Essential Utilities, Inc. (NYSE: WTRG)

Essential Utilities, Inc. is a holding company for regulated utilities that provide water wastewater and natural gas services to an estimated 5.5 million people across nine states including Pennsylvania Ohio Texas Illinois North Carolina New Jersey Indiana Virginia and Kentucky. The company operates primarily under the Aqua brand for its water and wastewater businesses and the Peoples brand for its natural gas business. Essential Utilities traces its roots to over a century of service through a series of acquisitions and organic growth that have built a combined network of treatment plants pumping stations pipelines and storage facilities. The firm’s mission is to sustain life and improve economic prosperity by safely and reliably delivering Earth’s most essential resources to customers and communities. It maintains a diversified geographic footprint that reduces exposure to any single regional economic downturn or weather event.

Essential Utilities generates revenue chiefly from regulated water and wastewater operations and regulated natural gas distribution. In the water business the company bills customers based on metered consumption and applies rate structures approved by state utility commissions that include base rates usage charges and various surcharges for infrastructure improvements. The natural gas business earns revenue from gas sales transportation and storage services with rates that incorporate a purchased gas adjustment mechanism to pass through changes in commodity costs. In addition to its regulated activities the company conducts modest not regulated operations such as service line protection plans and gas marketing which provide supplementary fee based income. Growth in revenue is driven by periodic rate increases customer additions through acquisitions and organic growth and higher commodity costs that flow through to natural gas sales. The company also benefits from revenue stabilization mechanisms that decouple earnings from short term fluctuations in usage.

Essential Utilities, Inc. operates through the following segments: Regulated Water segment and Regulated Natural Gas segment. These reportable segments were identified based on quantitative thresholds and qualitative similarities in economic characteristics regulatory environment and service nature.

• The Regulated Water segment comprises eight operating segments each corresponding to a state where the company delivers water and wastewater utility services. Activities include sourcing water from surface and groundwater sources treating water at purification plants distributing water through pressurized pipe networks and collecting wastewater via sewer systems for treatment at municipal or company owned facilities. The segment also provides fire protection services and offers ancillary services such as meter reading billing and customer support. Capital investment focuses on replacing aging mains upgrading treatment technology and expanding capacity to meet regulatory standards and customer growth.

• The Regulated Natural Gas segment consists of one operating segment that provides natural gas distribution service to residential commercial and industrial customers. The company procures natural gas from interstate intrastate and local sources transports it through its pipeline network and stores gas in underground facilities to meet peak demand. Revenue is derived from gas sales transportation and storage services with rates that adjust periodically via a purchased gas adjustment mechanism. The segment also engages in gathering operations in the Marcellus Shale region where locally produced gas is collected and fed into the distribution system.

Essential Utilities occupies a solid position in the U. S. utility sector due to its scale regulatory expertise and ability to access capital markets. The company benefits from economies of scale that lower operating costs per customer and from a diversified service footprint that lessens the impact of regional weather or economic shifts. Competitive advantages include a long history of rate case management a skilled workforce and established relationships with state utility commissions. While the firm faces little direct competition for the provision of daily water wastewater and natural gas service within its franchised territories it does compete with other utilities for acquisition targets and with alternative energy providers such as electricity propane and renewable sources for natural gas customers. Barriers to entry are high because of the capital intensive nature of infrastructure the need for regulatory approvals and the entrenched position of incumbent utilities.

The company serves a broad mix of residential commercial industrial and municipal customers for its water wastewater and natural gas services. Roughly half of the water and wastewater customer base resides in Pennsylvania with significant numbers also in Ohio Texas Illinois North Carolina and other states where the Aqua brand operates. The natural gas customer base is concentrated in western Pennsylvania and Kentucky with approximately three quarters of those customers located in the former state. Residential accounts make up the largest share of both water and natural gas revenue followed by commercial and industrial users. The customer base has grown steadily through acquisitions of municipal systems partnerships with developers and organic addition of new homes and businesses.