On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815, due in 2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay $49,700 of borrowings under the Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the Company’s resultsexisting five-year unsecured revolving credit facility, and (2) for general corporate purposes.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

General Information

COVID-19 Pandemic

Financial Condition

On May 20, 2022, the issuancesCompany issued $500,000 of $80,000long-term debt (the “Senior Notes”), less expenses of $5,815, due in 2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay $49,700 of borrowings under the Aqua Pennsylvania’s 364-day revolving credit facility and $50,000$410,000 of first mortgage bonds byborrowings under the Company’s existing five-year unsecured revolving credit facility, and (2) for general corporate purposes.

On April 15, 2021, the Company’s operating subsidiary Aqua Pennsylvania in July and January 2017 andOhio, Inc. issued $100,000 of first mortgage bonds, byof which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further on April 19, 2021, the Company issued $400,000 of long-term debt, less expenses of $4,010, which is due in 2031 with an interest rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under our Aqua IllinoisPennsylvania five- year revolving credit facility, and the balance was used to repay in July 2017.
full the borrowings under its existing five-year unsecured revolving credit agreement.

At SeptemberJune 30, 2017,2022, we had $4,139$12,976 of cash and cash equivalents compared to $3,763$10,567 at December 31, 2016.2021. During the first ninesix months of 2017,2022, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.

At SeptemberJune 30, 2017,2022 our $250,000$1,000,000 unsecured revolving credit facility, which expires in February 2021,December 2023, had $183,547$840,117 available for borrowing. At SeptemberAdditionally, at June 30, 2017,2022, we had short-term lines of credit of $135,500,$435,500, primarily used for working capital, of which $114,510$430,797 was available for borrowing. One of our short-term lines of credit is a Peoples Natural Gas Companies’ 364-day unsecured revolving credit facility, which as of June 30, 2022, was amended to increase the amount available on the facility from $100,000 to $300,000 and to update the termination date to June 29, 2023. Another one of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility, which was also amended on June 30, 2022, to update its termination date to June 29, 2023 to coincide with four banks, which is used to provide working capital,the Peoples Natural Gas Companies revolving credit facility. As of June 30, 2022, $300,000 and as of September 30, 2017, $80,000 was$95,297 were available for borrowing. In July we issued $180,000 of long-term debt,borrowing from the proceeds of which were used to reduce our borrowings under ourPeoples Natural Gas Companies and Aqua Pennsylvania 364-day revolving credit facilities. Subsequently, in October we issued $75,000 of long-term debt, the proceeds of which were used to reduce our borrowings under our revolving credit facilities.
facilities, respectively. Our short-term lines of credit of $135,500$435,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.
The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended June 30, 2022 and 2021 are presented below.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

For the three months ended June 30, 2022, consolidated operating revenues increased by $51,724 or 13.0% as compared to the same period in 2021. Revenues from our Regulated Water segment, Regulated Natural Gas segment and Other business segment increased by $21,178, $26,167 and $4,379, respectively. Refer below for further details on the changes on Regulated Water and Regulated Natural Gas segment revenues. The increase in our Other business segment revenue is due to higher revenues from our non-regulated natural gas operations.

Consolidated operations and maintenance increased by $7,466 or 5.9%, primarily due to:

increase in production costs for water and wastewater operations of $1,475;

increase in customer assistance surcharge costs of $606 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the increase in average gas prices as compared to the prior period;

additional operating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $2,239;

increase in insurance expense of $1,424 due to higher insurance claims;

increase in legal expenses of $1,467;

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment; and,

expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

offset by the decrease in bad debt expense of $788; and,

a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization of general and administrative costs as a result of greater capital spend in the current period.

Purchased gas increased by $30,246 or 67.4%. Purchased gas represents the cost of gas sold by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. The expense increased primarily due to the 190.7% increase in the average gas commodity prices in the second quarter of 2022 as compared to the same period in the prior year.

Interest expense, net of interest income increased by $2,699 or 5.2% for the quarter primarily due to the increase in average borrowings.

Allowance for funds used during construction (“AFUDC”) increased by $1,647,$1,245 or by 25.4% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied, and an increaseapplied.

Other income, inclusive of gain on sale of other assets, decreased by$1,263 or by 58.4% due to lower credits recognized from postretirement benefits as compared with the same period in the AFUDC rate as a result of an increase in the amount of AFUDC related to equity.
prior year.

Our effective income tax rate was 4.3%9.0% in the thirdsecond quarter of 20172022 and 10.3%4.5% in the thirdsecond quarter of 2016.2021. The effective income tax rate decreasedincrease is primarily attributed to a decrease in the amortization of certain regulatory liabilities associated with deferred taxes.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Consolidated operating revenues increased by $167,434 or 17.1% for the six months ended June 30, 2022, as compared to the same period in 2021. Revenues from our Regulated Water segment, Regulated Natural Gas segment and Other business segment increased by $32,023, $128,235 and $7,176, respectively. A detailed discussion of the factors contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations. The increase in our Other business segment revenue is due to higher revenues from our non-regulated natural gas operations.

Consolidated operations and maintenance increased by $24,972 or 9.9%, primarily due to:

increase in employee related costs of $9,002;

increase in production costs for water and wastewater operations of $3,001;

increase in customer assistance surcharge costs of $7,367 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the effectincrease in average gas prices during the first six months of 2022 compared to the prior period;

additional tax deductions recognizedoperating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $3,582;

a decrease in expenses of $6,149 in our Regulated Gas Segment due to higher capitalization as a result of the factors described above.
Analysis of First Nine Months of 2017 Compared to First Nine Months of 2016
Revenues decreased by $16,863 or 2.7%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a decrease in customer water consumption, offset by an increase in water and wastewater rates and infrastructure rehabilitation surcharges of $4,586, additional water and wastewater revenues from organic growth of $2,296, and additional water and wastewater revenues of $1,257 associated with a larger customer base due to utility acquisitions.
Operations and maintenance expenses decreased by $19,384 or 8.5%, primarily due to a reduction in operating expenses for Aqua Resources of $12,981 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $4,459, a decreasegreater capital spend in the Company’s self-insured employee medical benefit program expense of $4,239, and a decrease in postretirement benefits expense of $2,946, offset by the prior year effect of a gain on sale of a utility system of $1,215. The gain on sale of a utility system is reported in the consolidated statement of net income as a component of operations and maintenance expense. The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source. current period.

Purchased gas increased by $3,863$125,805 or 4.0%,71.1%. Purchased gas represents the cost of gas sold by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. The expense increased primarily due to the 103.7% increase in the average gas commodity prices during the first six months of 2022 as compared to the same period in the prior year.

Depreciation and amortization expense increased by $10,406 or 7.1% principally due to continued capital expenditures to expand and improve our utility plant placed in service since September 30, 2016.
facilities and our acquisitions of new utility systems.

Taxes other than income taxes increased by $1,296$2,566 or 3.0% primarily6.1% largely due to an increase in sales and use taxes and regulatory fees in our Regulated Natural Gas segment and pumping fees in our Aqua Texas subsidiary, offset by the decrease in property taxes during the period as compared with prior period.

Interest expense, net of $489interest income, increased by $5,344 or 5.2% for the quarter primarily due to the effect of a benefit recorded in 2016 for Ohio based on the final settlement of a property tax bill, and an increase in pumping fees of $319 in Texas due to higher rates and water production.
Interest expense increased by $4,988 or 8.3%, primarily due to an increase in average borrowings.
AFUDC

Allowance for funds used during construction (“AFUDC”) increased by $4,124,$4,150 or by 52.9% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Other income, inclusive of gain on sale of assets, decreased by$3,112 or by 54.5% compared to the same period in the prior year. The first quarter of 2021 included a recovery of a previously incurred cost of $1,917 that resulted in a recognition of a regulatory asset in the prior period. Additionally, during the first half of 2022, there were lower credits recognized from postretirement benefits as compared with the same period in the prior year.

Our effective income tax rate was (3.4)% in the first six months of 2022 and 3.1% in the first six months of 2021. The decrease in the effective tax rate for the first half of the year is primarily attributed to an increase in our income tax benefit associated with the AFUDC rate as a resulttax deduction for qualifying infrastructure and the amortization of an increasethe customer surcredit tax repair catch-up adjustment during the first six months of 2022 in the amount of AFUDC related to equity. our Regulated Natural Gas segment.

Segment Results of Operations

Regulated Water Segment

Our Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. The Regulated Water segment is aggregated into one reportable segment.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Revenues from our Regulated Water segment increased by $21,178 or 8.5% for the second quarter of 2022 as compared to the same period in 2021, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $10,044;

increase in volume consumption of $3,943, and,

additional water and wastewater revenues of $6,215 associated with a larger customer base due to utility acquisitions and organic growth.

Operations and maintenance expense for the three months ended June 30, 2022 increased by $15,014 or 19.3% was primarily due to the following:

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,239;

increase in production costs for water and wastewater operations of $1,475;

expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

Depreciation and amortization increased by $4,714 or 10.3% primarily due to continued capital spend.

AFUDC increased by $909 or by 20.5% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Our effective income tax rate for our Regulated Water Segment was 15.4% in the second quarter of 2022 and 10.4% in the second quarter of 2021. The increase in the effective tax rate is primarily the result of lower income tax benefit associated with the tax deduction for qualifying infrastructure in the second quarter of 2022 as compared to 2021.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Revenues increased by $32,023 or 6.7%% for the first six months of 2022 as compared to the same period in 2021, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $15,904;

increase in volume consumption of $4,226, and,

additional water and wastewater revenues of $10,557 associated with a larger customer base due to utility acquisitions and organic growth.

Operations and maintenance expense for the six months ended June 30, 2022 increased by $22,755 or 14.6% was primarily due to the following:

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $3,582;

increase in employee related costs of $3,781;

increase in legal expenses of $1,073; and,

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment during the second quarter of 2022 as compared with the prior period.

Depreciation and amortization increased by $8,292 or 9.1% primarily due to continued capital spend, offset by a change in the amortization of a regulated liability in 2022.

Interest expense, net, increased by $1,576 or 2.9% for the quarter primarily due to an increase in average borrowings.

AFUDC increased by $2,811 or 36.6% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Our effective income tax rate for our Regulated Water Segment was 13.5% in the first six months of 2022 and 8.2% in the first six months of 2021. The increase in the effective tax rate is primarily the result of lower income tax benefit associated with the tax deduction for qualifying infrastructure in the first six months of 2022 as compared to 2021.

Regulated Natural Gas Segment

Our Regulated Natural Gas segment recognizes revenues by selling gas directly to customers at approved rates or by transporting gas through our pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Natural gas sales to residential, commercial and industrial customers are seasonal, which results in higher demand for natural gas for heating purposes during the colder months.

Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas impact operating revenues on a dollar-for-dollar basis, but do not impact gross margin. Management uses gross margin, a non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis for evaluating our natural gas utility operations since purchased gas expenses are included in operating revenues and passed through to customers. The following table shows the reconciliation of gross margin (non-GAAP) to operating revenues (GAAP):

The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to similarly titled measures reported by other companies.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Operating revenues from the Regulated Natural Gas segment increased by $26,167 or 18.5% due to:

impact of higher gas cost of $23,604 during the quarter as compared to the prior period;

higher gas consumption of $2,332;

increase in customer assistance surcharge of $606, which has an equivalent offsetting amount in operations and maintenance expense. These revenues and offsetting expenses increased mainly due to the increase in average gas prices during the second quarter of 2022 compared to the prior period; and,

offset by the tax repair surcredits to customers of $4,751.

Operations and maintenance expense for the three months ended June 30, 2022 decreased by $7,427 or 14.2% primarily due to the following:

increase in customer assistance surcharge costs of $606, which has an equivalent offsetting amount in revenues;

offset by a decrease in bad debt expense of $1,156; and,

a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization as a result of greater capital spend in the current period.

Purchased gas increased by $23,604 or 59.3%. The increase is largely due to the 190.7% increase in the average gas commodity prices in the second quarter of 2022 as compared to the prior period.

Depreciation and amortization increased by $1,010 or 3.6% primarily due to continued capital spend.

Taxes other than income taxes increased by $976 or 21.0% largely due to increase in sales and use taxes and regulatory fees.

Interest expense, net, decreased by $1,251 or 6.1% for the quarter due to higher interest expense during the second quarter in 2021 that did not continue in 2022.

Our effective income tax rate was 6.0%(82.0)% in the second quarter of 2022 and 167.2% in the second quarter of 2021. The decrease in the effective tax rate is primarily attributed to the increase in the income tax benefit associated with the tax deduction for qualifying infrastructure and the amortization of the catch-up adjustment during the second quarter of 2022 in our Regulated Natural Gas segment.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Operating revenues from the Regulated Natural Gas segment increased by $128,235 or 26.5% due to:

impact of higher gas cost of $118,023 during the period compared to the prior period;

higher usage of $10,990 due to colder than normal weather during the first half of 2022 as compared to the same period in 2021;

increase in customer assistance surcharge of $7,367, which has an equivalent offsetting amount in operations and maintenance expense. These revenues and offsetting expenses increased mainly due to the increase in average gas prices during the first half of 2022 compared to the prior period; and,

offset by the tax repair surcredits to customers of $17,238.

Operations and maintenance expense for the six months ended June 30, 2022 increased by $699 or 0.7% primarily due to the following:

increase in employee related costs of $4,259; and,

increase in customer assistance surcharge costs of $7,367, which has an equivalent offsetting amount in revenues;

offset by a decrease in bad debt expense of $1,785; and,

a decrease in expenses of $6,149 during the second quarter of 2022 in our Regulated Gas Segment primarily driven by higher capitalization as a result of greater capital spend in the current period.

Purchased gas increased by $118,022 or 72.6%. The increase is largely due to the 103.7% increase in the average gas commodity prices in the first ninesix months of 20172022 as compared to the prior period.

Depreciation and 8.4%amortization increased by $3,124 or 5.6% primarily due to continued capital spend.

Taxes other than income taxes increased by $2,720 or 29.9% mainly due to an increase in sales and use taxes and regulatory fees during the first quarter of 2022 as compared to the same period in 2021.

Interest expense, net, increased by $2,104 or 5.6% due to additional borrowings pushed down by Essential Utilities, Inc.

AFUDC increased by $1,339 due to the increase in the first nine monthsaverage balance of 2016. Theutility plant construction work in progress, to which AFUDC is applied.

Our effective income tax rate decreased due to the effect of additional tax deductions recognizedwas (26.5)% in the first nine monthshalf of 20172022 and (3.7)% in the first half of 2021. The decrease in the effective tax rate is primarily attributed to the increase in the income tax benefit associated with the tax deduction for certain qualifying infrastructure improvements for Aqua Pennsylvania.
Net income increased by $1,732 or 0.9%, primarily as a resultand the amortization of the factors described above. catch-up adjustment during the first half of 2022 in our Regulated Natural Gas segment.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

General Information

COVID-19 Pandemic

Financial Condition

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended June 30, 2022 and 2021 are presented below.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Consolidated operations and maintenance increased by $7,466 or 5.9%, primarily due to:

increase in production costs for water and wastewater operations of $1,475;

increase in customer assistance surcharge costs of $606 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the increase in average gas prices as compared to the prior period;

additional operating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $2,239;

increase in insurance expense of $1,424 due to higher insurance claims;

increase in legal expenses of $1,467;

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment; and,

expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

offset by the decrease in bad debt expense of $788; and,

a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization of general and administrative costs as a result of greater capital spend in the current period.

Interest expense, net of interest income increased by $2,699 or 5.2% for the quarter primarily due to the increase in average borrowings.

Allowance for funds used during construction (“AFUDC”) increased by $1,647,$1,245 or by 25.4% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied, and an increaseapplied.

Other income, inclusive of gain on sale of other assets, decreased by$1,263 or by 58.4% due to lower credits recognized from postretirement benefits as compared with the same period in the AFUDC rate as a result of an increase in the amount of AFUDC related to equity. prior year.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Consolidated operations and maintenance increased by $24,972 or 9.9%, primarily due to:

increase in employee related costs of $9,002;

increase in production costs for water and wastewater operations of $3,001;

additional tax deductions recognizedoperating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $3,582;

Depreciation and amortization expense increased by $10,406 or 7.1% principally due to continued capital expenditures to expand and improve our utility plant placed in service since September 30, 2016. facilities and our acquisitions of new utility systems.

Allowance for funds used during construction (“AFUDC”) increased by $4,124,$4,150 or by 52.9% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Segment Results of Operations

Regulated Water Segment

Our Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. The Regulated Water segment is aggregated into one reportable segment.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Revenues from our Regulated Water segment increased by $21,178 or 8.5% for the second quarter of 2022 as compared to the same period in 2021, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $10,044;

increase in volume consumption of $3,943, and,

additional water and wastewater revenues of $6,215 associated with a larger customer base due to utility acquisitions and organic growth.

Operations and maintenance expense for the three months ended June 30, 2022 increased by $15,014 or 19.3% was primarily due to the following:

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,239;

increase in production costs for water and wastewater operations of $1,475;

expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

Depreciation and amortization increased by $4,714 or 10.3% primarily due to continued capital spend.

AFUDC increased by $909 or by 20.5% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Revenues increased by $32,023 or 6.7%% for the first six months of 2022 as compared to the same period in 2021, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $15,904;

increase in volume consumption of $4,226, and,

additional water and wastewater revenues of $10,557 associated with a larger customer base due to utility acquisitions and organic growth.

Operations and maintenance expense for the six months ended June 30, 2022 increased by $22,755 or 14.6% was primarily due to the following:

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $3,582;

increase in employee related costs of $3,781;

increase in legal expenses of $1,073; and,

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment during the second quarter of 2022 as compared with the prior period.

Depreciation and amortization increased by $8,292 or 9.1% primarily due to continued capital spend, offset by a change in the amortization of a regulated liability in 2022.

Interest expense, net, increased by $1,576 or 2.9% for the quarter primarily due to an increase in average borrowings.

AFUDC increased by $2,811 or 36.6% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Regulated Natural Gas Segment

The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to similarly titled measures reported by other companies.

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Operating revenues from the Regulated Natural Gas segment increased by $26,167 or 18.5% due to:

impact of higher gas cost of $23,604 during the quarter as compared to the prior period;

higher gas consumption of $2,332;

offset by the tax repair surcredits to customers of $4,751.

Operations and maintenance expense for the three months ended June 30, 2022 decreased by $7,427 or 14.2% primarily due to the following:

increase in customer assistance surcharge costs of $606, which has an equivalent offsetting amount in revenues;

offset by a decrease in bad debt expense of $1,156; and,

a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization as a result of greater capital spend in the current period.

Purchased gas increased by $23,604 or 59.3%. The increase is largely due to the 190.7% increase in the average gas commodity prices in the second quarter of 2022 as compared to the prior period.

Depreciation and amortization increased by $1,010 or 3.6% primarily due to continued capital spend.

Taxes other than income taxes increased by $976 or 21.0% largely due to increase in sales and use taxes and regulatory fees.

Interest expense, net, decreased by $1,251 or 6.1% for the quarter due to higher interest expense during the second quarter in 2021 that did not continue in 2022.

Other income, inclusive of gain on sale of other assets, decreased by$1,263 or by 58.4% due to lower credits recognized from postretirement benefits as compared with the same period in the AFUDC rate as a result of an increase in the amount of AFUDC related to equity.
prior year.

Depreciation and amortization expense increased by $10,406 or 7.1% principally due to continued capital expenditures to expand and improve our utility plant placed in service since September 30, 2016.
facilities and our acquisitions of new utility systems.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One)

☒SQUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~September~~June 30, ~~2017~~2022

☐£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from_______________ to _______________

Commission File Number 1-6659

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania	23-1702594
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania	19010 -3489
(Address of principal executive offices)	(Zip Code)

(610) 527-8000
(Registrant’s telephone number, including area code)

N/A

(Former Name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒S No☐£

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes☒S No☐£

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:


Large ~~accelerated filer~~☒Accelerated Filer S	Accelerated~~filer~~☐ Filer £
~~Non-accelerated filer~~☐ ~~(donotcheck~~ifa~~smallerreportingcompany)~~Non-Accelerated Filer £	Smaller~~reportingcompany~~☐ Reporting Company £
Emerging~~growthcompany~~☐ Growth Company £

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐£ No☒S


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.50 par value	WTRG	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 22, 2022: 262,170,763

~~October 20, 2017: 177,690,598~~

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	Page
Part I – Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) – ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016~~2021	2

Consolidated Statements of ~~Net Income (unaudited) –~~ ~~Three Months Ended September 30, 2017~~Operations and ~~2016~~	3

~~Consolidated Statements of Net Income (unaudited) –~~ ~~Nine Months Ended September 30, 2017 and 2016~~	4

~~Consolidated Statements of~~ Comprehensive Income (unaudited) – ‎Three ~~and Nine~~ Months Ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021	5
	4
Consolidated Statements of Operations and Comprehensive Income (unaudited) – ‎Six Months Ended June 30, 2022 and 2021	4

Consolidated Statements of Capitalization (unaudited) – ~~September~~‎June 30, ~~2017~~2022 and December 31, ~~2016~~2021	6


Consolidated ~~Statement~~Statements of Equity (unaudited) – ~~Nine~~‎Six Months Ended ~~September~~June 30, ~~2017~~2022	7


Consolidated Statements of Equity (unaudited) – ‎Six Months Ended June 30, 2021	7

Consolidated Statements of Cash Flow (unaudited) – ~~Nine~~‎Six Months Ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021,	8
	9

Notes to Consolidated Financial Statements (unaudited)	9
	10

Item 2. Management’s Discussion and Analysis of Financial ‎Condition and Results of Operations	26
	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
	43

Item 4. Controls and Procedures	31
43

Part II – Other Information

Item 1. Legal Proceedings	31
		43

Item 1A. Risk Factors	31
		43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
		44
~~Item 6. Exhibits~~	32

~~Exhibit Index~~Item 6. Exhibits	33
		45

Signatures	34 46

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

September 30,

December 31,
Assets

2017

2016
Property, plant and equipment, at cost

$
6,857,093

$
6,509,117
Less: accumulated depreciation

1,580,619

1,507,502
Net property, plant and equipment

5,276,474

5,001,615
Current assets:

Cash and cash equivalents

4,139

3,763
Accounts receivable and unbilled revenues, net

104,894

97,394
Inventory, materials and supplies

16,557

12,961
Prepayments and other current assets

11,209

12,804
Assets held for sale

1,543

1,728
Total current assets

138,342

128,650

Regulatory assets

1,044,787

948,647
Deferred charges and other assets

36,169

30,845
Investment in joint venture

7,379

7,026
Goodwill

42,230

42,208
Total assets

$
6,545,381

$
6,158,991
Liabilities and Equity

Stockholders' equity:

Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,669,222 and 180,311,345 as of September 30, 2017 and December 31, 2016

$
90,334

$
90,155
Capital in excess of par value

804,753

797,513
Retained earnings

1,115,601

1,032,844
Treasury stock, at cost, 2,984,973 and 2,916,969 shares as of September 30, 2017 and December 31, 2016

(73,229)

(71,113)
Accumulated other comprehensive income

806

669
Total stockholders' equity

1,938,265

1,850,068

Long-term debt, excluding current portion

1,974,327

1,759,962
Less: debt issuance costs

21,854

22,357
Long-term debt, excluding current portion, net of debt issuance costs

1,952,473

1,737,605
Commitments and contingencies (See Note 13)

Current liabilities:

Current portion of long-term debt

84,704

150,671
Loans payable

20,990

6,535
Accounts payable

63,358

59,872
Accrued interest

23,210

18,367
Accrued taxes

21,745

25,607
Other accrued liabilities

38,943

40,484
Total current liabilities

252,950

301,536

Deferred credits and other liabilities:

Deferred income taxes and investment tax credits

1,391,096

1,269,253
Customers' advances for construction

107,715

91,843
Regulatory liabilities

239,469

250,635
Other

110,412

115,583
Total deferred credits and other liabilities

1,848,692

1,727,314

Contributions in aid of construction

553,001

542,468
Total liabilities and equity

$
6,545,381

$
6,158,991

See notes to consolidated financial statements beginning on page 9 of this report.


	June 30,		December 31,
Assets	2022		2021
Property, plant and equipment, at cost	$	13,111,170	$	12,610,376
Less: accumulated depreciation		2,518,805		2,358,510
Net property, plant and equipment		10,592,365		10,251,866

Current assets:
Cash and cash equivalents		12,976		10,567
Accounts receivable, net		143,385		141,025
Unbilled revenues		79,394		119,896
Inventory - materials and supplies		38,193		33,756
Inventory - gas stored		90,417		75,804
Prepayments and other current assets		31,722		36,597
Regulatory assets		17,208		20,150
Total current assets		413,295		437,795

Regulatory assets		1,511,541		1,429,840
Deferred charges and other assets, net		136,764		141,955
Funds restricted for construction activity		1,313		1,313
Goodwill		2,340,792		2,340,815
Operating lease right-of-use assets		44,713		48,930
Intangible assets		5,381		5,764
Total assets	$	15,046,164	$	14,658,278

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS OF NET INCOME~~BALANCE SHEETS (continued)

~~(In thousands, except per share amounts)~~

~~(UNAUDITED)~~

Three Months Ended

September 30,

2017

2016
Operating revenues

$
215,008

$
226,593

Operating expenses:

Operations and maintenance

67,982

79,812
Depreciation

34,264

33,881
Amortization

42

389
Taxes other than income taxes

15,234

14,712
Total operating expenses

117,522

128,794

Operating income

97,486

97,799

Other expense (income):

Interest expense, net

22,411

20,168
Allowance for funds used during construction

(3,914)

(2,267)
Gain on sale of other assets

(43)

(62)
Equity earnings in joint venture

(593)

(1,621)
Income before income taxes

79,625

81,581
Provision for income taxes

3,400

8,411
Net income

$
76,225

$
73,170

Net income per common share:

Basic

$
0.43

$
0.41
Diluted

$
0.43

$
0.41

Average common shares outstanding during the period:

Basic

177,660

177,336
Diluted

178,124

177,817

Cash dividends declared per common share

$
0.2047

$
0.191

See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF NET INCOME~~

~~(In thousands, except per share amounts)~~

~~(UNAUDITED)~~

Nine Months Ended

September 30,

2017

2016
Operating revenues

$
606,213

$
623,076

Operating expenses:

Operations and maintenance

207,963

227,347
Depreciation

101,508

97,645
Amortization

358

1,367
Taxes other than income taxes

44,390

43,094
Total operating expenses

354,219

369,453

Operating income

251,994

253,623

Other expense (income):

Interest expense, net

65,124

60,136
Allowance for funds used during construction

(10,570)

(6,446)
Gain on sale of other assets

(322)

(390)
Equity earnings in joint venture

(402)

(1,143)
Income before income taxes

198,164

201,466
Provision for income taxes

11,899

16,933
Net income

$
186,265

$
184,533

Net income per common share:

Basic

$
1.05

$
1.04
Diluted

$
1.05

$
1.04

Average common shares outstanding during the period:

Basic

177,583

177,243
Diluted

178,103

177,781

Cash dividends declared per common share

$
0.5873

$
0.5473

See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Net income

$
76,225

$
73,170

$
186,265

$
184,533
Other comprehensive income, net of tax:

Unrealized holding gain on investments, net of tax expense of $22 and $11 for the three months, and $73 and $14 for the nine months ended September 30, 2017 and 2016, respectively

42

20

137

26
Reclassification of gain on sale of investment to net income, net of tax of $30 for the nine months ended September 30, 2016 (1)

-

-

-

(57)
Comprehensive income

$
76,267

$
73,190

$
186,402

$
184,502

(1) Amount of pre-tax gain of $87 reclassified from accumulated other comprehensive income to gain on sale of other assets on the consolidated statements of net income for the nine months ended September 30, 2016.

See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CAPITALIZATION~~

(In thousands of dollars, except per share amounts)

(UNAUDITED)

September 30,

December 31,

2017

2016
Stockholders' equity:

    Common stock, $.50 par value

$
90,334

$
90,155
    Capital in excess of par value

804,753

797,513
    Retained earnings

1,115,601

1,032,844
    Treasury stock, at cost

(73,229)

(71,113)
    Accumulated other comprehensive income

806

669
Total stockholders' equity

1,938,265

1,850,068

Long-term debt of subsidiaries (substantially collateralized by utility plant):

Interest Rate Range
Maturity Date Range

0.00% to  0.99%
2023 to 2033

4,196

4,661
1.00% to  1.99%
2019 to 2035

13,196

15,539
2.00% to  2.99%
2024 to 2033

19,689

19,668
3.00% to  3.99%
2019 to 2056

475,904

381,944
4.00% to  4.99%
2020 to 2054

556,681

487,318
5.00% to  5.99%
2019 to 2043

205,703

213,078
6.00% to  6.99%
2017 to 2036

44,000

52,985
7.00% to  7.99%
2022 to 2027

32,521

33,066
8.00% to  8.99%
2021 to 2025

6,214

6,565
9.00% to  9.99%
2018 to 2026

25,700

26,400
10.00% to 10.99%
2018

6,000

6,000

1,389,804

1,247,224

Notes payable to bank under revolving credit agreement, variable rate, due 2021

49,000

25,000
Unsecured notes payable:

Bank notes at 1.975% and 2.48% due 2018 and 2019

100,000

100,000
Notes ranging from 3.01% to 3.59% due 2027 through 2041

245,000

245,000
Notes ranging from 4.62% to 4.87%, due 2018 through 2024

122,800

133,600
Notes ranging from 5.20% to 5.95%, due 2018 through 2037

152,427

159,809
Total long-term debt

2,059,031

1,910,633

Current portion of long-term debt

84,704

150,671
Long-term debt, excluding current portion

1,974,327

1,759,962
Less:  debt issuance costs

21,854

22,357
Long-term debt, excluding current portion, net of debt issuance costs

1,952,473

1,737,605

Total capitalization

$
3,890,738

$
3,587,673

See notes to consolidated financial statements beginning on page 9 of this report.


	June 30,		December 31,
Liabilities and Equity	2022		2021
Stockholders' equity:
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 265,415,337 and 256,102,388 as of June 30, 2022 and December 31, 2021	$	132,707	$	128,050
Capital in excess of par value		3,715,975		3,705,814
Retained earnings		1,577,442		1,434,201
Treasury stock, at cost, 3,244,664 and 3,234,765 shares as of June 30, 2022 and December 31, 2021		(84,092)		(83,615)
Total stockholders' equity		5,342,032		5,184,450

Long-term debt, excluding current portion		6,135,390		5,815,211
Less: debt issuance costs		47,654		35,707
Long-term debt, excluding current portion, net of debt issuance costs		6,087,736		5,779,504
Commitments and contingencies (See Note 13)

Current liabilities:
Current portion of long-term debt		120,931		132,146
Loans payable		4,703		65,000
Accounts payable		194,105		192,932
Book overdraft		20,659		81,722
Accrued interest		43,384		40,815
Accrued taxes		34,457		37,924
Regulatory liabilities		1,878		384
Other accrued liabilities		124,008		124,140
Total current liabilities		544,125		675,063

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		1,511,182		1,406,537
Customers' advances for construction		109,457		103,619
Regulatory liabilities		755,651		769,617
Asset retirement obligations		1,268		1,256
Operating lease liabilities		41,736		48,230
Pension and other postretirement benefit liabilities		28,698		50,226
Other		28,328		43,666
Total deferred credits and other liabilities		2,476,320		2,423,151

Contributions in aid of construction		595,951		596,110
Total liabilities and equity	$	15,046,164	$	14,658,278

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

~~CONSOLIDATED STATEMENT OF EQUITY~~

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Accumulated

Capital in

Other

Common

Excess of

Retained

Treasury

Comprehensive

Stock

Par Value

Earnings

Stock

Income

Total
Balance at December 31, 2016

$
90,155

$
797,513

$
1,032,844

$
(71,113)

$
669

$
1,850,068
Net income

-

-

186,265

-

-

186,265
Other comprehensive income, net of income tax of $73

-

-

-

-

137

137
Dividends

-

-

(104,286)

-

-

(104,286)
Sale of stock (34,814 shares)

17

1,067

-

-

-

1,084
Repurchase of stock (68,004 shares)

-

-

-

(2,116)

-

(2,116)
Equity compensation plan (165,442) shares)

83

(83)

-

-

-

-
Exercise of stock options (157,621) shares)

79

2,524

-

-

-

2,603
Stock-based compensation

-

4,379

(204)

-

-

4,175
Cumulative effect of change in accounting principle - windfall tax benefit

-

-

982

-

-

982
Other

-

(647)

-

-

-

(647)
Balance at September 30, 2017

$
90,334

$
804,753

$
1,115,601

$
(73,229)

$
806

$
1,938,265

Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - windfall tax benefit
See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

CONSOLIDATED STATEMENTS OF ~~CASH FLOW~~ OPERATIONS AND COMPREHENSIVE INCOME

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Nine Months Ended

September 30,

2017

2016
Cash flows from operating activities:

Net income

$
186,265

$
184,533
Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and amortization

101,866

99,012
Deferred income taxes

9,774

15,345
Provision for doubtful accounts

3,476

3,533
Stock-based compensation

4,379

3,642
Loss (gain) on sale of utility system and market-based business unit

324

(1,824)
Gain on sale of other assets

(322)

(390)
Net change in receivables, inventory and prepayments

(13,550)

(15,235)
Net change in payables, accrued interest, accrued taxes and other accrued liabilities

3,705

(241)
Pension and other postretirement benefits contributions

(15,421)

(8,145)
Other

1,565

8,404
Net cash flows from operating activities

282,061

288,634
Cash flows from investing activities:

Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $2,533 and $1,626

(337,731)

(270,019)
Acquisitions of utility systems and other, net

(5,860)

(5,626)
Net proceeds from the sale of utility system and other assets

1,144

6,545
Other

1,448

(32)
Net cash flows used in investing activities

(340,999)

(269,132)
Cash flows from financing activities:

Customers' advances and contributions in aid of construction

5,648

6,006
Repayments of customers' advances

(3,519)

(1,882)
Net proceeds of short-term debt

14,455

31,269
Proceeds from long-term debt

441,294

234,288
Repayments of long-term debt

(293,270)

(181,359)
Change in cash overdraft position

(1,932)

(12,586)
Proceeds from issuing common stock

1,084

1,029
Proceeds from exercised stock options

2,603

3,836
Stock-based compensation windfall tax benefits

-

1,263
Repurchase of common stock

(2,116)

(2,905)
Dividends paid on common stock

(104,286)

(96,994)
Other

(647)

(984)
Net cash flows from (used in) financing activities

59,314

(19,019)
Net change in cash and cash equivalents

376

483
Cash and cash equivalents at beginning of period

3,763

3,229
Cash and cash equivalents at end of period

$
4,139

$
3,712

Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for

$
35,145

$
23,548
Non-cash customer advances and contributions in aid of construction

31,615

20,065

Refer to Note 3 - Acquisitions for a description of non-cash activities

See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

(In thousands of dollars, except per share amounts)

(UNAUDITED)


	Three Months Ended
	June 30,
	2022		2021
Operating revenues	$	448,756	$	397,032

Operating expenses:
Operations and maintenance		134,981		127,515
Purchased gas		75,143		44,897
Depreciation		77,425		72,764
Amortization		1,751		1,408
Taxes other than income taxes		21,720		21,120
Total operating expenses		311,020		267,704

Operating income		137,736		129,328

Other expense (income):
Interest expense		55,221		52,036
Interest income		(824)		(338)
Allowance for funds used during construction		(6,151)		(4,906)
Gain on sale of other assets		(478)		(223)
Other		(423)		(1,941)
Income before income taxes		90,391		84,700
Provision for income taxes		8,100		3,786
Net income	$	82,291	$	80,914

Comprehensive income	$	82,291	$	80,914

Net income per common share:
Basic	$	0.31	$	0.32
Diluted	$	0.31	$	0.32

Average common shares outstanding during the period:
Basic		262,099		254,769
Diluted		262,558		255,441

The accompanying notes are an integral part of these consolidated financial statements

‎

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands of dollars, except per share amounts)

(UNAUDITED)



	Six Months Ended
	June 30,
	2022		2021
Operating revenues	$	1,148,031	$	980,597

Operating expenses:
Operations and maintenance		277,562		252,590
Purchased gas		302,855		177,050
Depreciation		155,303		144,401
Amortization		2,219		2,715
Taxes other than income taxes		44,727		42,161
Total operating expenses		782,666		618,917

Operating income		365,365		361,680

Other expense (income):
Interest expense		108,857		102,805
Interest income		(1,433)		(725)
Allowance for funds used during construction		(11,990)		(7,840)
Gain on sale of other assets		(478)		(303)
Other		(2,125)		(5,412)
Income before income taxes		272,534		273,155
Provision for income taxes (benefit)		(9,133)		8,552
Net income	$	281,667	$	264,603

Comprehensive income	$	281,667	$	264,603

Net income per common share:
Basic	$	1.08	$	1.04
Diluted	$	1.07	$	1.04

Average common shares outstanding during the period:
Basic		262,026		254,667
Diluted		262,545		255,268

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITALIZATION

(In thousands of dollars, except per share amounts)

(UNAUDITED)



		June 30,		December 31,
		2022		2021
Stockholders' equity:
Common stock, $0.50 par value		$	132,707	$	128,050
Capital in excess of par value			3,715,975		3,705,814
Retained earnings			1,577,442		1,434,201
Treasury stock, at cost			(84,092)		(83,615)
Total stockholders' equity			5,342,032		5,184,450

Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range	Maturity Date Range
0.00% to 0.99%	2023 to 2033		2,029		2,341
1.00% to 1.99%	2023 to 2039		8,892		9,341
2.00% to 2.99%	2022 to 2058		311,075		312,751
3.00% to 3.99%	2022 to 2056		1,355,474		1,359,284
4.00% to 4.99%	2023 to 2059		1,282,991		1,286,024
5.00% to 5.99%	2023 to 2043		15,715		16,119
6.00% to 6.99%	2022 to 2036		32,417		32,475
7.00% to 7.99%	2022 to 2027		28,504		28,980
8.00% to 8.99%	2025 to 2025		2,424		2,772
9.00% to 9.99%	2026 to 2026		11,800		11,800
			3,051,321		3,061,887

Notes payable to bank under revolving credit agreement, variable rate, due 2023			140,000		300,000
Unsecured notes payable:
Amortizing notes at 3.00% due 2022			-		20,470
Notes at 2.40% due 2031			400,000		400,000
Notes at 2.704% due 2030			500,000		500,000
Notes ranging from 3.01% to 3.59% due 2029 through 2050			1,125,000		1,125,000
Notes at 4.28%, due 2049			500,000		500,000
Notes at 5.30%, due 2052			500,000		-
Notes ranging from 5.64% to 5.95%, due 2022 through 2034			40,000		40,000
Total long-term debt			6,256,321		5,947,357

Current portion of long-term debt			120,931		132,146
Long-term debt, excluding current portion			6,135,390		5,815,211
Less: debt issuance costs			47,654		35,707
Long-term debt, excluding current portion, net of debt issuance costs			6,087,736		5,779,504

Total capitalization		$	11,429,768	$	10,963,954

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



			Capital in
	Common		Excess of		Retained		Treasury
	Stock		Par Value		Earnings		Stock		Total
Balance at December 31, 2021	$	128,050	$	3,705,814	$	1,434,201	$	(83,615)	$	5,184,450
Net income		-		-		199,376		-		199,376
Dividends of March 1, 2022 ($0.2682 per share)		-		-		(67,821)		-		(67,821)
Dividends of June 1, 2022 ($0.2682 per share)		-		-		(67,863)		-		(67,863)
Issuance of common stock under dividend reinvestment plan (93,833 shares)		47		4,070		-		-		4,117
Repurchase of stock (21,290 shares)		-		-		-		(1,012)		(1,012)
Equity compensation plan (57,052 shares)		29		(29)		-		-		-
Exercise of stock options (28,516 shares)		14		998		-		-		1,012
Stock-based compensation		-		2,716		(136)		-		2,580
Other		-		(9)		-		270		261
Balance at March 31, 2022	$	128,140	$	3,713,560	$	1,497,757	$	(84,357)	$	5,255,100
Net income		-		-		82,291		-		82,291
Dividends of June 1, 2022 ($0.2682 per share)		-		-		(2,424)		-		(2,424)
Issuance of common stock from stock purchase contracts (9,029,461 shares)		4,515		(4,515)		-		-		-
Issuance of common stock under dividend reinvestment plan (92,889 shares)		47		4,007		-		-		4,054
Repurchase of stock (305 shares)		-		-		-		(15)		(15)
Equity compensation plan (4,736 shares)		2		(2)		-		-		-
Exercise of stock options (6,462 shares)		3		224		-		-		227
Stock-based compensation		-		2,725		(182)		-		2,543
Other		-		(24)		-		280		256
Balance at June 30, 2022	$	132,707	$	3,715,975	$	1,577,442	$	(84,092)	$	5,342,032

The accompanying notes are an integral part of these consolidated financial statements

‎

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



			Capital in
	Common		Excess of		Retained		Treasury
	Stock		Par Value		Earnings		Stock			Total
Balance at December 31, 2020	$	124,285	$	3,379,057	$	1,261,862	$	(81,327)	$	4,683,877
Net income		-		-		183,689		-		183,689
Dividends of March 1, 2021 ($0.2507 per share)		-		-		(61,520)		-		(61,520)
Issuance of common stock under dividend reinvestment plan (98,904 shares)		49		4,112		-		-		4,161
Repurchase of stock (76,105 shares)		-		-		-		(3,262)		(3,262)
Equity compensation plan (192,407 shares)		97		(97)		-		-		-
Exercise of stock options (20,201 shares)		10		704		-		-		714
Stock-based compensation		-		2,631		(174)		-		2,457
Other		-		(31)		-		256		225
Balance at March 31, 2021	$	124,441	$	3,386,376	$	1,383,857	$	(84,333)	$	4,810,341
Net income		-		-		80,914		-		80,914
Dividends of June 1, 2021 ($0.2507 per share)		-		-		(61,584)		-		(61,584)
Issuance of common stock under dividend reinvestment plan (90,654 shares)		46		4,049		-		-		4,095
Repurchase of stock (364 shares)		-		-		-		(17)		(17)
Equity compensation plan (4,874 shares)		2		(2)		-		-		-
Exercise of stock options (22,786 shares)		11		781		-		-		792
Stock-based compensation		-		2,316		(146)		-		2,170
Other		-		(148)		-		252		104
Balance at June 30, 2021	$	124,500	$	3,393,372	$	1,403,041	$	(84,098)	$	4,836,815

The accompanying notes are an integral part of these consolidated financial statements

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands of dollars)

(UNAUDITED)


	Six Months Ended
	June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	281,667	$	264,603
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		157,522		147,116
Deferred income taxes		(13,810)		19,594
Provision for doubtful accounts		12,793		16,511
Stock-based compensation		5,471		5,053
Gain on sale of other assets		(478)		(808)
Net change in receivables, inventory and prepayments		6,742		55,561
Net change in payables, accrued interest, accrued taxes and other accrued liabilities		(4,222)		(78,587)
Pension and other postretirement benefits contributions		(14,564)		(12,971)
Other		(14,819)		(3,204)
Net cash flows from operating activities		416,302		412,868
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $3,013 and $1,393		(424,645)		(404,557)
Acquisitions of utility systems, net		(50,010)		-
Net proceeds from the sale of other assets		485		960
Other		157		(184)
Net cash flows used in investing activities		(474,013)		(403,781)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction		5,796		8,988
Repayments of customers' advances		(901)		(1,961)
Net repayments of short-term debt		(60,297)		(6,349)
Proceeds from long-term debt		770,376		760,176
Repayments of long-term debt		(464,585)		(619,477)
Change in cash overdraft position		(61,061)		(30,595)
Proceeds from issuance of common stock under dividend reinvestment plan		8,171		8,256
Proceeds from exercised stock options		1,239		1,506
Repurchase of common stock		(1,027)		(3,279)
Dividends paid on common stock		(138,108)		(123,104)
Other		517		329
Net cash flows from (used in) financing activities		60,120		(5,510)
Net change in cash and cash equivalents		2,409		3,577
Cash and cash equivalents at beginning of period		10,567		4,827
Cash and cash equivalents at end of period	$	12,976	$	8,404

Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for	$	94,473	$	74,752
Non-cash customer advances and contributions in aid of construction		8,789		17,651

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated balance sheets and statements of capitalization of ~~Aqua America,~~Essential Utilities, Inc. and subsidiaries ~~(the~~(collectively, the “Company”, “we”, “us” or “our”) at ~~September~~June 30, ~~2017,~~2022, the unaudited consolidated statements of ~~net income~~operations and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021, and the consolidated statements of cash ~~flow for the nine months ended September 30, 2017~~flows and ~~2016, and the consolidated statement~~ of equity for the ~~nine~~six months ended ~~September~~June 30, ~~2017 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are,~~2022 and 2021, have been prepared in accordance with accounting principles generally accepted in the ~~opinion of management, necessary to present a fair statement of its consolidated financial position, consolidated changes in equity, consolidated results of operations,~~United States (“GAAP”) for interim reporting and ~~consolidated cash flow~~the rules and regulations for ~~the periods presented.~~reporting on Quarterly Reports on Form 10-Q. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016. The~~2021. Interim results ~~of operations for interim periods may~~are not benecessarily indicative of results for a full year. In the ~~results that may be expected for the entire year. The December 31, 2016~~opinion of management, all adjustments, consisting of only recurring accruals, which are necessary to present a fair statement of its consolidated balance sheet data presented herein was derived from the Company’s December 31, 2016 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation in thesheets, consolidated statements of equity, consolidated statements of operations and comprehensive income, and consolidated cash ~~flows:~~

~~pension and other postretirement benefit contributions, and~~

as a result of the early adoption, in the third quarter of 2017, of the Financial Accounting Standards Board’s (“FASB”) accounting guidance on the classification of certain cash receipts and cash payments, the presentation of debt extinguishment costs (refer to Note 15 – ~~Recent Accounting Pronouncements~~).

flow for the periods presented, have been made.

The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its consolidated balance sheets, the revenues and expenses in its consolidated statements of ~~net~~operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.

In the preparation of these financial statements and related disclosures, we have assessed the impact that the COVID-19 pandemic and the global geopolitical uncertainties (“major events”) has had on our estimates, assumptions, forecasts, and accounting policies. Because of the essential nature of our business, we do not believe these major events had a material impact on our estimates, assumptions and forecasts used in the preparation of our financial statements, although we continue to monitor this closely. As these major events are continuing to evolve, future events and effects related to these major events cannot be determined with precision, and actual results could significantly differ from our estimates or forecasts.

There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2021.

910

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 2 – ~~Goodwill~~Revenue Recognition

The following table presents our revenues disaggregated by major source and customer class:


	Three Months Ended								Three Months Ended
	June 30, 2022								June 30, 2021
	Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues		Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues
Revenues from contracts with customers:
Residential	$	149,542		30,653		95,942		-	$	144,415	$	24,312	$	83,760	$	-
Commercial		41,025		6,973		18,853		-		37,967		5,268		14,850		-
Fire protection		9,547		-		-		-		8,919		-		-		-
Industrial		7,604		432		957		-		7,747		410		521		-
Gas transportation & storage		-		-		40,573		-		-		-		37,789		-
Other water		15,899		-		-		-		12,714		-		-		-
Other wastewater		-		3,507		-		-		-		2,564		-		-
Other utility		-		-		11,840		3,325		-		-		5,971		3,489
Revenues from contracts with customers		223,617		41,565		168,165		3,325		211,762		32,554		142,891		3,489
Alternative revenue program		1,109		(161)		176		-		421		(50)		(5)		-
Other and eliminations		(545)		-		-		11,505		-		-		-		5,970
Consolidated	$	224,181	$	41,404	$	168,341	$	14,830	$	212,183	$	32,504	$	142,886	$	9,459

	Six Months Ended								Six Months Ended
	June 30, 2022								June 30, 2021
	Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues		Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues
Revenues from contracts with customers:
Residential	$	280,830	$	57,148		381,048	$	-	$	277,272	$	48,673	$	297,953	$	-
Commercial		76,145		13,038		75,893		-		71,155		10,263		55,871		-
Fire protection		18,740		-		-		-		17,964		-		-		-
Industrial		14,785		776		2,799		-		14,736		854		1,478		-
Gas transportation & storage		-		-		119,747		-		-		-		115,593		-
Other water		33,250		-		-		-		23,157		-		-		-
Other wastewater		-		6,005		-		-		-		4,314		-		-
Other utility		-		-		35,066		6,240		-		-		15,151		7,315
Revenues from contracts with customers		423,750		76,967		614,553		6,240		404,284		64,104		486,046		7,315
Alternative revenue program		1,724		(188)		-		-		830		(4)		206		-
Other and eliminations		(545)		-		-		25,530		-		-		-		17,816
Consolidated	$	424,929	$	76,779	$	614,553	$	31,770	$	405,114	$	64,100	$	486,252	$	25,131

Note 3 – Acquisitions

Water and Wastewater Utility Acquisitions - Completed

In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves approximately 11,000 customer connections in Lower Makefield, Falls and Middletown townships, and Yardley Borough, Bucks County, Pennsylvania, for a cash purchase price of $53,000.

In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves 992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility systems were $4,000 and $32,100, respectively.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The purchase price allocation for these acquisitions consisted primarily of acquired property, plant and equipment.

The pro forma effect of the utility systems acquired is not material either individually or collectively to the Company’s results of operations.

Water and Wastewater Utility Acquisitions – Pending Completion

In July 2022, the Company’s subsidiary, Aqua Pennsylvania Wastewater, was granted a one-year exclusivity agreement by the board of the Bucks County Water and Sewer Authority (“BCWSA”) regarding the sale of the county’s wastewater assets. Aqua Pennsylvania Wastewater made an offer to purchase the BCWSA’s wastewater assets for a purchase price of $885,000 plus adjustments for additional utility assets acquired by BCWSA, and capital expenditures prior to closing. In addition, an agreement is proposed where Aqua Pennsylvania Wastewater will continue to make payments to the seller after closing to acquire additional wastewater treatment capacity as required by customer growth over time. The award is conditioned upon several items, including a final vote by the BCWSA and entering into a definitive agreement in which Aqua will buy and BCWSA will sell the wastewater assets.

In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern Oaks Water System, which serves approximately 740 customers for $3,300.In October 2021, the Company entered into a purchase agreement to acquire the wastewater utility assets of the City of Beaver Falls, Pennsylvania which consists of approximately 7,600 customers for $41,250. In July 2021, the Company entered into a purchase agreement to acquire the water utility assets of Shenandoah Borough, Pennsylvania which consists of approximately 2,930 customers for $12,000. In April 2021, the Company entered into a purchase agreement to acquire certain water or wastewater utility assets of Oak Brook, Illinois which consists of approximately 4,000 customers for $12,500. In January 2021, the Company entered into purchase agreements to acquire, in separate transactions, the wastewater utility system assets of East Whiteland Township, Pennsylvania and Willistown Township, Pennsylvania which consist of approximately 10,500 customers for $72,400.

The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are secured. The closings of our acquisitions of East Whiteland Township and Willistown Township are expected to occur during the third quarter of 2022, while the Oak Brook acquisition is expected to occur during the fourth quarter of 2022. The closings of our Shenandoah Borough, Beaver Falls, and Southern Oaks acquisitions are expected to occur in the first half of 2023. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

DELCORA Purchase Agreement

In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000 customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In May 2020, Delaware County, Pennsylvania filed a lawsuit alleging that DELCORA does not have the legal authority to establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between DELCORA and the Company; (2) the County cannot terminate DELCORA prior to the closing of the transaction; and (3) the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of Pennsylvania. On March 3, 2022, the Commonwealth Court issued a decision finding that Delaware County can dissolve the Authority if it so chooses, but the purchase agreement must be upheld regardless of who is operating the system. The case was remanded back to the trial court for the entry of an order consistent with the Commonwealth Court’s opinion.

The administrative law judges in the regulatory approval process recommended that the Company’s application be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge (“ALJ”) and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was also appealed to the Commonwealth Court by Delaware County, and a decision is expected in the next several months.

After the PUC issued the 2021 Order, on April 16, 2021, the administrative law judge issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a letter notifying the PUC of the March 3, 2022 Commonwealth Court decision and requested that the PUC move forward with processing the application. Several parties responded to the Company’s letter and referenced the issues in the second appeal before Commonwealth Court regarding the 2021 Order. On July 14, 2022, the Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the proceeding.

The purchase price for this pending acquisition is subject to certain adjustments at closing, and is subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of this acquisition by the issuance of common stock and by utilizing our revolving credit facility until permanent debt is secured. Closing of our acquisition of DELCORA is expected to occur in late 2022 or early 2023, subject to the timing of the regulatory approval process and Delaware County’s on-going litigation.
‎

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 4 – Goodwill

The following table summarizes the changes in the Company’s goodwill, by business segment:



	Regulated Water		Regulated Natural Gas		Other		Consolidated
Balance at December 31, 2021	$	58,527	$	2,277,447	$	4,841	$	2,340,815
Reclassification to utility plant acquisition adjustment		(23)		-		-		(23)
Balance at June 30, 2022	$	58,504	$	2,277,447	$	4,841	$	2,340,792

Regulated

Segment

Other

Consolidated
Balance at December 31, 2016

$
37,367

$
4,841

$
42,208
Goodwill acquired

72

-

72
Reclassification to utility plant acquisition adjustment

(50)

-

(50)
Balance at September 30, 2017

$
37,389

$
4,841

$
42,230

The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with some acquisitions upon achieving specific objectives.

~~Goodwill is~~

Note 5 – Capitalization

Forward Equity Sale

In August 2020, the Company entered into a forward equity sale agreement for 6,700,000 shares of common stock with a third party (the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser borrowed an equal number of shares of the Company’s common stock from stock lenders and sold the borrowed shares to the public. The Company did not ~~amortized but is tested~~receive any proceeds from the sale of its common stock by the forward purchaser until settlement of the shares underlying the forward equity sale agreement. The actual proceeds to be received by the Company would have varied depending upon the settlement date, the number of shares designated for ~~impairment annually, or more often, if circumstances indicate~~settlement on that settlement date, and the method of settlement. The forward equity sale agreement was accounted for as an equity instrument and was recorded at a ~~possible impairment may exist, to determine whether it is more likely than not that the~~ fair value of ~~a reporting unit is less than its carrying amount. When testing goodwill for impairment,~~$0 at inception. The fair value was not adjusted as the Company ~~may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events. Alternatively,~~continued to meet the accounting requirements for equity instruments.

On August 9, 2021, the Company ~~may bypass this qualitative assessment for some of its reporting units and perform a quantitative goodwill impairment test~~settled the forward equity sale agreement in full by ~~determining the fair value of a reporting unit based on a discounted cash flow analysis.~~physical share settlement. The Company ~~tested~~issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74 per share. Pursuant to the ~~goodwill attributable~~agreement, the forward price was computed based upon the initial forward price of $46.00 per share, adjusted for a floating interest rate factor equal to ~~each of its reporting units for impairment as of July 31, 2017, in conjunction with~~a specified daily rate less a spread and scheduled dividends during the timing of its annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that noneterm of the ~~Company’s goodwill was impaired.~~agreement. The Company used the proceeds received upon settlement of the forward equity sale agreement to fund general corporate purposes, including for water and wastewater utility acquisitions, working capital and capital expenditures. The forward equity sale agreement has now been completely settled, and there are no additional shares subject to the forward equity sale agreement.

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 3 –~~ ~~Acquisitions~~

Tangible Equity Units

~~During the first nine months of 2017,~~

On April 23, 2019, the Company ~~completed four acquisitions~~issued $690,000, less expenses of ~~water and wastewater utility systems in various states adding 1,003 customers. The total purchase price~~$16,358, of ~~these utility systems consisted~~its tangible equity units (the “Units”), with a stated amount of $5,860 in cash, which resulted in $72 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.

As$50.00 per unit. This issuance was part of the ~~Company’s growth-through-acquisition strategy,~~permanent financing to close the Peoples Gas Acquisition. Each Unit consisted of a prepaid stock purchase contract and an amortizing note, each issued by the Company. The amortizing notes had an initial principal amount of $8.62909, or $119,081 in aggregate, and yielded interest at a rate of 3.00% per year, and paid equal quarterly per unit cash installments of $0.75 per amortizing note (except for the July 30, 2019 installment payment, which was $0.80833 per amortizing note), that constituted a payment of interest and a partial repayment of principal. This cash payment in the aggregate was equivalent to 6.00% per year with respect to each $50.00 stated amount of the Units. The amortizing notes represented unsecured senior obligations of the Company.

Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date, and, in exchange, the Company ~~has entered into~~issued shares of its common stock. During April 2022, 981,919 stock purchase ~~agreements to acquire~~contracts were early settled by the water or wastewater utility system assets of five municipalities for a total combined purchase price in cash of $145,700. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and is subject to regulatory approvals. Closing for these acquisitions are expected to occur by mid-year 2018, which is subject to the timingholders of the ~~regulatory approval process. These acquisitions will add approximately 14,900 customers~~contracts, resulting in ~~two of the states that the Company operates in.~~

Pursuant to its strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in Pennsylvania. The total purchase price for the utility system was $16,750, which consisted of the issuance of ~~439,943~~1,166,107 shares of the Company’s common stock. On May 2, 2022, the remaining 6,621,315 stock purchase contracts were each mandatorily settled for 1.18758 shares of the Company’s common stock, and ~~$3,905~~ in cash. The purchase price allocation for this acquisition consisted primarily of acquired property, plant and equipment of $25,167, contributions in aid of construction of $16,565, and goodwill of $8,622. Additionally, during 2016,the aggregate the Company ~~completed eighteen acquisitions~~issued 7,863,354 shares of ~~water and wastewater utility systems in various states adding 2,469 customers. The total purchase price of these utility systems consisted of $5,518 in cash,~~its common stock. Additionally, the final quarterly installment payment was made, which resulted in ~~$1,756 of goodwill being recorded. The pro forma effect~~the complete pay-off of the ~~businesses acquired is not material either individually or collectively~~amortizing notes.

Long-term Debt and Loans Payable

On June 30, 2022, the following debt amendments were executed: (1) Peoples Natural Gas Companies amended its 364-day revolving credit agreement primarily to increase the amount of ~~operations.~~ the facility from $100,000 to $300,000 and to update the termination date of the facility to June 29, 2023, and (2) Aqua Pennsylvania amended its 364-day revolving credit agreement primarily to update the termination date of the facility to June 29, 2023 to coincide with the term of the Peoples Natural Gas Companies’ facility.

~~Note 4~~ – ~~Assets Held for Sale~~

~~In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265 customers. This water system is reported as assets held for sale in~~On April 15, 2021, the Company’s ~~consolidated balance sheet.~~

~~In the second quarter of 2016, the Company decided to market for sale two business units that are reported within the Company’s market-based~~operating subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.

]

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

~~Note 5 –~~ ~~Capitalization~~

~~In October 2017, Aqua Pennsylvania~~Ohio, Inc., issued ~~$75,000~~$100,000 of first mortgage bonds, of which ~~$35,000~~$50,000 is due in ~~2054, $20,000~~2031 and $50,000 is due in ~~2055, and $20,000 is due in 2057~~2051, with interest rates of ~~4.06%, 4.07%,~~2.37% and ~~4.09%~~3.35%, respectively. The proceeds from these bonds were used for general corporate purposes and to repay existing ~~indebtedness and for general corporate purposes.~~

~~In July 2017, Aqua Illinois~~indebtedness. Further, on April 19, 2021, the Company issued ~~$100,000~~$400,000 of ~~first mortgage bonds consisting~~long-term debt, less expenses of $4,010, which is due in 2031, with an interest rate of 2.40%. The Company used the ~~following:~~

\

Amount
Interest Rate
Maturity
$25,000
3.64%
2032
$6,000
3.89%
2037
$15,000
3.90%
2038
$10,000
4.18%
2047
$22,000
4.22%
2049
$22,000
4.24%
2050

~~The~~ proceeds from ~~these bonds were~~this issuance to repay $50,000 of borrowings under the Aqua Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing ~~indebtedness and for general corporate purposes.~~ five year unsecured revolving credit agreement.

In July 2017, Aqua Pennsylvania issued $80,000 of first mortgage bonds, of which $40,000 is due in 2055 and $40,000 is due in 2057 with interest rates of 4.04% and 4.06%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

In January 2017, Aqua Pennsylvania issued $50,000 of first mortgage bonds, of which $10,000 is due in 2042 and $40,000 is due in 2044 with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

~~Note 6 –~~ ~~Fair Value of Financial Instruments~~

The Company follows the FASB’s accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

~~Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;~~

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

~~Level 3: inputs that are unobservable and significant to the fair value measurement.~~

1215

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 6 – Financial Instruments

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended September 30, 2017.

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the three and six months ended June 30, 2022 and 2021.

The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the carrying amount of the Company’s loans payable was ~~$20,990~~$4,703 and ~~$6,535,~~$65,000, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, is determined based on Level 1 methods and assumptions. As of June 30, 2022 and December 31, 2021, the carrying amounts of the Company's cash and cash equivalents was $12,976 and $10,567, respectively, which equates to their fair value. The Company’s assets underlying the deferred compensation ~~plan liability is~~and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the carrying amount of these securities was ~~$18,145~~$25,630 and ~~$17,072,~~$28,576, respectively, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.

Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net gain (loss) recognized during the period on equity securities	$	(459)	$	251	$	(737)	$	499
Less: net gain / loss recognized during the period on equity securities sold during the period		-		-		-		-
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	(459)	$	251	$	(737)	$	499

The ~~fair value of cash and cash equivalents, which~~net gain (loss) recognized on equity securities is ~~comprised of a money market fund, is determined based~~presented on the ~~net asset value per unit utilizing Level 2 methods~~consolidated statements of operations and ~~assumptions. As of September 30, 2017 and December 31, 2016,~~comprehensive income on the ~~carrying amounts of the Company's cash and cash equivalents was $4,139 and $3,763, respectively, which equates to their fair value.~~line item “Other.”

The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:

September 30,

December 31,

2017

2016
Carrying Amount

$
2,059,031

$
1,910,633
Estimated Fair Value

2,185,051

2,018,933

The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The Company’s customers’ advances for construction have a carrying value of ~~$107,715~~$109,457 as of ~~September~~June 30, ~~2017,~~2022, and ~~$91,843~~$103,619 as of December 31, ~~2016.~~2021. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future ~~rate increases.~~rates. Portions of these ~~non-interest bearing~~non-interest-bearing instruments are payable annually through ~~2027~~2032, and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the ~~non-interest bearing~~non-interest-bearing feature.

Note 7 – Net Income per Common Share

Basic net income per common share is based on the weighted average number of common shares ~~outstanding.~~outstanding and the weighted average minimum number of shares issued upon settlement of the stock purchase contracts issued under the tangible equity units. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

compensation isand shares issuable under the forward equity sale agreement (from the date the Company entered into the forward equity sale agreement to the settlement date) are included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation isand shares issuable under the forward equity sale agreement are calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based ~~compensation.~~compensation and settlement of the forward equity sale agreement. The treasury stock method assumes that the proceeds from stock-based compensation and settlement of the forward equity sale agreement are used to purchase the Company’s common stock at the average market price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:



	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	September 30,		September 30,		June 30,		June 30,
	2017	2016	2017	2016	2022	2021	2022	2021
Average common shares outstanding during the period for basic computation	177,660	177,336	177,583	177,243	262,099	254,769	262,026	254,667
Dilutive effect of employee stock-based compensation	464	481	520	538
Effect of dilutive securities:
Forward equity sale agreement					-	285	-	147
Tangible equity units					-	-	-	-
Employee stock-based compensation					459	387	519	454
Average common shares outstanding during the period for diluted computation	178,124	177,817	178,103	177,781	262,558	255,441	262,545	255,268

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The number of outstanding employee stock options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was 83,080 for the three and six months ended June 30, 2022. For the three and six months ended June 30, 2021, all of the Company’s outstanding employee stock options were included in the calculations of diluted net income per share as there were no anti-dilutive employee stock options. Additionally, the ~~calculated cost to exercise the stock options was less than the average market price~~dilutive effect of performance share units and restricted share units granted are included in the Company’s ~~common stock during these periods.~~calculation of diluted net income per share.

Note 8 – Stock-based Compensation

Under the Company’s ~~2009 Omnibus~~Amended and Restated Equity Compensation Plan ~~as amended as of February 27, 2014~~ (the ~~“2009 Plan”~~“Plan”)~~, as~~ approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, ~~(the “2004 Plan”),~~ stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The ~~2009~~ Plan authorizes 6,250,000 shares for issuance under the ~~plan.~~Plan. A maximum of 3,125,000 shares under the ~~2009~~ Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the ~~2009~~ Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the ~~2009~~ Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the ~~2009~~ Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the ~~2009~~ Plan. Awards to employees and consultants under the ~~2009~~ Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors. In the case of awards to non-employee directors, the Board of Directors makes such awards. At ~~September~~June 30, ~~2017, 3,741,526~~2022, 1,804,222 shares were still available for issuance under the ~~2009~~ Plan. NoNaN further grants may be made under the Company’s 2004 Equity Compensation Plan.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

Performance Share Units– A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the ~~three-year~~three year performance period specified in the grant, subject to exceptions through the respective vesting period, which is generally three years. Each grantee is granted a target award of PSUs and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation ~~costs~~expense for ~~stock-based compensation related to~~ PSUs:



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2022		2021		2022		2021
Stock-based compensation within operations and maintenance expenses	$	1,035	$	1,012	$	2,875	$	2,504	$	1,692	$	1,290	$	3,342	$	2,931
Income tax benefit		420		411		1,167		1,013		485		364		952		826

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes the PSU transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2022:



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Share Units	Fair Value		Share Units	Fair Value
Nonvested share units at beginning of period	476,896	$	27.96	355,384	$	42.19
Granted	125,202		30.79	160,245		42.31
Performance criteria adjustment	(64,398)		27.75
Forfeited	(16,306)		28.26	(18,150)		44.46
Share units vested in prior period and issued in current period	32,400		25.31
Share units issued	(125,999)		36.37
Nonvested share units at end of period	427,795	$	26.13	497,479		42.15

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes the RSU transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~ 2022:



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Stock Units	Fair Value		Stock Units	Fair Value
Nonvested stock units at beginning of period	109,273	$	28.48	193,687	$	43.76
Granted	41,293		30.37	71,376		45.10
Stock units vested and issued	(26,914)		26.18	(54,926)		36.76
Forfeited	(2,287)		30.52	(6,621)		44.77
Nonvested stock units at end of period	121,365	$	29.60	203,516		46.12

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Stock-based compensation within operations and maintenance expenses

$
73

$
-

$
177

$
-
Income tax benefit

43

15

167

249

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~



	Three Months Ended				Six Months Ended
	June 30,					June 30,
	2022		2021		2022		2021
Stock-based compensation within operations and maintenance expenses	$	141	$	90	$	241	$	301
Income tax benefit		41		26		69		86


	~~2017~~
~~Expected term (years)~~	~~5.45~~
~~Risk-free interest rate~~	~~2.01%~~
~~Expected volatility~~	~~17.7%~~
~~Dividend yield~~	~~2.51%~~
~~Grant date fair value per option~~	~~$ 4.07~~


	2022
Expected term (years)		5.48
Risk-free interest rate		1.92%
Expected volatility		26.50%
Dividend yield		2.37%
Grant date fair value per option	$	9.34

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

For the nine months ended September 30, 2016, there were no compensation costs for stock-based compensation related to stock options, as the previous stock option grant that occurred in 2010 became fully amortized in 2013. Additionally, there were no stock options granted during the nine months ended September 30, 2016.

The following table summarizes stock option transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2022:



		Weighted		Weighted				Weighted		Weighted
		Average		Average	Aggregate			Average		Average	Aggregate
		Exercise		Remaining	Intrinsic			Exercise		Remaining	Intrinsic
	Shares	Price		Life (years)	Value		Shares	Price		Life (years)	Value
Outstanding at beginning of period	427,335	$	15.55				813,492	$	35.37
Granted	120,127		30.47				84,296		45.19
Forfeited	(2,439)		30.47				(2,344)		41.78
Expired / Cancelled	(2,812)		14.26
Expired							(125)		35.94
Exercised	(157,621)		16.51				(34,978)		35.42
Outstanding at end of period	384,590	$	19.73	3.9	$	5,175	860,341	$	36.32	6.7	$	8,199

Exercisable at end of period	266,902	$	15.00	1.4	$	4,855	777,449	$	35.37	6.4	$	8,144


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Stock-based compensation within operations and maintenance expenses	$	13	$	12	$	25	$	106
Income tax benefit		3		4		7		31

1721

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes restricted stock transactions for the six months ended June 30, 2022:


	Number	Weighted
	of	Average
	Shares	Fair Value
Nonvested restricted stock at beginning of period	1,068	$	46.83
Granted	0		0
Vested	-		-
Nonvested restricted stock at end of period	1,068	$	46.83

The Company did 0t grant restricted stock for the six months ended June 30, 2022.

Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense ~~which~~that is equal to the fair market value of the stock on the grant date and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Stock-based compensation within operations and maintenance expenses	$	165	$	175	$	357	$	350
Income tax benefit		47		51		103		101

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Stock-based compensation within operations and maintenance expenses

$
150

$
131

$
412

$
375
Income tax benefit

62

54

171

155

The following table summarizes stock award transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2022:



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Stock Awards	Fair Value		Stock Awards	Fair Value
Nonvested stock awards at beginning of period	-	$	-	-	$	-
Granted	12,529		32.92	7,660		46.66
Vested	(12,529)		32.92	(7,660)		(46.66)
Nonvested stock awards at end of period	-	$	-	-		-

1822

Table of Contents

~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 9 – Pension Plans and Other Postretirement Benefits

The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan, and other postretirement benefit plans for certain of its employees.

The following tables provide the components of net periodic benefit (credit) cost for the Company’s pension and other postretirement benefit plans:


	Pension Benefits
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Service cost	$	707	$	876	$	1,414	$	1,953
Interest cost		3,202		3,255		6,403		6,316
Expected return on plan assets		(5,894)		(5,791)		(11,789)		(11,698)
Amortization of prior service cost		134		140		268		280
Amortization of actuarial loss		436		727		871		1,797
Net periodic benefit cost (credit)	$	(1,415)	$	(793)	$	(2,833)	$	(1,352)

	Other
	Postretirement Benefits
		Three Months Ended				Six Months Ended
		June 30,				June 30,
	2022		2021		2022		2021
Service cost	$	477	$	699	$	955	$	1,398
Interest cost		843		839		1,685		1,678
Expected return on plan assets		(1,126)		(1,039)		(2,251)		(2,078)
Amortization of prior service credit		-		(108)		-		(216)
Amortization of actuarial loss		(334)		55		(668)		110
Net periodic benefit cost	$	(140)	$	446	$	(279)	$	892

The net periodic benefit (credit) cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The ~~following tables provide~~Company presents the components of net periodic benefit ~~cost:~~

Pension Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
794

$
784

$
2,382

$
2,394
Interest cost

3,108

3,251

9,324

9,787
Expected return on plan assets

(4,270)

(4,215)

(12,810)

(12,696)
Amortization of prior service cost

145

145

435

435
Amortization of actuarial loss

2,001

1,797

6,003

5,354
Settlement charge

-

-

-

3,028
Special termination benefit charge

-

-

-

302
Net periodic benefit cost

$
1,778

$
1,762

$
5,334

$
8,604

Other

Postretirement Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
255

$
253

$
765

$
761
Interest cost

737

726

2,211

2,202
Expected return on plan assets

(647)

(645)

(1,941)

(2,001)
Amortization of prior service cost

(127)

(137)

(381)

(411)
Amortization of actuarial loss

291

220

873

707
Net periodic benefit cost

$
509

$
417

$
1,527

$
1,258

(credit) cost other than service cost in the consolidated statements of operations and comprehensive income on the line item “Other”.

~~Effective July 1, 2015, the Company added a permanent lump sum option~~

There were $14,564 cash contributions made to the form of benefit payments offered to participants of the qualified defined benefit pension plan and non-qualified retirement plans upon retirement or termination. During the first quarter of 2016, the lump sum payments paid to participants who elected this option for payments from the non-qualified retirement plans resulted in a settlement charge.

~~The Company made cash contributions of $15,421 to its~~ Pension Plan during the first six months of ~~2017, which completed the Company’s 2017 cash contributions.~~ 2022.

1923

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 10 – ~~Water~~Rate Activity

On May 16, 2022, the Company’s regulated water and ~~Wastewater Rates~~wastewater operating subsidiary in Pennsylvania, Aqua Pennsylvania, received an order from the Pennsylvania Public Utility Commission that allowed base rate increases that would increase total annual operating revenues by $69,251. New rates went into effect on May 19, 2022. At the time the rate order was received, the rates in effect also included $35,470 in Distribution System Improvement Charges (“DSIC”), which was 7.2% above prior base rates. Consequently, the aggregate base rates increased by $104,721 since the last base rate increase and DSIC was reset to 0.

On January 3, 2022, the Company’s natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in an increase of $5,238 in annual revenues, and new rates went into effect on January 4, 2022. On June 7, 2022, an additional $260 was approved and made effective by the Commission, resulting from a rehearing requested by the operating division.

On June 30, 2022, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North Carolina, filed an application with the North Carolina Utilities Commission designed to increase rates by $18,064 in the first year of new rates being implemented, then an additional $4,303 and $4,577 in the second and third years, respectively.

A base rate case is also underway for our water and wastewater utility operating divisions in Ohio which is expected to increase operating revenues by $5,483 annually based on a settlement agreement that remains subject to approval by the Public Utilities Commission of Ohio. New rates are expected to be effective in the third or fourth quarter of 2022.

During the first ~~nine~~six months of ~~2017,~~2022, the Company’s two other water utility operating divisions in ~~Indiana and~~ Ohio were granted base rate increases designed to increase total operating revenues on an annual basis by ~~$7,403.~~$1,378. Further, during the first ~~nine~~six months of ~~2017,~~2022, the ~~Company’s operating divisions in Illinois, New Jersey, and North Carolina~~Company received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by ~~$3,659.~~$6,789 in its water and wastewater utility operating divisions in Pennsylvania, North Carolina, and Illinois.

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 11 – Taxes Other than Income Taxes

The following table provides the components of taxes other than income taxes:



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2022		2021		2022		2021
Property	$	6,955	$	7,007	$	20,608	$	20,119	$	8,239	$	9,570	$	16,253	$	17,284
Gross receipts, excise and franchise		3,969		3,409		10,507		9,468		4,017		3,949		8,117		7,633
Payroll		2,066		2,140		7,322		7,775		4,778		4,718		11,439		11,474
Regulatory assessments		674		639		1,933		1,991		1,812		847		3,577		1,685
Pumping fees		1,526		1,442		3,820		3,501		1,947		1,464		3,323		2,590
Other		44		75		200		240		927		572		2,018		1,495
Total taxes other than income	$	15,234	$	14,712	$	44,390	$	43,094	$	21,720	$	21,120	$	44,727	$	42,161

2025

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table presents information about the Company’s reportable ~~segment:~~segments:



	Three Months Ended						Three Months Ended						Three Months Ended								Three Months Ended
	September 30, 2017						September 30, 2016						June 30, 2022								June 30, 2021
	Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated
Operating revenues	$	214,032	$	976	$	215,008	$	222,231	$	4,362	$	226,593	$	269,355	$	167,729	$	11,672	$	448,756	$	248,177	$	141,562	$	7,293	$	397,032
Operations and maintenance expense		70,772		(2,790)		67,982		73,013		6,799		79,812		92,815		44,907		(2,741)		134,981		77,801		52,334		(2,620)		127,515
Depreciation		34,533		(269)		34,264		34,025		(144)		33,881
Operating income (loss)		94,142		3,344		97,486		100,563		(2,764)		97,799
Interest expense, net		20,753		1,658		22,411		19,167		1,001		20,168
Purchased gas														-		63,392		11,751		75,143		-		39,788		5,109		44,897
Depreciation and amortization														50,260		29,131		(215)		79,176		45,546		28,121		505		74,172
Taxes other than income taxes														15,562		5,614		544		21,720		16,044		4,638		438		21,120
Operating income														110,718		24,685		2,333		137,736		108,786		16,681		3,861		129,328
Interest expense, net (a)														27,604		19,171		7,622		54,397		27,122		20,422		4,154		51,698
Allowance for funds used during construction		3,914		-		3,914		2,267		-		2,267		(5,347)		(804)		-		(6,151)		(4,438)		(468)		-		(4,906)
Income tax expense (benefit)		3,138		262		3,400		9,027		(616)		8,411
Other														(1,728)		10		817		(901)		(1,940)		(439)		215		(2,164)
Income before income taxes														90,189		6,308		(6,106)		90,391		88,042		(2,834)		(508)		84,700
Provision for income taxes (benefit)														13,847		(5,170)		(577)		8,100		9,193		(4,739)		(668)		3,786
Net income (loss)		74,208		2,017		76,225		74,681		(1,511)		73,170	$	76,342	$	11,478	$	(5,529)	$	82,291	$	78,849	$	1,905	$	160	$	80,914

	Nine Months Ended						Nine Months Ended						Six Months Ended								Six Months Ended
	September 30, 2017						September 30, 2016						June 30, 2022								June 30, 2021
	Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated
Operating revenues	$	602,341	$	3,872	$	606,213	$	606,323	$	16,753	$	623,076	$	508,553	$	612,912	$	26,566	$	1,148,031	$	476,530	$	484,677	$	19,390	$	980,597
Operations and maintenance expense		210,842		(2,879)		207,963		210,014		17,333		227,347		178,903		104,359		(5,700)		277,562		156,148		103,660		(7,218)		252,590
Depreciation		102,340		(832)		101,508		98,445		(800)		97,645
Purchased gas														-		280,698		22,157		302,855		-		162,676		14,374		177,050
Depreciation and amortization														98,976		58,835		(289)		157,522		90,684		55,711		721		147,116
Taxes other than income taxes														31,453		11,805		1,469		44,727		31,465		9,085		1,611		42,161
Operating income (loss)		246,361		5,633		251,994		255,431		(1,808)		253,623		199,221		157,215		8,929		365,365		198,233		153,545		9,902		361,680
Interest expense, net		60,277		4,847		65,124		57,061		3,075		60,136		55,159		39,823		12,442		107,424		53,582		37,719		10,779		102,080
Allowance for funds used during construction		10,570		-		10,570		6,446		-		6,446		(10,496)		(1,493)		(1)		(11,990)		(7,685)		(155)		-		(7,840)
Income tax expense (benefit)		12,243		(344)		11,899		18,610		(1,677)		16,933
Other														(3,673)		(434)		1,504		(2,603)		(3,369)		(867)		(1,479)		(5,715)
Income before income taxes														158,231		119,319		(5,016)		272,534		155,705		116,848		602		273,155
Provision for income taxes (benefit)														21,346		(31,645)		1,166		(9,133)		12,826		(4,307)		33		8,552
Net income (loss)		184,733		1,532		186,265		186,579		(2,046)		184,533	$	136,885	$	150,964	$	(6,182)	$	281,667	$	142,879	$	121,155	$	569	$	264,603
Capital expenditures		337,321		410		337,731		269,046		973		270,019	$	216,612	$	207,394	$	639	$	424,645	$	247,911	$	156,252	$	394	$	404,557

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 13 – Commitments and Contingencies

The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of ~~September~~June 30, ~~2017,~~2022, the aggregate amount of ~~$16,898~~$16,941 is accrued for loss contingencies and is reported in the Company’s consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses. While the final outcome of these loss contingencies cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of these matters are not expected to have a material adverse effect on the Company’s financial position, results of operations or

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

~~cash flows.~~ Further, the Company has insurance coverage for certain of these loss contingencies, and as of ~~September~~June 30, ~~2017,~~2022, estimates that approximately ~~$5,415~~$2,255 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other ~~assets.~~assets, net.

During a portion of 2019, the Company initiated a do not consume advisory for some of its water customers in one division served by the Company’s Illinois subsidiary. The do not consume advisory was lifted in 2019 and, in 2022, the water system was determined to be in compliance with the federal Lead and Copper Rule. During the second quarter of 2021, an immaterial amount was accrued for the portion of the fine or penalty that we determined to be probable and estimable of being incurred. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorney's fees, and "damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park, Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. The Company is vigorously defending against this claim. A claim for the expenses incurred has been submitted to the Company’s insurance carrier for potential recovery of a portion of these costs, and on August 3, 2020, the Company received $2,874 in insurance proceeds. The Company continues to assess the potential loss contingency on this matter. While the final outcome of this claim cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no other pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is the subject that are material or are expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled ~~$1,451~~$2,470 at ~~September~~June 30, ~~2017~~2022 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

~~Note 14 –~~ ~~Income Taxes~~

During the nine months ended September 30, 2017, the Company’s Federal net operating loss (“NOL”) carryforward decreased by $31,935. In addition, during the nine months ended September 30, 2017, the Company’s state NOL carryforward increased by $23,173. As of September 30, 2017, the balance of the Company’s Federal NOL was $81,208. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance. As of September 30, 2017, the balance of the Company’s gross state NOL was $600,358, a portion of which is offset by a valuation allowance because the Company does not believe the state NOLs are more likely than not to be realized. The Company’s Federal and state NOL carryforwards begin to expire in 2032 and 2023, respectively. The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $64,738 and $85,523, respectively. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $145,947 and $685,880 respectively. The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability.

In accordance with a 2012 settlement agreement with the Pennsylvania Public Utility Commission, Aqua Pennsylvania expenses, for tax purposes, qualifying utility asset improvement costs, which results in a substantial reduction in income tax expense and greater net income and cash flows. The Company’s effective income tax rate for the third quarter of 2017 and 2016 was 4.3% and 10.3%, respectively, and for the first nine months of 2017 and 2016 was 6.0% and 8.4%, respectively.

As of September 30, 2017 regulatory assets increased by $96,140, as compared to the beginning of the year, primarily due to the effect of additional tax deductions for certain qualifying infrastructure improvements, which results in differences between costs capitalized for book and deducted as an expense for tax purposes.

As of September 30, 2017, the total gross unrecognized tax benefit was $28,938, of which $23,700, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded for qualifying infrastructure improvements in Pennsylvania. At December 31, 2016, the Company had unrecognized tax benefits of $28,099.

Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities. Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. Management believes that an adequate provision has been made for any adjustments that may result from tax

2227

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~examinations. Although~~

Note 14 – Income Taxes

The Company’s effective tax rate was 9.0% and (3.4)% for the three and six months ended June 30, 2022, respectively. The Company’s effective tax rate was 4.5% and 3.1% for the three and six months ended June 30, 2021, respectively. The increase in the effective tax rate for the second quarter of the year is primarily attributed to a decrease in the amortization of certain regulatory liabilities associated with deferred taxes. The decrease in the effective tax rate for the first half of the year is primarily attributed to an increase in our income tax benefit associated with the tax deduction for qualifying infrastructure and the amortization of the customer surcredit tax repair catch-up adjustment during 2022 in our Regulated Natural Gas segment. The statutory Federal tax rate is 21% for the three and six months ended June 30, 2022 and 2021. For states with a corporate net income tax, the state corporate net income tax rates range from 2.5% to 9.99% for all periods presented. In determining its interim tax provision, the Company reflects its estimated permanent and flow-through tax differences for the taxable year.

The Company uses a method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania that allows a tax deduction for qualifying utility asset improvement costs. Consistent with the Company’s accounting for differences between book and tax expenditures in Pennsylvania in its other regulated subsidiaries, the Company uses the flow-through method to account for this timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made prior to the date of its acquisition in March 16, 2020 (“catch-up adjustment”) and recognized a regulatory liability for $160,655 for these income tax benefits.On May 6, 2021, the Pennsylvania Public Utility Commission approved a settlement order which stipulates, among other points, that the catch-up adjustment be provided by a surcredit to utility customers over a five-year period beginning August 2021, and the Company can continue to use flow-through accounting for the current tax repair benefit until its next base rate case. During the second quarter and the first six months of 2022, $4,751 and $17,238, respectively, of income tax ~~audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change~~benefits were amortized as refunds to ~~the total amount~~Peoples Natural Gas customers.

Table of ~~unrecognized income tax benefits within the next 12 months.~~Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 15 – Recent Accounting Pronouncements

Pronouncements to be adopted upon the effective date:

In ~~March 2017,~~October 2021, the FASB issued ~~updated~~ accounting guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reported as an employee cost within operating income, net of amounts capitalized.accounting for acquired revenue contracts with customers in a business combination. The guidance ~~requires~~specifies for all acquired revenue contracts, regardless of their timing of payment, the ~~bifurcation of net benefit cost.~~circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination, as well as how to measure those contract assets and contract liabilities. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. Theupdated accounting guidance is effective for ~~annual reporting periods~~fiscal years beginning after December 15, 2017, and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the service cost component of net benefit cost.2022 with early adoption permitted. The Company is evaluating the requirements of the updated guidance to determine the impact of ~~adoption, and does not believe it will have a material impact on its results of operations or financial position.~~ adoption.

~~In January 2017,~~Pronouncement adopted during the FASB issued updated accounting guidance that eliminates step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company has elected to early adopt the provisions of the updated guidance, for its annual impairment valuation performed in the third quarter of 2017, and the provisions of the updated guidance did not have an impact on its results of operations or financial position. year:

In August 2016, the FASB issued updated accounting guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company has elected to early adopt the provisions of the updated guidance, which resulted in the reclassification of $375 debt extinguishment costs, for the nine months ended September 30, 2016, from cash flows from operating to financing activities to conform to the new classification.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

In March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based payments, which includes several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available. On January 1, 2017, the Company adopted the updated guidance, prospectively, and recognized a previously unrecognized windfall tax benefit for stock-based compensation of $982 associated with the Company’s 2012 Federal net operating loss, which was recorded as an adjustment to deferred income taxes and retained earnings (refer to the presentation of “cumulative effect of change in accounting principle - windfall tax benefit” on the Company’s Consolidated Statement of Equity). Additionally, income tax benefits in excess of compensation costs or tax deficiencies for share-based compensation are now recorded to the Company’s income tax provision, instead of historically to stockholder’s equity, which impacts its effective tax rate. Lastly, all tax-related cash flows resulting from share-based payments are reported prospectively as operating activities on the statement of cash flows, a change from the historical requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities.

~~In February 2016,~~2020, the FASB issued updated accounting guidance on accounting for ~~leases, which requires lessees to establish a right-of-use asset~~convertible instruments and a lease liability on the balance sheet for all leases with terms longer than 12 months. For income statement purposes, leases will be classified as either operating or finance. Operating leases will resultcontracts in straight-line expense while finance leases will result in a front-loaded expense pattern. The updated accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption available. The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.

In January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income.an entity’s own equity. The updated guidance ~~is effective~~reduces the number of accounting models for ~~interim~~convertible debt and ~~annual periods beginning after December 31, 2017. The Company does not expect~~convertible preferred stock instruments and makes certain disclosure amendments intended to improve the ~~provisions of~~information provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception, which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Further, the standard changes the way certain convertible instruments are treated when calculating earnings per share. As permitted, we adopted this updated guidance toon January 1, 2022, which did not have a material impact on ~~its results of operations or~~our consolidated financial ~~position.~~ statements.

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~~AQUA AMERICA,~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

~~NOTES TO CONSOLIDATED~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL ~~STATEMENTS (continued)~~CONDITION AND RESULTS OF OPERATIONS

(In thousands of dollars, except per share amounts)

~~(UNAUDITED)~~

In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of recognition. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Additionally, the accounting for contributions in aid of construction may be impacted by the updated accounting guidance if the contributions are determined to be in scope. In July 2015, the FASB approved a one year deferral to the original effective date of this guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and based on current interpretations of the updated guidance believes that the impact of adoption will not result in a material change in the Company’s measurement of revenue and timing of recognition if contributions in aid of construction are determined to not be in scope. In 2017, the American Institute of Certified Public Accountants (AICPA) power and utility entities revenue recognition task force has determined that contributions in aid of construction are not in the scope of the new standard, and submitted its recommendation to the AICPA’s revenue recognition working group for approval. The Company plans to implement the updated guidance using the modified retrospective approach on January 1, 2018.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(In thousands of dollars, except per share amounts)~~

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among ~~others:~~others, the effects of the COVID-19 pandemic, the effects of regulation, abnormal weather, geopolitical forces, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2021 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such ~~report.~~report and those included under the captions “Risk Factors” and this Quarterly Report. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Essential Utilities, Inc. (formerly known as Aqua America, Inc.) (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or ~~wastewater~~natural gas services to ~~what we estimate to be almost three~~an estimated five million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and ~~Virginia. Our~~Kentucky under the Aqua and Peoples brands. One of our largest operating ~~subsidiary,~~subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of ~~people~~water or wastewater customers we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven ~~other~~additional states. ~~In addition,~~Additionally, pursuant to the Company’s growth strategy, commencing on March 16, 2020, with the completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based ~~activities are~~businesses, conducted through Aqua Infrastructure, LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. Aqua Resources provides water and wastewaterits non-regulated subsidiaries, that provide utility service ~~through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories; and offers, through a third party, water and wastewater~~ line ~~repair service and~~ protection solutions and repair services to ~~households.~~ households and gas marketing and production activities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

During 2016, we completed the sale of business units within Aqua Resources which provided liquid waste hauling and disposal services, and inspection, cleaning and repair of storm and sanitary wastewater lines. Additionally, in 2016, we decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.

~~Aqua America, Inc., which prior to its name change~~For many years, starting in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth-through-acquisition strategy focused on water and wastewater operations. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012. Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and ~~has~~have extended our regulated operations from southeastern Pennsylvania to include our current regulated utility operations in seven other states. ~~Currently,~~On March 16, 2020, the Company completed the Peoples Gas Acquisition, a natural gas distribution utility, marking its entrance into the regulated natural gas business. The Company seeks to acquire businesses in the U.S. regulated sector, ~~which includes~~focusing on water and wastewater ~~utilities and other regulated~~ utilities and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated utility businesses.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.

We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate the business safe and informed while supporting our customers and assuring the continuity of our operations. We continue to monitor the COVID-19 pandemic and take steps to mitigate the potential risks to our business. Since the start of the COVID-19 pandemic, we have implemented protective measures in the field, our plants, and within our offices, which we continuously update for changes in conditions and emerging trends and align with the recommendations of the Centers for Disease Control and Prevention and Federal, State and local health authorities. Our office employees returned to the workplace safely in 2021 and remain working in a hybrid flex schedule as positions allow. We also encouraged employees to become vaccinated. In addition, we are monitoring collections of customer utility accounts, risks present in our supply chain, and increased expenses for costs associated with workforce-related supplies, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the expense amounts included in general rates.

Inflationary Cost Environment

During the six months ended June 30, 2022, we experienced inflationary cost increases in our materials, labor and other operating costs, as well as supply chain pressures as a result of the COVID-19 pandemic and global uncertainties associated with the current conflict in Ukraine and sanctions imposed in response to this conflict. The price of natural gas substantially increased and resulted in the significant increase in the revenue and expenses of our Regulated Natural Gas business during the six month period ended June 30, 2022, as compared to the same period a year earlier. We expect these pressures to continue throughout 2022. We continue to review the adequacy of our rates as approved by public utility commissions in relation to the increasing cost of providing services and the inherent regulatory lag in adjusting those rates. We also continue to work with our suppliers to monitor and address the risks present in our supply chain. While we have experienced some delays in certain materials, we have been

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

able to adjust our purchasing procedures to secure and stock the necessary materials without materially impacting our operations or capital investment program.

The Company’s consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.

During the first ~~nine~~six months of ~~2017,~~2022, we ~~had $337,731~~incurred $424,645 of capital expenditures, expended ~~$5,860~~$50,010 for the acquisition of ~~water and~~a wastewater utility ~~systems,~~system, issued ~~$441,294~~$770,376 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of ~~$293,270.~~$524,882. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The issuance of long-term debt was ~~comprised principally of the~~for funds borrowed under our revolving credit facility and used for capital expenditures and general corporate purposes, including a municipal acquisition.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)



	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating revenues	$	448,756	$	397,032	$	1,148,031	$	980,597
Operations and maintenance expense	$	134,981	$	127,515	$	277,562	$	252,590
Purchased gas	$	75,143	$	44,897	$	302,855	$	177,050
Net income	$	82,291	$	80,914	$	281,667	$	264,603

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		30.1%		32.1%		24.2%		25.8%
Purchased gas		16.7%		11.3%		26.4%		18.1%
Depreciation and amortization		17.6%		18.7%		13.7%		15.0%
Taxes other than income taxes		4.8%		5.3%		3.9%		4.3%
Interest expense, net of interest income		12.1%		13.0%		9.4%		10.4%
Net income		18.3%		20.4%		24.5%		27.0%

Effective tax rate		9.0%		4.5%		-3.4%		3.1%

~~Analysis of Third Quarter of 2017 Compared to Third Quarter of 2016~~

Revenues decreased by $11,585 or 5.1%, primarily due to a decrease in customer water consumption, and a decrease in market-based activities revenue of $3,431 associated with the dispositions of business units, offset by an increase in water and wastewater rates and infrastructure rehabilitation surcharges of $1,759, and additional water and wastewater revenues of $505 associated with a larger customer base due to utility acquisitions.

Operations and maintenance expenses decreased by $11,830 or 14.8%, primarily due to a reduction in operating expenses for Aqua Resources of $4,249 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $2,928, a decrease in the Company’s self-insured employee medical benefit program expense of $2,425, and a decrease in postretirement benefits expense of $1,011. The decrease in water production costs is due to a reduction in purchased water expense of $1,907 due to replacing a purchased water supply coincident with the Company securing its own water supply source.

~~Depreciation expense increased by $383 or 1.1%, primarily due to the utility plant placed in service since September 30, 2016.~~

~~Interest expense increased by $2,243 or 11.1%, primarily due to an increase in average borrowings.~~

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Depreciation and amortization expense increased by $5,004 or 6.7% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

increase in insurance expense of $4,685, which includes the ~~third~~impact of a favorable insurance reserve adjustment of $2,426 during the first quarter of ~~2017~~2021;

increase in legal expenses of $1,280,

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment;

and,

expenses of $376, associated with remediating an advisory for ~~certain qualifying infrastructure improvements for Aqua Pennsylvania.~~ some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

offset by the decrease in bad debt expense of $3,718; and,

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~~Net income increased by $3,055 or 4.2%, primarily~~

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

~~Depreciation expense~~

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Water segment:


	Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021	2022		2021
Operating revenues	$	269,355	$	248,177	$	508,553	$	476,530
Operations and maintenance expense	$	92,815	$	77,801	$	178,903	$	156,148
Net income	$	76,342	$	78,849	$	136,885	$	142,879

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		34.5%		31.3%		35.2%		32.8%
Depreciation and amortization		18.7%		18.4%		19.5%		19.0%
Taxes other than income taxes		5.8%		6.5%		6.2%		6.6%
Interest expense, net of interest income		10.2%		10.9%		10.8%		11.2%
Net income		28.3%		31.8%		26.9%		30.0%

Effective tax rate		15.4%		10.4%		13.5%		8.2%

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

increase in legal expense of $1,266; and,

increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment

increase in production costs for water and wastewater operations of $3,001;

expenses of $376, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Natural Gas segment:


	Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021	2022			2021
Operating revenues	$	167,729	$	141,562	$	612,912	$	484,677
Operations and maintenance expense	$	44,907	$	52,334	$	104,359	$	103,660
Purchased gas	$	63,392	$	39,788	$	280,698	$	162,676
Net income	$	11,478	$	1,905	$	150,964	$	121,155

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		26.8%		37.0%		17.0%		21.4%
Purchased gas		37.8%		28.1%		45.8%		33.6%
Depreciation and amortization		17.4%		19.9%		9.6%		11.5%
Taxes other than income taxes		3.3%		3.3%		1.9%		1.9%
Interest expense, net of interest income		11.4%		14.4%		6.5%		7.8%
Net income		6.8%		1.3%		24.6%		25.0%

Effective tax rate		-82.0%		167.2%		-26.5%		-3.7%



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Operating revenues (GAAP)	$	167,729	$	141,562	$	612,912	$	484,677
Purchased gas		63,392		39,788		280,698		162,676
Gross margin (non-GAAP)	$	104,337		101,774	$	332,214	$	322,001

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

increase of $2,601 due to higher rates and other surcharges;

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

increase of $5,968 due to higher rates and other surcharges;

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Impact of Recent Accounting Pronouncements

We describe the impact of recent accounting pronouncements in Note 15, Recent Accounting Pronouncements, to the consolidated financial statements in this report.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. ~~There have been no significant changes in our exposure to market risks since December 31, 2016.~~ Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2021, filed March 1, 2022, for additional ~~information.~~information on market risks.

Item 4 – Controls and Procedures

~~(a)~~

~~Evaluation of Disclosure Controls and Procedures~~

(a)Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

~~(b)~~

~~Changes in Internal Control over Financial Reporting~~

~~No change~~(b)Changes in Internal Control over Financial Reporting

We have implemented a new enterprise resource planning (ERP) system for our Regulated Water business segment that enhances our business and financial processes and standardizes some of our information technology systems with our other segments. In connection with this new ERP implementation, we have updated our internal controls over financial reporting, as necessary, to accommodate modifications in our Regulated Water business processes and accounting procedures.

Except as described above, there were no changes in our internal control over financial reporting, ~~occurred~~ during ~~our most recent fiscal~~the quarter ended June 30, 2022 that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1 – Legal Proceedings

We are party to various legal ~~proceedings.~~proceedings in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A – Risk Factors

~~There have been no material changes to~~Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2021, under “Part 1, Item 1A – Risk Factors.”

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the Company’s purchases of its common stock for the quarter ended ~~September~~June 30, ~~2017:~~2022:

Issuer Purchases of Equity Securities

Total

Maximum

Number of

Number of

Shares

Shares

Purchased

that May

as Part of

Yet be

Total

Publicly

Purchased

Number

Average

Announced

Under the

of Shares

Price Paid

Plans or

Plan or
Period

Purchased (1)

per Share

Programs

Programs
July 1-31, 2017

196

$
33.46

-

-
August 1-31, 2017

513

$
33.86

-

-
September 1-30, 2017

-

$
-

-

-
Total

709

$
33.75

-

-


	Issuer Purchases of Equity Securities
				Total	Maximum
				Number of	Number of
				Shares	Shares
				Purchased	that May
				as Part of	Yet be
	Total			Publicly	Purchased
	Number	Average		Announced	Under the
	of Shares	Price Paid		Plans or	Plan or
Period	Purchased (1)	per Share		Programs	Programs
April 1 - 30, 2022	47	$	51.75	-	-
May 1 -31, 2022	66	$	49.31	-	-
June 1 - 30, 2022	192	$	47.01	-	-
Total	305	$	48.24	-	-

~~(1)~~

These amounts include the following: (a) 196 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation; and (b) 513 shares we acquired from our employees who elected to pay the exercise price of their stock options (and then hold shares of the stock), upon exercise, by delivering to us shares of our common stock in accordance with the terms of our equity compensation plan that were previously approved by our shareholders and disclosed in our proxy statements. These features of our equity compensation plan are available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the option exercise.

(1)These amounts consist of 305 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation. This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the award vesting.

‎

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.

~~November 2, 2017~~August 9, 2022


		~~Aqua America,~~Essential Utilities, Inc.
		Registrant



		/s/ Christopher H. Franklin
		Christopher H. Franklin
		Chairman, President and
		Chief Executive Officer



		/s/ ~~David P. Smeltzer~~Daniel J. Schuller
		~~David P. Smeltzer~~Daniel J. Schuller
		Executive Vice President and
		Chief Financial Officer




									Accumulated
			Capital in						Other
	Common		Excess of		Retained		Treasury		Comprehensive
	Stock		Par Value		Earnings		Stock		Income		Total
Balance at December 31, 2016	$	90,155	$	797,513	$	1,032,844	$	(71,113)	$	669	$	1,850,068
Net income		-		-		186,265		-		-		186,265
Other comprehensive income, net of income tax of $73		-		-		-		-		137		137
Dividends		-		-		(104,286)		-		-		(104,286)
Sale of stock (34,814 shares)		17		1,067		-		-		-		1,084
Repurchase of stock (68,004 shares)		-		-		-		(2,116)		-		(2,116)
Equity compensation plan (165,442) shares)		83		(83)		-		-		-		-
Exercise of stock options (157,621) shares)		79		2,524		-		-		-		2,603
Stock-based compensation		-		4,379		(204)		-		-		4,175
Cumulative effect of change in accounting principle - windfall tax benefit		-		-		982		-		-		982
Other		-		(647)		-		-		-		(647)
Balance at September 30, 2017	$	90,334	$	804,753	$	1,115,601	$	(73,229)	$	806	$	1,938,265

Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - windfall tax benefit
See notes to consolidated financial statements beginning on page 9 of this report.



	Regulated
	Segment		Other		Consolidated
Balance at December 31, 2016	$	37,367	$	4,841	$	42,208
Goodwill acquired		72		-		72
Reclassification to utility plant acquisition adjustment		(50)		-		(50)
Balance at September 30, 2017	$	37,389	$	4,841	$	42,230

\
Amount	Interest Rate	Maturity
$25,000	3.64%	2032
$6,000	3.89%	2037
$15,000	3.90%	2038
$10,000	4.18%	2047
$22,000	4.22%	2049
$22,000	4.24%	2050


Exhibit No.		Description
4.1		~~Bond Purchase Agreement,~~Fifth Supplemental Indenture, dated ~~July 10, 2017~~April 19, 2021, between Essential Utilities, Inc. and U.S. Bank N.A., as trustee (incorporated by ~~and among Aqua Illinois, Inc., Teachers Insurance and Annuity Association of America~~reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed with the SEC on April 19, 2021)
~~4.2~~
4.2		~~Bond Purchase Agreement,~~Sixth Supplemental Indenture, dated ~~July~~May 20,2022, between Essential Utilities, Inc. and U.S. Bank Trust Company National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed with the SEC on May 20, 2017 by and among Aqua Pennsylvania, Inc., New York Life Insurance Company, New York Life Insurance and Annuity Corporation, New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3), New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3-2)2022)
~~31.1~~
10.1*		Second Amendment to Credit Agreement, dated June 30, 2022, by and between PNG Companies, LLC and PNC Bank, National Association, TD Bank, N.A., and Citizens Bank N.A

10.2*		Sixth Amendment to Credit Agreement, dated June 30, 2022, between Aqua Pennsylvania and PNC Bank, National Association, Citizens Bank, N.A., TD Bank, N.A., and The Huntington National Bank

31.1*		Certification of Chief Executive Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of ~~1934.~~1934
~~31.2~~
31.2*		Certification of Chief Financial Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of ~~1934.~~1934
~~32.1~~
32.1*		Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section ~~1350.~~1350
~~32.2~~
32.2*		Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section ~~1350.~~1350
~~101.INS~~		~~XBRL Instance Document~~
~~101.SCH~~101.INS		Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document
~~101.CAL~~
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.DEF~~
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
~~101.LAB~~
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
~~101.PRES~~
101.PRES		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included in Exhibit 101)

December 31,

Carrying amount

Estimated fair value