Essential Utilities Earnings: Warm Winter Offsets Core Earnings Growth in First Quarter

We reaffirm our $42 per share fair value estimate for Essential Utilities WTRG after the company reported earning $0.72 per share during the first quarter, down from $0.76 during the first quarter of 2022 primarily due to exceptionally warm winter weather that reduced gas use. Essential remains on track to meet our full-year outlook. We also reaffirm our narrow moat and stable moat trend ratings.

Essential’s gas utility represents about one-third of earnings on a full-year basis, but most of those earnings come during the first quarter, resulting in an outsize weather effect on first-quarter consolidated earnings. With heating degree days in Essential’s gas distribution service territories down 19% from 2022 and 17% below normal, lower gas usage resulted in an $0.08 per share drop in earnings.

We expect Essential can offset this impact with cost savings, core water customer growth, and regulatory activities during the balance of the year. We reaffirm our 2023 full-year EPS estimate at the low end of management’s $1.85-$1.90 guidance range, assuming no contribution from the long-delayed pending Delcora acquisition.

Regulated rate increases added $0.06 per share to earnings in the first quarter and we expect will continue to be the primary growth driver during the rest of the year.

The pace of water acquisitions remains Essential’s primary long-term growth uncertainty. Essential is set to close less than $100 million of municipal acquisitions this year, excluding Delcora, down from $120 million last year and our $200 million long-term annual run-rate assumption. Our 6% annual earnings growth estimate assumes $1.3 billion average annual capital investment, including acquisitions. Management is targeting 5%-7% annual earnings growth.

Management’s plan to file a request later this year for its first Peoples Gas base rate adjustment in Pennsylvania since the 2020 acquisition likely will support earnings growth in 2025.