Essential Utilities Closes Solid 2022

We are reaffirming our $42 fair value estimate for Essential Utilities WTRG after the company reported earning $1.77 per share in 2022, up from $1.67 in 2021. This was in line with our outlook and management’s guidance. We are reaffirming our narrow moat and stable moat trend ratings.

The core water and gas businesses continue to perform well. Rate increases and other regulatory activities added $0.22 per share year over year, partially offset by higher interest expense and operating costs. Favorable colder weather also helped the gas business.

We expect regulatory rate activity will be the primary underlying growth driver in 2023. Our 2023 EPS estimate is at the low end of management’s $1.85-$1.90 EPS guidance range, excluding the pending Delcora acquisition. Closing the Delcora deal now appears it will have a more substantial impact on 2024 earnings. We plan to adjust our forecasts, but the timing shift doesn’t have a material impact on our fair value estimate.

We think Essential’s municipal acquisition growth is a big question mark. An uptick in acquisitions would drive earnings growth to the top end of management’s 5%-7% annual earnings growth target, but that appears unlikely in the near term. Essential closed only $120 million of municipal acquisitions in 2022, below our $200 million annual run rate estimate. Excluding Delcora, Essential only has $103 million of pending acquisitions going into 2023, not enough to get to the high end of management’s targets based on our estimates.

Management’s active municipal acquisitions opportunities fell to 400,000 customers from 430,000 during the fourth quarter, according to management’s disclosures. We expect all acquisitions will be in states with fair market value legislation, which we consider a competitive advantage for Essential since it eliminates the drag on earnings and returns from goodwill.