Essential Services and Shareholder Value Delivered with Integrity
Essential Utilities Inc. (NYSE: WTRG) is one of the largest publicly traded water, wastewater service, and natural gas providers in the U.S., serving approximately five and a half million people across 10 states under the Aqua and Peoples brands. The company recognizes the importance water and natural gas play in everyday life and is proud to deliver safe, reliable services that contribute to a better quality of life in the communities it serves.
In keeping with our commitment to stakeholders, we will:
- Continue to recognize the importance of our quarterly dividend to shareholders. We have a history of delivering consecutive quarterly cash dividends for 77 years and increased the dividend 32 times in the last 31 years
- Invest approximately $1 billion in 2023 to replace and expand water and wastewater utility infrastructure and to replace and upgrade natural gas utility infrastructure, leading to significant reductions in methane emissions that occurs in aged gas pipes
- Continue to publish our award-winning Environmental, Social and Governance (ESG) report highlighting the company’s commitment to environmental stewardship, sustainable business practices, employee safety, diversity and inclusion, customer experience, and community engagement
Advisor Access spoke with Essential Utilities CEO Chris Franklin
Advisor Access: Would you provide an overview of Essential Utilities and the value proposition it offers to investors?
Chris Franklin: Essential Utilities provides a unique combination of experienced, regulated utility companies offering essential services to customers and a unique investment opportunity for investors. Our business model allows us to play an important role in solving our nation’s water and natural gas infrastructure challenges through thoughtful capital investment, operational excellence, environmental stewardship, regulatory collaboration, and a commitment to strengthening local communities, all while delivering strong financial results to our shareholders.
Since becoming CEO in 2015, we have consistently grown earnings per share, customer base, market cap, annualized dividend, and made significant ESG commitments. Our customer base has grown from nearly 958,000 customers to over 1.8 million customers. During this time annualized dividends have increased from $0.712 per share to $1.148 per share and the market cap of the company has grown from $4.4 billion to well over $10 billion today.
Finally, there has been a plethora of stories highlighting the need for investment in infrastructure across the U.S. Many cities and municipalities face difficulty maintaining their systems and meeting state and federal compliance requirements. We understand what it takes to address these infrastructure challenges and have a proven track record of making the necessary investments in our systems. We also recognize that these investments not only contribute to increased reliability and safety, but also make a positive impact on the environment.
AA: Essential Utilities recently announced a 7% increase in its dividend, the 32nd dividend increase in 31 years. To what do you attribute this success?
CF: Nearly a third of Essential’s stock is owned by retail shareholders, many of whom have enjoyed our long history of paying dividends. Our most recent increase of 7% not only marks the 32nd increase in 31 years, but also the 77th consecutive year of quarterly dividend payments.
We take great pride in our long, consistent record of delivering shareholder value and believe our dividend policy is indicative of our financial strength. Our dividend payout target remains in the 60–65% range.
AA: In June, Essential Utilities Inc. was named to 3BL Media’s 100 Best Corporate Citizens list for the second consecutive year, moving from #90 to #42 and placing among the top three utilities. In addition, Essential is on Newsweek’s America’s Most Responsible Companies list. How does Essential make ESG a priority?
CF: We recognize transparent and detailed ESG reporting is important to many of our constituencies. While it was not originally labeled “ESG,” our work on environmental, social, and governance issues has always been a priority at Essential Utilities. While we have been achieving great things for over 135 years, we have worked diligently to highlight and share our progress and accomplishments in more recent years. Finally, we have put an increased focus on ensuring our ESG ratings accurately reflect the work of our company.
Our most recent ESG Reporting Update, which is available for download on our microsite at ESG.Essential.co, was published in August 2022, and provided updates that included the following:
- SASB and ESG Metrics Index – A pamphlet of key ESG metrics updated for 2021, inclusive of Sustainable Accounting Standards Board disclosures and additional information
- TCFD Report – Climate change reporting consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures
- CDP Report – A copy of Essential’s filed 2021 Carbon Disclosure Project (CDP) questionnaire
- AGA Sustainability Template – Greenhouse gas emissions (GHG) reporting consistent with industry standards set by the American Gas Association
- ESG Commitment Progress Tracker – A graphic, updated for mid-2022, showing Essential’s progress towards its stated ESG commitments regarding GHG emissions reduction, employee diversity, and supplier diversity
The SASB and ESG Metrics Index also briefly detail key ESG highlights from the past year, including the opening of Essential’s state-of-the-art water testing laboratory, the launch of the new Employee Resource groups, and the formation of a talent recruitment partnership with the Pittsburgh Energy Innovation Center. Recognizing the company’s ESG leadership is what led to Newsweek naming Essential among America’s Most Responsible Companies for 2022 and 3BL Media including Essential among its 100 Best Corporate Citizens for 2022.
Note: This chart illustrates how prominent ESG ratings agencies hold Essential in high regard and among the most sustainable utilities in the world.
AA: Essential has committed to achieve, by 2035, a 60% reduction in Scope 1 and 2 greenhouse gas emissions from a 2019 baseline. How does the company intend to do this and what progress has been made so far on this significant objective?
CF: In January 2021, we announced a commitment to reduce Scope 1 and 2 greenhouse gas emissions by 60% by 2035 from a 2019 baseline. Just a year and half later, the company achieved an estimated 14% reduction in greenhouse gas emissions. I think it is also important to note that the 60% reduction we have committed to is achievable based on methods and technologies that exist today. This was driven in large part by our switch to nearly 100 percent renewable electric power for our water segment operations in Pennsylvania, Ohio, Illinois, and New Jersey. We also continue to do extensive replacement of aging gas pipelines each year and accelerated methane leak detection and repair, which will be the greatest contributors toward our targeted 60% reduction. This rate of reduction, through 2035, is consistent with the Paris Agreement, which aims to limit global temperature increase to well below 2°C.
As you may be aware, many utility companies have made net zero commitments, but most are based on the expectations and anticipation of new technological developments, which are not certain. While net zero is our aspiration, we are proud that our current commitment is achievable, and we will provide regular updates to stakeholders with transparency. Like many of our peers, we are actively exploring technologies like hydrogen and renewable natural gas that can be blended alongside traditional natural gas and reduce emissions. Innovation has been at the heart of our company for over 135 years and that will continue as we help shape the future of energy in America.
AA: Essential has also set goals to increase employee and supplier diversity. What steps has the company taken and has it made strides to achieve this goal?
CF: It is critical that our workforce and supply chain accurately reflect the diversity in the communities we serve. We may have a 10-state footprint across the nation, but our impacts are felt locally in every community we operate. Our customers interact with team members who are also their neighbors. We purchase supplies and services from vendors who are also, on a personal level, our customers. This level of interconnection and interdependence is central to who we are and how we operate. Only when we foster a diverse, equitable, and inclusive company are we able to take greater advantage of diverse ideas, perspectives, and experiences that make Essential stronger and more effective. When our communities thrive, all our stakeholders benefit, and through our hiring and purchasing decisions we can influence this dynamic greatly.
We have made two important commitments, each of which is now factored into executive compensation. The first is that we will increase the amount we spend with diverse suppliers to 15% of our controllable spending, up from about 9% when we made the commitment. Through mid-2022, we have reached 13% and have strong momentum. We are collaborating with our Tier 1 suppliers to identify and account for certified diverse Tier 2 suppliers. We participate in networking events with both vendors and peers that have mature supplier diversity programs. Our supply chain group is also a member of various councils and industry working groups specializing in sharing best practices and resources on supplier diversity.
The second commitment is that, based on an analysis of the demographics of the communities we serve, we will achieve 17% employees of color, up from about 14%. This was based on a detailed review of the local demographics of our service areas, with the intent to reflect Essential’s team diversity with the neighborhoods we serve. We have a range of diverse recruitment tactics, many of which are supported through diversity associations and job boards for minorities, veterans, and women engineers, and recruiting new talent from local community colleges and city-based universities. But diversity in hiring is not the only element of success. We also need to build an equitable and inclusive workplace to retain and develop diverse talent. Essential regularly conducts education and implicit bias workshops to foster better understanding of points of view and how preconceived notions impact relationships at work. We also host Diversity, Black, Women’s, and Pride Employee Resource Groups to ensure our employees feel supported in their professional growth at all levels.
AA: How does the focus on ESG impact Essential’s bottom line?
CF: Essential’s ESG performance and financial performance are inextricably linked as a utility, as much as or perhaps more so than any other industry. It has been this way for our company since its inception, over a century before ESG began to play a more overt role in the capital markets and investment community. For over 135 years, our local communities have entrusted us with a humbling and critical responsibility: safeguard and deliver natural resources for life, both now and for future generations. Essential would not exist today, let alone be in such a sound financial position, if it did not excel at ESG.
We earn a regulated rate of return on the investment on the installation of new water main, which also leads to reduced water and gas leakage harmful to the environment, which in turn makes production costs more efficient. We have built a state-of-the-art testing lab, which both helps protect drinking water quality for our community while boosting our ability to meet regulatory standards and avoid noncompliance costs. We have set supplier diversity targets, which has provided an opportunity for us to reevaluate our vendors and seek lower costs while supporting our local economy. These are just three of countless examples of how ESG and financial success mutually reinforce each other at Essential. Over the next 10 years or 25 years or even another 135 years, this relationship will not change, and our company will continue to pioneer innovation on ESG while delivering strong financial performance.
AA: Is there anything else you’d like investors to know about Essential Utilities?
CF: Essential Utilities is an over 135-year-old company that plays an important role in solving our nation’s water and natural gas infrastructure challenges. Our commitment to capital investment, operational excellence, environmental stewardship, and strengthening local communities is part of our culture. Our employees deliver on our mission to improve quality of life and economic prosperity by safely and reliably delivering earth’s most essential resources. Aligned with our proven growth strategy we are focused on delivering shareholder value while remaining a stable industry leader.
A fixture of the Essential leadership team, Christopher Franklin is chairman and chief executive officer of Essential Utilities, Inc. Since being named CEO in 2015, Franklin has refocused the company on growing its regulated business, purchasing municipal water and wastewater systems, and shedding its underperforming unregulated businesses. The company also broadened its strategy by adding a natural gas platform. The accomplishment of which Franklin is most proud is building a strong management team and bringing diversity to the company’s board of directors, employee base, and management team, since being named CEO. Additionally, Franklin was named one of the Philadelphia Business Journal’s Most Admired CEOs in 2017. In 2019, Franklin was recognized by EY (formerly Ernst & Young) with their “Entrepreneur of the Year” award. Prior to his role as CEO, Franklin was president and chief operating officer. A 30-year veteran of the company, Franklin has held executive roles in public affairs, customer service and operations. In addition to serving as the chairman of Essential’s board of directors, Franklin is active in the community and serves on six nonprofit boards, including as director and past chairman of the National Association of Water Companies, member of PNC’s Advisory Board, Philadelphia, Penn., Director, CenterPoint Energy (NYSE: CNP), Houston, Tex. In addition to being a director at the Philadelphia Chamber of Commerce, he is also a member of the Executive Committee. Franklin earned his bachelor’s degree from West Chester University and his MBA from Villanova University.
“The US Environmental Protection Agency is continuing to consider tightening of water quality standards, which we discussed in detail …Rising interest rates, in our view, also will provide a further catalyst to drive more municipalities to sell their water systems, underpinning Essential’s growth plans.”
—Verity Mitchell, HSBC Bank
Nov. 11, 2022
“We reiterate our BUY rating for WTRG, which remains our top pick in the water utility sector. Our price target of $62 reflects a water utility peer group weighted-average forward P/E of 31.6x. In addition to the steady long-term growth story being intact, we believe there are a number of positive catalysts on the horizon, particularly on the M&A front.”
—Ryan M Connors, Northcoast Research
Aug. 4, 2022
“Our Overweight rating is premised on our belief that WTRG shares do not fully reflect the company’s strong fundamentals, which include a proven EPS growth strategy, a rate base that is growing at a mid-to-upper single digit CAGR, constructive regulatory treatment (particularly in PA where roughly 70% of earnings are derived and a 10% allowed ROE was just issued for Aqua PA’s water/wastewater operations), an efficient operating model, and a solid financial profile. We believe relatively low-risk, regulated EPS growth of at least 6% is achievable driven by the timely rate recognition of elevated pipeline infrastructure investment needs for the foreseeable future supplemented by water/wastewater municipal M&A trends.”
—Jonathan Reeder, Wells Fargo Securities, LLC
July 17, 2022
Investors and others should note that Essential Utilities Inc. posts important financial information using the investor relations section of the Essential Utilities Inc. website, https://www.essential.co/investor-relations, and Securities and Exchange Commission filings.
The information contained in this facsimile message is intended only for the use of the individuals to whom it is addressed and may contain information that is privileged and confidential. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by telephone at (707) 933-8500.
The material, information and facts discussed in this report are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. This is not an offer or solicitation of the securities discussed. Advisor-Access LLC and/or its employees, contractors and owners, may purchase or sell the securities mentioned in this report from time to time. Any opinions or estimates in this report are subject to change without notice. This report contains forward-looking statements. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. The securities discussed may involve a high degree of risk and may not be suitable for all investors. Essential Utilities Inc. has paid Advisor Access a fee to distribute this email. Chris Franklin had final approval of the content and is wholly responsible for the validity of the statements and opinions.
About Advisor Access
Advisor-Access LLC was designed to bring compelling investment ideas to investors in the form of in-depth interviews with company management and the latest fact sheets and corporate presentations, in a concise format: the critical pieces of information an investor needs to make an informed investment decision. Read the Advisor-Access Full Disclosure Online.