Essential Utilities (WTRG) Q3 2026 earnings review
Essential Utilities nears merger close, while insurance credits lift profit
Essential Utilities cleared key regulatory hurdles for its buyout by American Water, while one-off cost credits lifted third-quarter profit. The water and natural gas provider grew revenue 7% from a year ago to $508 million on newly approved utility rates and higher gas usage. Chairman and chief executive Christopher Franklin pointed to consistent earnings across both divisions as profit per share excluding merger costs rose 15% to $0.38, but insurance recoveries and lower bad debt expenses drove that margin expansion.
| Revenue | $508.3M +6.6% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.38 +15.2% from a year ago |
| Rate awards approved in 2026 | $70.5M up from $56.6M at the half year |
| Merger closing outlook | Unchanged Q1 2027 target; settlements in PA, NC, TX |
⚖️ Verdict: 🟢 Bullish
The story got better because the utility operator reached regulatory settlements in Pennsylvania, North Carolina, and Texas for its pending merger, reducing the main obstacle to closing in the first quarter of 2027. One caution: regulated water sales growth slowed to 5% while depreciation and interest costs rose much faster, and the release omitted the standing multi-year earnings growth plan that requires a steep fourth-quarter profit jump by our math.
The question now is whether state utility commissions will formally approve the three merger settlements and the $163 million Pennsylvania gas rate request without costly conditions. Constructive commission orders would secure both the Q1 2027 deal close and next year's revenue base, while pushback would squeeze returns on the company's $1.7 billion capital program. Final commission rulings in Pennsylvania and Illinois over the next two quarters will decide it.
🐂 Bull Case
Three State Settlements Reduce Merger Approval Risk
Essential Utilities is merging with rival utility American Water in an all-stock deal where each Essential share converts into 0.305 American Water shares. Completing the transaction requires approval from state utility regulators across the company's footprint. Entering this quarter, outstanding state reviews in Pennsylvania, North Carolina, Texas, Illinois, and New Jersey stood as the primary hurdle to closing.
This quarter, the utility operator cleared the most contentious steps in those state reviews. Essential said that "Settlement agreements have also been reached with the relevant regulators in Pennsylvania, North Carolina and Texas", adding to final approvals already secured in Kentucky, Ohio, and Virginia. Reaching a settlement in Pennsylvania is crucial because state affordability politics had threatened to complicate the review, so the Q1 2027 closing plan looks much safer.
What to watch: final commission orders approving the settlement agreements in Pennsylvania, North Carolina, and Texas, along with the statutory ruling in Illinois due in November 2026. Formal commission sign-offs without costly new conditions would remove the remaining regulatory obstacles to closing in the first quarter.
Approved Rate Increases Near Last Year's Total
As a regulated utility, Essential raises prices mainly by filing rate cases and infrastructure surcharges with state commissions to recover its capital spending. By our math, regulators approved $13.9 million of new annual revenue in the third quarter, lifting the nine-month total to $70.5 million across water and natural gas.
- Water rate awards through nine months: $53.6 million across six states, up from $43.9 million at the half year
- Natural gas rate awards through nine months: $16.9 million in Pennsylvania and Kentucky, up from $12.7 million at the half year
- Pending rate requests: $241.7 million in annual revenue ($78.5 million in water and $163.2 million in Pennsylvania gas)
That conversion matters because higher authorized rates are the main way the business offsets rising financing and depreciation bills. Meanwhile, the backlog of pending requests held steady at $241.7 million, down $1.2 million from last quarter by our math.
What to watch: the Pennsylvania Public Utility Commission ruling on the $163.2 million natural gas rate request, which supports "the replacement and retirement of aging gas mains and the associated reduction of greenhouse gas emissions". A constructive award around year-end would lock in the revenue base for 2027.
Insurance Recoveries Lift Q3 Profit Margins
Chairman and chief executive Christopher Franklin said, "Our strong performance this quarter highlights the consistent earnings growth generated by both our water and natural gas divisions." Profit per share excluding merger costs rose 15.2% from a year ago to $0.38, as operating margin expanded by 2.3 percentage points to 37.9%.
However, a closer look at the expense lines shows that one-off cost credits did most of the work. Operations and maintenance expense — the day-to-day cost of running the utility network — fell 2.2 percentage points of revenue to 29.9%, "primarily due to insurance recoveries recognized during the current quarter, as well a decrease in bad debt expense in our regulated natural gas segment". Excluding $4.9 million of merger costs, day-to-day operating expenses dropped by $5.9 million.
What to watch: fourth-quarter operations and maintenance expense as a share of revenue. Essential said that "Excluding the one-time items and the impact of abnormal weather, operations and maintenance expenses for the full year are expected to be in line with historic norms", so margins should narrow next quarter when insurance credits do not repeat.
🐻 Bear Case
Depreciation and Interest Outrun Water Revenue Growth
Essential is stepping up capital spending on pipes and treatment plants, investing $1.1 billion in the first nine months of 2026 (~$438 million in Q3 by our math) toward a $1.7 billion full-year plan. Management frames this spending and municipal buyouts as a steady engine for earnings, yet there is a lag before regulators let the utility bill customers for new assets.
- Regulated water revenue: $380.6 million, up 4.5% from a year ago, down from 7.6% growth in Q2
- Depreciation and interest expenses: depreciation rose 7.0% to $110.6 million, while interest rose 11.0% to $91.3 million
- Signed acquisition agreements: $290 million for 208,000 customers, of which $276.5 million and 198,000 customers sit in the stalled DELCORA sewer deal
This cuts against Franklin's claim of consistent growth across both divisions because water top-line growth slowed to its lowest rate in five quarters while capital costs kept climbing. Meanwhile, municipal buyouts added four small deals worth $9.6 million in October, but DELCORA — a Pennsylvania sewer authority under contract since 2019 — still makes up 95% of the acquisition backlog.
What to watch: the timing and size of the upcoming Aqua Pennsylvania water rate case filing, which management previously slated for around year-end. A delayed filing would push rate relief further into 2027, leaving depreciation and interest to weigh on water profit margins.
Risks this quarter didn't answer
The third-quarter earnings release gave no update on several standing financial, regulatory, and legal risks that govern the standalone outlook through closing.
- Full-year earnings growth target: the release omitted the standing 5% to 7% compound annual growth target off the $1.97 per share 2024 base, which by our math requires fourth-quarter profit per share excluding one-offs to jump roughly 35% to about $0.64, as well as the unquantified one-time benefit meant to bridge that gap.
- Fixed exchange ratio: shareholders remain locked into receiving 0.305 American Water shares per Essential share with no price collar.
- Pennsylvania rate dockets: the $163.2 million Peoples natural gas request remains unapproved, and the release gave no filing date for the deferred Aqua Pennsylvania water rate case.
- Litigation and contingent fees: the release provided no update on the quarterly filing notes covering PFAS settlement accounting, gas explosion lawsuits, the $16.5 million Hummingbird loan fee maturing September 30, 2026, or merger advisor fees.
💲 Other KPIs
Total debt rose 5.1% from the end of 2025 to $8.70 billion by our math, up from $8.50 billion last quarter as the utility borrowed to fund its $1.1 billion nine-month capital program. Short-term debt and current maturities jumped to $670.3 million from $172.0 million at year-end, while available credit lines fell to $759 million from $960 million in Q2.
Average diluted shares rose 1.0% from a year ago to 285.0 million. Share count growth has slowed for three straight quarters — down from 2.9% growth in Q1 and 1.2% in Q2 by our math — because the water and gas company curtailed stock sales under its equity issuance program after announcing the all-stock merger.
Income tax expense reached $6.6 million, or 6.0% of pre-tax profit by our math, up from 4.5% a year ago and 3.0% in the second quarter. Through the first nine months, the effective tax rate stands at 3.6%, which remains below the 5% full-year ceiling management outlined last quarter due to tax deductions on pipe repair spending.
🔮 Guidance
Unchanged. Essential still plans to invest $1.7 billion in regulated water and natural gas infrastructure this year, up from $1.4 billion in 2025. With $1.1 billion spent in the first nine months (~$438 million in Q3 by our math), the plan leaves about $600 million of capital spending for the fourth quarter.
New. The utility operator expects full-year day-to-day operating costs to match historical growth rates once merger bills, insurance recoveries, and abnormal weather are stripped out. Because third-quarter operating costs excluding merger bills fell 3.8% from a year ago on insurance credits, returning to normal growth for the year points to higher operating expenses in the fourth quarter.
Unchanged. The company continues to target closing the all-stock combination with American Water in the first quarter of 2027, following new regulatory settlement agreements in Pennsylvania, North Carolina, and Texas.
❓ Key Questions
Does Essential still back its 5–7% earnings growth target?
The release omitted the 5% to 7% compound annual earnings growth plan off the $1.97 per share 2024 base. Reaching the $2.17–$2.26 implied range requires $0.59–$0.68 in Q4 after $1.58 in the first nine months, and management has not sized the one-time benefit meant to bridge it.
What are the terms of the Pennsylvania merger settlement?
Reaching a settlement with regulators in Pennsylvania removes a major hurdle to the American Water deal, but the release gave no terms. Investors need to know whether the agreement includes rate freezes or capital spending commitments before the commission votes.
How large were the third-quarter insurance recoveries?
Insurance credits lowered employee benefit costs in the water division and reduced natural gas operating expenses, allowing day-to-day operating costs excluding merger fees to fall $5.9 million. Without the dollar amount of those credits, readers cannot measure underlying cost inflation.
Was the $16.5 million Hummingbird loan fee collected at maturity?
A convertible note tied to a Greene County data center project matured on September 30, 2026, carrying a $16.5 million fixed loan fee receivable alongside $5.1 million of remaining principal. The earnings release did not state whether the fee was paid.