costs.

Competitive Dynamics and the Path Forward

Essential Utilities operates in a competitive landscape where scale, operational efficiency, regulatory effectiveness, and technological adoption are key differentiators. While American Water Works holds the top position in the U.S. water market with advantages in scale and potentially lower operating costs per unit, WTRG leverages its diversified service offering (water, wastewater, and natural gas) as a unique competitive angle, particularly in regions like Pennsylvania. This bundled approach, while not directly comparable to pure-play water utilities, provides a broader platform for customer relationships and capital deployment.

WTRG's strategic focus on significant infrastructure investment is a direct response to the industry-wide need to upgrade aging systems and a key competitive lever. By investing heavily in its network, WTRG aims to improve reliability and service quality, which are critical factors for customer satisfaction and regulatory support. This capital program also builds rate base, providing a clear path for earnings growth, a metric closely watched by investors and compared across peers.

Technological advancements, such as the Intelis smart meters and the patent-pending PFAS mitigation solution, represent tangible efforts by WTRG to enhance its operational capabilities and address emerging challenges more effectively. The Intelis meters offer a quantifiable benefit in terms of safety features (automatic shutoff), potentially reducing risk and improving operational control compared to traditional meters used by some competitors. The modular PFAS solution aims to provide a cost-effective and scalable treatment method, which could be a competitive advantage in acquiring smaller systems facing compliance challenges and potentially generate revenue by offering the technology to other utilities.

However, WTRG's competitive standing is also influenced by factors like operational efficiency metrics and the pace of innovation compared to some rivals who may have faster technology deployment cycles or lower per-unit costs in specific areas. The company's initiative to implement "lean practices" in 2025 is a strategic move aimed at addressing these efficiency aspects and driving down operating costs over time, which is crucial for maintaining affordability and competitiveness in rate cases.

The fragmented nature of the water and wastewater industry, with numerous small, often undercapitalized municipal systems, presents a significant growth opportunity for WTRG. The company's active M&A pipeline and recent successes in acquiring municipal assets demonstrate its capability to capitalize on this trend. Regulatory reforms, such as the changes to Pennsylvania's fair market value statute, are intended to provide greater certainty and potentially accelerate consolidation, favoring experienced acquirers like WTRG.

The potential for significant new load growth from data centers in the Peoples Gas service territory represents an emerging opportunity that could further differentiate WTRG. Discussions with developers representing substantial power generation needs highlight the strategic value of WTRG's natural gas infrastructure and access to regional shale resources as a potential lower-cost energy source compared to alternatives, offering a unique growth avenue not available to pure-play water utilities.

Conclusion

Essential Utilities is executing a clear, regulated growth strategy centered on substantial infrastructure investment, strategic acquisitions, and operational discipline. The company's reaffirmation of its 2025 and multi-year EPS guidance, underpinned by recent regulatory successes and a robust capital plan, provides investors with a degree of predictability in a dynamic environment. WTRG's deployment of differentiated technology, particularly in natural gas safety and PFAS mitigation, enhances its operational capabilities and strengthens its competitive position.

While challenges remain, including ongoing legal proceedings and the need to continuously manage costs and regulatory relationships, management's focus on operational excellence, strategic M&A, and leveraging its diversified platform positions WTRG to capitalize on opportunities within the essential services sector. The significant projected rate base growth and commitment to dividend increases underscore the potential for long-term value creation, making WTRG a compelling consideration for investors seeking exposure to the stable, regulated utility space with a clear path for expansion.