NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management
Believes That the Company is at the Declining Phase of its Aggressive Roll-Up Growth Strategy After Completing the Levered Acquisition of Peoples Natural Gas in March 2020 and That it is Highly Likely to Fail in Meeting its 2023 Earnings Targets
Observes Exploding Bad Debts and a Persistent Decline in the Company’s Cash Flow Generation While a Number of Troubling Financial Reporting Issues Emerge
Questions the Company’s Dividend Policy, Which Since 1990 has Paid Out $2.6 Billion of Dividends That Can Be Viewed as Having Come From Existing and New Investors
Criticizes the Company for Stacking the Board With Executives Devoid of Water or Natural Gas Industry Experience
Expresses Concerns That the Company’s Audit Chairman Once Advised an Alleged Fraud and Ponzi-Like Scheme and That the Company’s Stock has Also Been Promoted by a Ponzi Scheme
Sees 35% to 50% Downside Risk to WTRG’s Share Price and Urges Investors to Visit www.SprucePointCap.com and Follow @SprucePointCap on Twitter for the Latest on $WTRG
Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, “A Non-Essential Stock Holding,” that outlines why we believe shares of Essential Utilities, Inc. (NYSE:WTRG) (“WTRG” or “Essential” or the “Company”) face up to 35% to 50% downside risk, or approximately $20.00 – $28.00 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and important updates.
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Spruce Point Report Overview
Based in Bryn Mawr, PA, Essential Utilities, Inc. (formerly Aqua America and Philadelphia Suburban Corp.) is a regulated utility providing water, wastewater, or natural gas services to residential and commercial customers predominately in the Northeast United States. After an unsuccessful strategy to grow by acquisition through state expansion and by joint venture, the Company is now facing long-term pressures both from declining water use and from the challenges stemming from its $4.3 billion acquisition of Peoples Natural Gas Co (Peoples), a levered transaction intended to drive the Company’s expansion into natural gas distribution.
Key findings from our report include:
Essential is an aggressive roll-up hitting a wall that draws public outrage. Since embarking on an aggressive roll-up acquisition strategy of water and wastewater municipal assets in the early 1990s, it has made over 350 acquisitions spending approximately $4.5 billion in cash. Favorable regulation and the perception that infrastructure assets are safe provided the Company an opportunity to borrow large amounts of money and pass-through higher prices to consumers. The Company is simultaneously pushing the narrative that it is investing money to improve aging infrastructure to deliver reliable water services. However, like most roll-ups, as they grow and mature, size ultimately becomes an inhibitor to continued growth. Essential has already failed at multiple state and joint venture expansions, and we believe it is now at the declining phase of its growth story as its aggressive price increases and numerous snafus in billing, service and water quality have created an environment of public outrage against it. Meanwhile, growing pools of capital dedicated to infrastructure investing, the emergence of NextEra Energy as a major player in the space, and changes in legislation towards “fair market value” that enable municipalities to command more for their assets have markedly increased Essential’s competitive field in completing new investments. To illustrate this further, in a recent auction in Essential’s home state of Pennsylvania, over 100 bidders emerged on an asset that ultimately sold at a 113% premium to Essential’s offer price. Through multiple Freedom of Information Act (FOIA) requests, we also see how Essential has pursued other deals of questionable economic value. The Company recently cut its acquisition pipeline from 430,000 to 400,000 (-7%) between January and February 2023 and subtly lowered its organic water rate base growth outlook.
Evidence shows that Essential’s recent $4.3 billion levered acquisition of Peoples was a defensive deal and is struggling. In 2018, the Company announced the acquisition of Peoples, a provider of natural gas distribution services to residents in the Northeast U.S. Peoples formed through various acquisitions by SteelRiver Infrastructure Partners from 2010 to 2017. In Spruce Point’s experience, when public companies buy assets from private equity owners, it rarely ends well for shareholders. Essential has been touting the many benefits of the transaction, including diversification into natural gas. However, based on our primary …
