Essential Utilities, Inc. WTRG
WTRG's water roll-up is failing and its $4.3bn Peoples gas pivot is a Ponzi-like dividend trap; 35%-50% downside to $20-$28 on sum-of-parts.
Thesis
Spruce Point issues a Strong Sell on Essential Utilities (NYSE: WTRG), arguing the 30-year water-utility roll-up has hit a wall as competition from NextEra and 'fair-market-value' legislation drives auction prices up while organic water usage declines. The defensive 2018 Peoples natural-gas acquisition (15x EBITDA, $4.3bn levered) is missing plan — EBITDA margins down 1,130bps, bad-debt allowance at 29% versus 7% peers, and goodwill is now under impairment review with the testing methodology quietly switched from quantitative DCF to qualitative. Cumulative dividends ($2.6bn) plus capex and acquisitions exceed operating cash flow by $9.1bn over 30 years, funded by perpetual debt and equity issuance — a 'Peter-to-Peter-to-Paul' scheme. Audit Chair Lee Stewart's undisclosed Fletcher Asset Management Ponzi tie compounds governance risk. Sum-of-parts at 14-15x water and 10-12x gas EBITDA implies $20-$28/share, 35%-50% downside from $41.50.
SCQA
Essential Utilities (WTRG, formerly Aqua America) is a $7.5bn-market-cap regulated water and natural gas utility that has spent ~$4.5bn rolling up 350+ municipal water assets and a $4.3bn Peoples gas distribution business since the early 1990s.
The roll-up is exhausted as auction competition drives prices up and water usage declines; the levered Peoples gas pivot is missing plan with collapsing margins, surging bad-debt allowance, an active goodwill-impairment review, and an audit chair tied to an alleged Ponzi scheme.
Investors should sell or short WTRG; the Board must replace Audit Chairman Lee Stewart, recruit directors with real water expertise, restore quarterly operating cash flow disclosure, and reconcile the Peoples revenue bridge.
A sum-of-parts valuation at 14-15x regulated water EBITDA and 10-12x gas EBITDA implies a $20-$28 share price — 35%-50% downside from the $41.50 trading price as of March 7, 2023.
The three reasons
- 1
Dividend is funded 'Peter-to-Pay-Peter-and-Paul' — 30yr cumulative $9.1bn capital deficit
- 2
$4.3bn Peoples gas deal was defensive; margins down 1,130bps and goodwill under impairment review
- 3
Audit Chair advised Fletcher Asset Management — bankruptcy trustee called it a Ponzi-like fraud
Primary demands
- Sell / short WTRG stock — 'Strong Sell' opinion with 35%-50% downside
- Replace Audit Chairman Lee C. Stewart given undisclosed Fletcher Asset Management Ponzi-scheme tie
- Reconstitute the Board with directors who have actual water-industry experience
- Provide quarterly operating cash flow disclosure and reconcile Peoples revenue bridge
- Reassess goodwill on the $4.3bn Peoples natural gas acquisition for impairment
KPIs cited
Pattern membership
Precedents cited
- Miller Energy (MILL) — 2011 short, -100%, CFO/COO charged with accounting fraud
- Danimer Scientific (DNMR) — 2021 short, -94%
- Generac (GNRC) — 2022 short, -60%, COO resigned
- Just Energy (JE) — 2013 short, -100%, dividend eliminated and bankruptcy
- Fletcher Asset Management — bankruptcy trustee described as Ponzi-like, audit chair Lee Stewart was an advisor
Composition what's on the 91 slides
Slide gallery ·
Notes
Classic Spruce Point short-seller deck: cover photo (rats on a storm drain) sets the tone, followed by track-record slide referencing Miller Energy / Danimer / Generac / Just Energy as precedents. The thesis spine is the 'Peter-to-Peter-to-Paul' dividend metaphor backed by 30 years of cumulative cash-flow data. Page 14 ('Why Now') is a particularly clean before/after-style 'what to look for vs. what's occurring' table — a good template. The Audit Chairman attack (Fletcher Asset Management Ponzi tie) is the personalized governance hit. Sum-of-parts on page 90 is the closing valuation model. Author is institutional (Spruce Point Capital Management); founder Ben Axler is named in industry coverage on slide 6 but not signed on the report itself.