{ "docId": "019dd923-622c-750b-8b99-5499dc38e401", "docSlug": "0ce9434f48c5", "documentTitle": "Essential Utilities, Inc. (WTRG)", "authorId": "54_Spruce_Point_Capital", "authorName": "Spruce Point Capital Management", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2023-03-08 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 8, "pageCount": 91, "prevPage": 7, "nextPage": 9, "slideType": "executive_summary", "function": "summarize", "density": "dense", "nDataPoints": 12, "notes": "The slide uses a high-contrast red-bordered box to highlight the core thesis, followed by a supporting narrative block.", "elementsJson": [ "headline_text", "paragraph", "callout_box" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b99-5499dc38e401/8", "deckHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401", "deckJsonHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401#slide-8", "components": [ { "bbox": null, "kind": "callout", "text": "Based on our analysis of over 30 years of financial data and public information, we question the public benefit of WTRG’s business model, and believe it is a vehicle for insider enrichment that operates akin to a Peter-to-Peter-to-Paul scheme whereby money from new and current investors is used to pay existing investors a highly promoted dividend.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ed-775b-bcb4-7a401231d6c5", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "downside risk: 35% - 50%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd952-e6ed-775b-bcb4-82a4ea89756d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.45, "w": 0.86, "x": 0.13, "y": 0.53 }, "kind": "paragraph", "text": "Since embarking on an aggressive roll-up acquisition strategy in the early 1990s of water and wastewater municipal assets, WTRG has made over 350 acquisitions spending approximately $4.5 billion in cash. Favorable regulation and the perception that infrastructure assets are safe, provide it an opportunity to borrow large amounts of money and implement higher prices to consumers while 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. WTRG 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” whereby municipalities can command more for their assets, has markedly increased WTRG’s competition in completing new acquisitions. To illustrate, in a recent auction in WTRG’s home state of Pennsylvania, over 100 bidders emerged, and an asset sold at a 113% premium to WTRG’s offer price. Through multiple Freedom of Information Act (FOIA) requests, we also see how WTRG has pursued deals of questionable economic value. For example, it invested over 4 years time to acquire assets from the Village of Frankfort that contributed only 711 customers. The assets cost $1.4 million (not including the $50k of legal fees it reimbursed the Village for) and require a $5.6 million capital improvement plan. WTRG’s plan is to increase prices 87% within three years! With long-term water use declining and limited organic customer growth opportunities, we believe small deals like Frankfort illustrate WTRG’s desperation to grow at any cost. WTRG 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.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6f42c7e6-b2f2-4382-9e4e-6ebb607d219c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.35, "w": 0.9, "x": 0.05, "y": 0.16 }, "kind": "paragraph", "text": "After conducting a forensic review of Essential Utilities, Inc. (NYSE: WTRG or “the Company”), Spruce Point has grave concerns about the efficacy of its business model, the accuracy of its financial reporting, and its ability to meet financial obligations and targets. WTRG, formerly named Philadelphia Suburban Corp. and Aqua America, Inc., is an aggressively managed roll-up of water, wastewater and natural gas assets that is highly dependent on external capital to sustain itself. Based on our analysis of over 30 years of financial data and public information, we question the public benefit of WTRG’s business model, and believe it is a vehicle for insider enrichment that operates akin to a Peter-to-Peter-to-Paul scheme whereby money from new and current investors is used to pay existing investors a highly promoted dividend. We have grave concerns about the accuracy of its financial reporting and growing financial stress given its recent $4.3 billion levered acquisition of Peoples to diversify into natural gas. Based on documented history of a Board member referencing the current Chairman & CEO as “disingenuous” and evidence that the Audit Chairman once advised a company that filed for bankruptcy and was described by the bankruptcy trustee in court documents as fraudulent and with “many of the characteristics of a Ponzi scheme,” we do not believe the Board is best equipped to look after shareholder interests. Investors should also be on further red alert that WTRG’s stock was once promoted by a notorious firm that itself ran a Ponzi scheme. Currently levered 7x Debt/EBITDA, needing to raise ~$1.7 billion (including $500 million of new equity sold at-the-market) and valued near the highest among its peers, we believe there is approximately 35% – 50% ($20.00 – $28.00) downside risk.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "9f191d38-f111-41f1-945b-0d17d8470d01", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "many of the characteristics of a Ponzi scheme — Bankruptcy Trustee in court documents regarding a company the Audit Chairman once advised.", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd952-e6ed-775b-bcb4-7e83d4c616c6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.68, "x": 0.305, "y": 0.03 }, "kind": "title", "text": "Spruce Point Issues A \"Strong Sell\" Opinion On Essential Utilities, Inc (WTRG) With 35% - 50% Downside", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "023e3e4f-017d-4947-a903-ec4db087eb1f", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [ { "name": "Executive summary", "slug": "executive-summary", "agent": null, "layer": "slide", "matchId": "6ceb72f9-d0dd-49cf-a12e-a09938b97f88", "evidence": "This slide presents a summary of Spruce Point's opinion on Essential Utilities, Inc., including a strong sell opinion and a predicted downside of 35% - 50%.", "confidence": 0.9 } ], "frameworks": [], "arcBeats": [ { "to": 10, "from": 5, "beatId": "22eaa2b2-2e04-41fa-b1a3-1b0bce9855e2", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "Complication", "beatSlug": "complication", "evidence": "The document presents evidence of WTRG's financial stress, reporting errors, and governance issues.", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }