Essential Utilities, Inc. (NYSE:WTRG) Q4 2022 Earnings Conference Call February 27, 2023 11:00 AM ET Company Participants Brian Dingerdissen - Vice President, Investor Relations and Treasurer Chris Franklin - Chairman and Chief Executive Officer Dan Schuller - Executive Vice President and Chief Financial Officer Conference Call Participants Ryan Connors - Northcoast Research Travis Miller - Morningstar Gregg Orrill - UBS Davis Sunderland - Baird Jonathan Reeder - Wells Fargo Operator Good day and welcome to ...

Financial Performance - Operating revenues for the nine months ended September 30, 2022, increased to $1,582,649, a rise of 17.8% compared to $1,342,457 for the same period in 2021[122] - Net income for the nine months ended September 30, 2022, was $350,305, reflecting an increase of 11.2% from $315,106 in the prior year[122] - Consolidated operating revenues increased by $240,192 or 17.9% for the nine months ended September 30, 2022, compared to the same period in 2021, driven by increases in the Regulated Water segment ($73,499), Regulated Natural Gas segment ($152,468), and Other business segment ($14,225) [129] - Revenues from the Regulated Water segment increased by $73,499 or 10.0% for the first nine months of 2022 compared to the same period in 2021 [143] - Operating revenues for the Regulated Natural Gas segment increased by $24,233 or 25.6% for the three months ended September 30, 2022, compared to the same period in 2021[151] - Net income for the three months ended September 30, 2022, was $(17,133), an improvement from $(28,292) in the same period of 2021[149] Expenses and Costs - Capital expenditures during the first nine months of 2022 totaled $719,688, with $104,383 allocated for the acquisition of wastewater utility systems[111] - The average gas commodity prices increased by 119.9% in Q3 2022 compared to the same period in the previous year, leading to a 104.2% rise in purchased gas expenses[124] - Operations and maintenance expenses for the nine months ended September 30, 2022, were $428,923, an increase of 9.4% from $391,945 in 2021[122] - Depreciation and amortization expense increased by $18,629 or 8.4% due to continued capital expenditures and acquisitions of new utility systems [132] - Interest expense, net of interest income, increased by $12,755 or 8.3% for the quarter, primarily due to higher average borrowings and interest rates on revolving lines of credit [133] - Purchased gas expense increased by $152,358 or 75.2%, primarily due to a 109.7% increase in average gas commodity prices during the first nine months of 2022 compared to the prior year [131] - Operations and maintenance expense increased by $36,978 or 9.4%, driven by higher employee-related costs ($14,185) and production costs for water and wastewater operations ($6,812) [130] - Purchased gas expenses rose by $20,738 or 101.7% due to a 119.9% increase in average gas commodity prices in Q3 2022 compared to the prior period[153] - Operations and maintenance expenses decreased by $2,104 or 3.9% for the three months ended September 30, 2022[151] Taxation - The effective tax rate for the nine months ended September 30, 2022, was 6.5%, compared to 3.2% in the previous year[122] - The effective income tax rate for the third quarter of 2022 was 6.5%, up from 3.4% in the same quarter of 2021, attributed to increased pretax income [128] - Effective income tax rate was a benefit of 42.6% in Q3 2022, compared to a benefit of 19.4% in Q3 2021[155] Financing Activities - The company issued $500,000 of long-term debt in May 2022, with a 5.30% interest rate, to repay existing borrowings and for general corporate purposes[114] - The company entered into at-the-market sales agreements for up to $500,000 in common stock to fund working capital and acquisitions[112] - As of September 30, 2022, the company had $23,366 in cash and cash equivalents, up from $10,567 at December 31, 2021[117] - Interest expense, net, increased by $4,021 or 7.2% due to additional borrowings and higher interest rates on the revolving line of credit[159] Other Income and Adjustments - Other income, including gain on sale of assets, increased by $1,327 or 65.8% compared to the same period in the prior year [134] - The increase in customer assistance surcharge costs in the Regulated Natural Gas segment was $8,668, which has an equivalent offsetting amount in revenues [130] - Gross margin (non-GAAP) for the three months ended September 30, 2022, was $77,861, compared to $74,366 in the same period of 2021[150] Regulatory and Legislative Impact - The company continues to assess the impact of the Inflation Reduction Act of 2022 on its financial statements and operations, particularly regarding methane emissions charges[108]

Financial Data and Key Metrics Changes - The company reported earnings per share (EPS) of $0.26 for Q3 2022, an increase from $0.19 in Q3 2021, representing a year-over-year growth of approximately 37% [26] - Year-to-date net income grew by 11.2% [6] - Revenues for Q3 2022 were $434.6 million, a 20% increase from the previous year [24] - Net income increased from $50.5 million in Q3 2021 to $68.6 million in Q3 2022 [26] Business Line Data and Key Metrics Changes - The regulated water segment contributed $301.3 million to revenues, while the regulated natural gas segment contributed $119 million [24] - Operations and maintenance (O&M) expenses rose to $151.4 million in Q3 2022, up from $139.4 million in Q3 2021 [26][30] - Gross margin increased by $46.2 million, driven by regulatory recoveries and customer growth [25] Market Data and Key Metrics Changes - The company experienced higher natural gas commodity prices, leading to an increase in purchased gas costs by $26.6 million year-over-year [25] - The company has a robust pipeline of opportunities, currently pursuing approximately 430,000 potential water and wastewater customers [46] Company Strategy and Development Direction - The company is focused on operational efficiency, infrastructure improvement, and service-related priorities [6] - A capital spending plan of approximately $1 billion for the year is on track, with significant investments in water, wastewater, and natural gas systems [8][50] - The company aims for rate base growth of 6% to 7% for water and 8% to 10% for natural gas [51] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving the 5% to 7% earnings growth per share expectation set at the beginning of the year [34] - The company remains optimistic about its ability to meet investor expectations despite delays in certain acquisitions [44] - Management highlighted the importance of addressing inflation and reducing lag in regulatory processes to maintain financial health [75] Other Important Information - The company received an upgrade to an AA ESG rating from MSCI, indicating strong governance and performance in environmental and social areas [11] - A hydrogen pilot project in partnership with the University of Pittsburgh was announced, focusing on the safe transportation of hydrogen through natural gas systems [12][14] Q&A Session Summary Question: Impact of cost-of-capital changes on municipal M&A - Management indicated that while financing costs have increased, it does not deter interest in municipal transactions, but may adjust the hurdle rates for acquisitions [59][60] Question: Appetite for higher ROEs in light of interest rates - Management noted that while ROEs were sticky during previous rate decreases, there may be a case for higher ROEs if high-interest rates persist [72][74] Question: Status of the Water Quality Accountability Act - Management mentioned that the bill has passed the Senate and is awaiting amendments in the House, with hopes for advancement next year [76] Question: Insights from the Bucks County acquisition outcome - Management reflected that clarity from sellers on the reasons for selling and the use of proceeds is crucial for successful transactions [80]

Part I – Financial Information [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements and detailed notes for Essential Utilities, Inc [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Metric (in thousands of dollars) | Metric (in thousands of dollars) | June 30, 2022 | December 31, 2021 | Change (%) | | :------------------------------- | :------------ | :---------------- | :--------- | | **Total Assets** | $15,046,164 | $14,658,278 | 2.65% | | Net property, plant and equipment | $10,592,365 | $10,251,866 | 3.32% | | Goodwill | $2,340,792 | $2,340,815 | -0.00% | | **Total Liabilities and Equity** | $15,046,164 | $14,658,278 | 2.65% | | Total stockholders' equity | $5,342,032 | $5,184,450 | 3.04% | | Long-term debt (net) | $6,087,736 | $5,779,504 | 5.33% | | Total current liabilities | $544,125 | $675,063 | -19.39% | - The company's total assets **increased** by **2.65%** from December 31, 2021, to June 30, 2022, **primarily due to** an **increase** in net property, plant, and equipment[7](index=7&type=chunk) - Total current liabilities **decreased significantly** by **19.39%**, **mainly due to** a **reduction** in loans payable and book overdrafts[9](index=9&type=chunk) [Consolidated Statements of Operations and Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Three Months Ended June 30 (in thousands of dollars, except per share amounts) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :----- | :---------- | :---------- | :--------- | :--------- | | Operating revenues | $448,756 | $397,032 | $51,724 | 13.03% | | Total operating expenses | $311,020 | $267,704 | $43,316 | 16.18% | | Operating income | $137,736 | $129,328 | $8,408 | 6.50% | | Net income | $82,291 | $80,914 | $1,377 | 1.70% | | Basic EPS | $0.31 | $0.32 | -$0.01 | -3.13% | | Diluted EPS | $0.31 | $0.32 | -$0.01 | -3.13% | Six Months Ended June 30 (in thousands of dollars, except per share amounts) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :----- | :---------- | :---------- | :--------- | :--------- | | Operating revenues | $1,148,031 | $980,597 | $167,434 | 17.07% | | Total operating expenses | $782,666 | $618,917 | $163,749 | 26.46% | | Operating income | $365,365 | $361,680 | $3,685 | 1.02% | | Net income | $281,667 | $264,603 | $17,064 | 6.45% | | Basic EPS | $1.08 | $1.04 | $0.04 | 3.85% | | Diluted EPS | $1.07 | $1.04 | $0.03 | 2.88% | - For the three months ended June 30, 2022, operating revenues **increased** by **13.03%** year-over-year, but net income per common share (basic and diluted) slightly **decreased** by **$0.01**[11](index=11&type=chunk) - For the six months ended June 30, 2022, operating revenues **grew** by **17.07%**, and net income **increased** by **6.45%**, leading to a **rise** in both basic and diluted EPS[12](index=12&type=chunk) [Consolidated Statements of Capitalization](index=7&type=section&id=Consolidated%20Statements%20of%20Capitalization) Metric (in thousands of dollars) | Metric (in thousands of dollars) | June 30, 2022 | December 31, 2021 | Change ($) | Change (%) | | :------------------------------- | :------------ | :---------------- | :--------- | :--------- |\n| Total stockholders' equity | $5,342,032 | $5,184,450 | $157,582 | 3.04% |\n| Long-term debt (net) | $6,087,736 | $5,779,504 | $308,232 | 5.33% |\n| Total capitalization | $11,429,768 | $10,963,954 | $465,814 | 4.25% | - Total capitalization **increased** by **4.25%** from December 31, 2021, to June 30, 2022, **driven by** increases in both stockholders' equity and long-term debt[14](index=14&type=chunk) - Long-term debt, excluding the current portion and net of debt issuance costs, **increased** by **$308,232 thousand**, or **5.33%**[14](index=14&type=chunk) [Consolidated Statements of Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Equity) Six Months Ended June 30, 2022 (in thousands of dollars) | Metric | Balance at Dec 31, 2021 | Net Income | Dividends Paid | Stock Issuances/Repurchases | Other Equity Changes | Balance at Jun 30, 2022 | | :----- | :---------------------- | :--------- | :------------- | :-------------------------- | :------------------- | :---------------------- | | Total Stockholders' Equity | $5,184,450 | $281,667 | $(138,108) | $9,407 | $4,616 | $5,342,032 | Six Months Ended June 30, 2021 (in thousands of dollars) | Metric | Balance at Dec 31, 2020 | Net Income | Dividends Paid | Stock Issuances/Repurchases | Other Equity Changes | Balance at Jun 30, 2021 | | :----- | :---------------------- | :--------- | :------------- | :-------------------------- | :------------------- | :---------------------- | | Total Stockholders' Equity | $4,683,877 | $264,603 | $(123,104) | $9,062 | $3,377 | $4,836,815 | - Total stockholders' equity **increased** by **$157,582 thousand** from December 31, 2021, to June 30, 2022, **primarily due to** net income of **$281,667 thousand**, partially offset by dividends paid of **$138,108 thousand**[16](index=16&type=chunk) [Consolidated Statements of Cash Flow](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flow) Six Months Ended June 30 (in thousands of dollars) | Cash Flow Activity | 2022 | 2021 | Change ($) | | :----------------- | :---------- | :---------- | :--------- | | Operating activities | $416,302 | $412,868 | $3,434 | | Investing activities | $(474,013) | $(403,781) | $(70,232) | | Financing activities | $60,120 | $(5,510) | $65,630 | | Net change in cash and cash equivalents | $2,409 | $3,577 | $(1,168) | - Net cash flows from operating activities remained **stable**, **increasing** slightly by **$3,434 thousand** year-over-year[20](index=20&type=chunk) - Cash flows used in investing activities **increased significantly** by **$70,232 thousand**, **primarily due to higher** property, plant, and equipment additions and utility system acquisitions[20](index=20&type=chunk) - Net cash flows from financing activities **swung** from a net outflow of **$5,510 thousand** in 2021 to a net inflow of **$60,120 thousand** in 2022, **driven by** proceeds from long-term debt and **reduced** short-term debt repayments[20](index=20&type=chunk) [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1 – Basis of Presentation](index=11&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC rules, and should be read with the Company's 2021 Annual Report on Form 10-K[22](index=22&type=chunk) - Management believes major events like the COVID-19 pandemic and global geopolitical uncertainties did **not materially impact** financial estimates **due to** the essential nature of the business, but continues to monitor them[24](index=24&type=chunk) [Note 2 – Revenue Recognition](index=12&type=section&id=Note%202%20%E2%80%93%20Revenue%20Recognition) Three Months Ended June 30, 2022 (in thousands of dollars) | Customer Class | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | | :------------- | :------------- | :------------------ | :------------------- | :------------- | | Residential | $149,542 | $30,653 | $95,942 | - | | Commercial | $41,025 | $6,973 | $18,853 | - | | Gas transportation & storage | - | - | $40,573 | - | | Consolidated Total | $224,181 | $41,404 | $168,341 | $14,830 | Six Months Ended June 30, 2022 (in thousands of dollars) | Customer Class | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | | :------------- | :------------- | :------------------ | :------------------- | :------------- | | Residential | $280,830 | $57,148 | $381,048 | - | | Commercial | $76,145 | $13,038 | $75,893 | - | | Gas transportation & storage | - | - | $119,747 | - | | Consolidated Total | $424,929 | $76,779 | $614,553 | $31,770 | - Natural Gas revenues showed **significant growth**, with residential natural gas revenues **increasing** from **$83,760 thousand** in Q2 2021 to **$95,942 thousand** in Q2 2022, and from **$297,953 thousand** in H1 2021 to **$381,048 thousand** in H1 2022[26](index=26&type=chunk) [Note 3 – Acquisitions](index=12&type=section&id=Note%203%20%E2%80%93%20Acquisitions) - In March 2022, the Company acquired the Lower Makefield Township wastewater system for **$53,000 thousand**, serving approximately **11,000** customer connections[27](index=27&type=chunk) - The Company has several pending acquisitions, including the Bucks County Water and Sewer Authority's wastewater assets for an offer of **$885,000 thousand**, and other water/wastewater systems totaling over **25,000** customers[30](index=30&type=chunk)[31](index=31&type=chunk) - The acquisition of DELCORA's wastewater system for **$276,500 thousand** is still pending, subject to regulatory approval and ongoing litigation with Delaware County, with closing expected in late 2022 or early 2023[34](index=34&type=chunk)[37](index=37&type=chunk) [Note 4 – Goodwill](index=15&type=section&id=Note%204%20%E2%80%93%20Goodwill) Goodwill by Business Segment (in thousands of dollars) | Segment | December 31, 2021 | June 30, 2022 | Change ($) | | :-------------- | :---------------- | :------------ | :--------- | | Regulated Water | $58,527 | $58,504 | $(23) | | Regulated Natural Gas | $2,277,447 | $2,277,447 | $0 | | Other | $4,841 | $4,841 | $0 | | Consolidated | $2,340,815 | $2,340,792 | $(23) | - Consolidated goodwill remained largely **stable**, with a **minor** reclassification of **$23 thousand** from Regulated Water goodwill to utility plant acquisition adjustment[39](index=39&type=chunk) [Note 5 – Capitalization](index=15&type=section&id=Note%205%20%E2%80%93%20Capitalization) - The Company **fully settled** a forward equity sale agreement on August 9, 2021, issuing **6,700,000** shares and receiving **$299,739 thousand** in cash proceeds[41](index=41&type=chunk) - In April and May 2022, the remaining tangible equity units were settled, resulting in the issuance of **9,029,461** shares of common stock and the **complete pay-off** of amortizing notes[44](index=44&type=chunk) - On May 20, 2022, the Company issued **$500,000 thousand** in Senior Notes due 2052 with a **5.30%** interest rate, using proceeds to repay existing credit facilities and for general corporate purposes[45](index=45&type=chunk) - On June 30, 2022, revolving credit agreements for Peoples Natural Gas Companies and Aqua Pennsylvania were amended to **increase** the facility amount (Peoples) and update termination dates to June 29, 2023[46](index=46&type=chunk) [Note 6 – Financial Instruments](index=17&type=section&id=Note%206%20%E2%80%93%20Financial%20Instruments) - The fair value of loans payable and cash and cash equivalents approximates their carrying amounts, determined using Level 1 methods[50](index=50&type=chunk) Long-term Debt (in thousands of dollars) | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Carrying amount | $6,256,321 | $5,947,357 | | Estimated fair value | $5,545,498 | $6,482,499 | - The estimated fair value of long-term debt **decreased** by approximately **$937 million** from December 31, 2021, to June 30, 2022, while its carrying amount **increased**[51](index=51&type=chunk) [Note 7 – Net Income per Common Share](index=18&type=section&id=Note%207%20%E2%80%93%20Net%20Income%20per%20Common%20Share) Average Common Shares Outstanding (in thousands) | Period | Basic (2022) | Basic (2021) | Diluted (2022) | Diluted (2021) | | :----- | :----------- | :----------- | :------------- | :------------- | | Three Months Ended June 30 | 262,099 | 254,769 | 262,558 | 255,441 | | Six Months Ended June 30 | 262,026 | 254,667 | 262,545 | 255,268 | - Average common shares outstanding for both basic and diluted computations **increased** year-over-year for both the three and six-month periods ended June 30, 2022, reflecting new share issuances[53](index=53&type=chunk) - The dilutive effect of the forward equity sale agreement was **zero** for 2022 periods, as it was settled in August 2021, but contributed to diluted shares in 2021[53](index=53&type=chunk) [Note 8 – Stock-based Compensation](index=19&type=section&id=Note%208%20%E2%80%93%20Stock-based%20Compensation) - The Company's Amended and Restated Equity Compensation Plan authorizes **6,250,000** shares for issuance, with **1,804,222** shares still available at June 30, 2022[55](index=55&type=chunk) Stock-based Compensation Expense (in thousands of dollars) | Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance Share Units (PSUs) | $1,692 | $1,290 | $3,342 | $2,931 | | Restricted Stock Units (RSUs) | $727 | $761 | $1,504 | $1,365 | | Stock Options | $141 | $90 | $241 | $301 | | Restricted Stock | $13 | $12 | $25 | $106 | | Stock Awards | $165 | $175 | $357 | $350 | - PSU compensation expense **increased** by **31.16%** for the three months and **14.02%** for the six months ended June 30, 2022, compared to the prior year[56](index=56&type=chunk) - The weighted-average fair value of PSUs granted in H1 2022 was **$42.31**, and for RSUs was **$45.10**[57](index=57&type=chunk)[59](index=59&type=chunk) [Note 9 – Pension Plans and Other Postretirement Benefits](index=24&type=section&id=Note%209%20%E2%80%93%20Pension%20Plans%20and%20Other%20Postretirement%20Benefits) Net Periodic Benefit Cost (Credit) (in thousands of dollars) | Benefit Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pension Benefits | $(1,415) | $(793) | $(2,833) | $(1,352) | | Other Postretirement Benefits | $(140) | $446 | $(279) | $892 | - Net periodic pension benefit cost **shifted** from a credit of **$(793) thousand** in Q2 2021 to a **larger** credit of **$(1,415) thousand** in Q2 2022, **primarily due to higher** expected return on plan assets[66](index=66&type=chunk) - Other postretirement benefits also **shifted** from a cost of **$446 thousand** in Q2 2021 to a credit of **$(140) thousand** in Q2 2022[66](index=66&type=chunk) - Cash contributions to the Pension Plan totaled **$14,564 thousand** during the first six months of 2022[67](index=67&type=chunk) [Note 10 – Rate Activity](index=25&type=section&id=Note%2010%20%E2%80%93%20Rate%20Activity) - Aqua Pennsylvania received an order in May 2022 allowing base rate increases of **$69,251 thousand** in annual operating revenues, with new rates effective May 19, 2022[68](index=68&type=chunk) - Kentucky's natural gas division received an order in January 2022 for a **$5,238 thousand** annual revenue **increase**, with an additional **$260 thousand** approved in June 2022[69](index=69&type=chunk) - Aqua North Carolina filed an application in June 2022 to **increase** rates by **$18,064 thousand** in the first year, with further increases in subsequent years[70](index=70&type=chunk) - Ohio's water and wastewater utility divisions are undergoing a base rate case expected to **increase** operating revenues by **$5,483 thousand** annually, with new rates anticipated in Q3 or Q4 2022[71](index=71&type=chunk) [Note 11 – Taxes Other than Income Taxes](index=26&type=section&id=Note%2011%20%E2%80%93%20Taxes%20Other%20than%20Income%20Taxes) Taxes Other than Income Taxes (in thousands of dollars) | Component | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Property | $8,239 | $9,570 | $16,253 | $17,284 | | Gross receipts, excise and franchise | $4,017 | $3,949 | $8,117 | $7,633 | | Payroll | $4,778 | $4,718 | $11,439 | $11,474 | | Regulatory assessments | $1,812 | $847 | $3,577 | $1,685 | | Pumping fees | $1,947 | $1,464 | $3,323 | $2,590 | | Other | $927 | $572 | $2,018 | $1,495 | | Total | $21,720 | $21,120 | $44,727 | $42,161 | - Total taxes other than income taxes **increased** by **$600 thousand** (**2.84%**) for the three months and **$2,566 thousand** (**6.09%**) for the six months ended June 30, 2022, compared to the prior year[74](index=74&type=chunk) - Regulatory assessments saw a **significant increase**, more than doubling for both the three and six-month periods[74](index=74&type=chunk) [Note 12 – Segment Information](index=26&type=section&id=Note%2012%20%E2%80%93%20Segment%20Information) - The Company operates in two reportable segments: Regulated Water (eight operating segments) and Regulated Natural Gas (one operating segment), plus an 'Other' category for non-regulated and corporate activities[75](index=75&type=chunk)[76](index=76&type=chunk) Operating Revenues by Segment (in thousands of dollars) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Regulated Water | $269,355 | $248,177 | $508,553 | $476,530 | | Regulated Natural Gas | $167,729 | $141,562 | $612,912 | $484,677 | | Other | $11,672 | $7,293 | $26,566 | $19,390 | | Consolidated | $448,756 | $397,032 | $1,148,031 | $980,597 | Total Assets by Segment (in thousands of dollars) | Segment | June 30, 2022 | December 31, 2021 | | :------ | :------------ | :---------------- | | Regulated Water | $8,645,314 | $8,403,586 | | Regulated Natural Gas | $6,121,964 | $5,960,602 | | Other | $278,886 | $294,090 | | Consolidated | $15,046,164 | $14,658,278 | - Regulated Natural Gas segment showed **strong** revenue **growth**, **increasing** by **18.5%** for the three months and **26.5%** for the six months ended June 30, 2022, **primarily due to higher** gas costs passed through to customers[77](index=77&type=chunk) [Note 13 – Commitments and Contingencies](index=28&type=section&id=Note%2013%20%E2%80%93%20Commitments%20and%20Contingencies) - The Company has accrued **$16,941 thousand** for loss contingencies as of June 30, 2022, with an estimated **$2,255 thousand** probable of recovery through insurance[79](index=79&type=chunk) - A class action lawsuit related to a 'do not consume' advisory in Illinois is in the discovery phase; management believes the final resolution is **not expected to have a material adverse effect** on the Company's financial position[80](index=80&type=chunk)[81](index=81&type=chunk) - The Company self-insures its employee medical benefit program, with a reserve of **$2,470 thousand** for unpaid claims at June 30, 2022[82](index=82&type=chunk) [Note 14 – Income Taxes](index=29&type=section&id=Note%2014%20%E2%80%93%20Income%20Taxes) Effective Tax Rate | Period | 2022 | 2021 | | :----- | :---- | :---- | | Three Months Ended June 30 | 9.0% | 4.5% | | Six Months Ended June 30 | -3.4% | 3.1% | - The effective tax rate **increased** for the second quarter of 2022 (**9.0%** vs. **4.5%**) **due to decreased** amortization of regulatory liabilities associated with deferred taxes[83](index=83&type=chunk) - The effective tax rate **decreased** for the first half of 2022 (**-3.4%** vs. **3.1%**) **due to increased** income tax benefits from qualifying infrastructure deductions and amortization of a customer surcredit tax repair catch-up adjustment in the Regulated Natural Gas segment[83](index=83&type=chunk)[84](index=84&type=chunk) [Note 15 – Recent Accounting Pronouncements](index=30&type=section&id=Note%2015%20%E2%80%93%20Recent%20Accounting%20Pronouncements) - The FASB issued new guidance in October 2021 on accounting for acquired revenue contracts in business combinations, effective for fiscal years beginning after December 15, 2022, which the Company is currently evaluating[86](index=86&type=chunk) - The Company adopted updated FASB guidance on convertible instruments and contracts in an entity's own equity on January 1, 2022, which did **not** have a **material impact** on its consolidated financial statements[87](index=87&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's analysis of financial performance, condition, forward-looking statements, and segment results [Forward-looking Statements](index=31&type=section&id=Forward-looking%20Statements) - The report contains forward-looking statements regarding acquisitions, legal proceedings, accounting pronouncements, and management's plans, which are subject to risks and uncertainties including the COVID-19 pandemic, regulation, weather, and capital markets[91](index=91&type=chunk) [General Information](index=31&type=section&id=General%20Information) - Essential Utilities, Inc is a holding company for regulated utilities providing water, wastewater, and natural gas services to approximately **five million** people across ten states under the Aqua and Peoples brands[92](index=92&type=chunk) - The Company's strategy focuses on acquiring businesses in the U.S regulated water and wastewater utility industry, with opportunistic **growth** in market-based activities like utility service line protection[94](index=94&type=chunk) [COVID-19 Pandemic](index=32&type=section&id=COVID-19%20Pandemic) - The Company continues to monitor the COVID-19 pandemic, implementing protective measures for employees and customers, and has returned office employees to a hybrid flex schedule[96](index=96&type=chunk) - Management is monitoring customer utility account collections, supply chain risks, and **increased** expenses related to workforce supplies, security, and cleaning **due to** the pandemic[96](index=96&type=chunk) [Inflationary Cost Environment](index=32&type=section&id=Inflationary%20Cost%20Environment) - During the first six months of 2022, the Company experienced inflationary cost increases in materials, labor, and other operating costs, exacerbated by supply chain pressures and global geopolitical uncertainties[97](index=97&type=chunk) - The price of natural gas **substantially increased**, leading to **significant** revenue and expense increases in the Regulated Natural Gas business, with these pressures expected to continue through 2022[97](index=97&type=chunk) - The Company is reviewing the adequacy of its approved rates in response to **increasing** service costs and is working with suppliers to mitigate supply chain risks[97](index=97&type=chunk)[98](index=98&type=chunk) [Financial Condition](index=33&type=section&id=Financial%20Condition) - The Company historically maintains a negative working capital position but expects internally generated funds, existing credit facilities, and proceeds from debt/equity issuances to provide sufficient working capital for at least the next twelve months[99](index=99&type=chunk) - In the first six months of 2022, the Company incurred **$424,645 thousand** in capital expenditures and **$50,010 thousand** for acquisitions, financed by **$770,376 thousand** in long-term debt and internally generated funds[100](index=100&type=chunk)[103](index=103&type=chunk) - As of June 30, 2022, the Company had **$840,117 thousand** available under its **$1,000,000 thousand** unsecured revolving credit facility and **$430,797 thousand** available from short-term lines of credit totaling **$435,500 thousand**[104](index=104&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) [Consolidated Results of Operations](index=34&type=section&id=Consolidated%20Results%20of%20Operations) Consolidated Financial Highlights (in thousands of dollars) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 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 | - Consolidated operating revenues **increased** by **13.0%** for Q2 2022 and **17.1%** for H1 2022, **driven by growth** in all segments, especially Regulated Natural Gas[108](index=108&type=chunk)[114](index=114&type=chunk) - Purchased gas expense **surged** by **67.4%** in Q2 2022 and **71.1%** in H1 2022, **primarily due to** a **190.7%** and **103.7% increase** in average gas commodity prices, respectively[109](index=109&type=chunk)[117](index=117&type=chunk) - Net income **increased** by **1.7%** in Q2 2022 and **6.45%** in H1 2022, despite **higher** operating expenses and interest costs[107](index=107&type=chunk) [Segment Results of Operations](index=38&type=section&id=Segment%20Results%20of%20Operations) [Regulated Water Segment](index=38&type=section&id=Regulated%20Water%20Segment) Regulated Water Segment Financial Highlights (in thousands of dollars) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 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 | - Regulated Water segment revenues **increased** by **8.5%** in Q2 2022 and **6.7%** in H1 2022, **driven by** rate increases (**$10,044 thousand** in Q2, **$15,904 thousand** in H1), **higher** volume consumption, and customer base **growth** from acquisitions[125](index=125&type=chunk)[130](index=130&type=chunk) - Operations and maintenance expense for the Regulated Water segment **increased** by **19.3%** in Q2 2022 and **14.6%** in H1 2022, **due to** acquired utility system costs, **higher** production costs, legal expenses, and outside services[125](index=125&type=chunk)[129](index=129&type=chunk) - Net income for the Regulated Water segment **decreased** by **3.18%** in Q2 2022 and **4.20%** in H1 2022, despite revenue **growth**, **primarily due to increased** operating expenses and a **higher** effective tax rate[124](index=124&type=chunk)[128](index=128&type=chunk)[132](index=132&type=chunk) [Regulated Natural Gas Segment](index=40&type=section&id=Regulated%20Natural%20Gas%20Segment) Regulated Natural Gas Segment Financial Highlights (in thousands of dollars) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 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 | - Regulated Natural Gas segment operating revenues **increased** by **18.5%** in Q2 2022 and **26.5%** in H1 2022, **primarily due to higher** gas costs passed through to customers (Q2: **$23,604 thousand**, H1: **$118,023 thousand**) and **increased** usage from colder weather in H1[137](index=137&type=chunk)[140](index=140&type=chunk) - Operations and maintenance expense **decreased** by **14.2%** in Q2 2022 but **increased** by **0.7%** in H1 2022, influenced by **higher** capitalization of general and administrative costs and changes in bad debt expense[137](index=137&type=chunk)[140](index=140&type=chunk) - Net income for the Regulated Natural Gas segment **significantly increased** by **502.5%** in Q2 2022 and **24.6%** in H1 2022, **benefiting from** a **substantial** income tax benefit related to qualifying infrastructure deductions and a customer surcredit tax repair catch-up adjustment[135](index=135&type=chunk)[139](index=139&type=chunk)[143](index=143&type=chunk) [Impact of Recent Accounting Pronouncements](index=44&type=section&id=Impact%20of%20Recent%20Accounting%20Pronouncements) - The Company refers to Note 15 for details on the impact of recent accounting pronouncements, including new guidance on acquired revenue contracts and adopted guidance on convertible instruments[145](index=145&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Details market risks from interest rate and equity price changes, referring to the 2021 Form 10-K - The Company is subject to market risks from changes in interest rates and equity prices[146](index=146&type=chunk) - Further details on market risks are available in Item 7A of the Company's 2021 Annual Report on Form 10-K[146](index=146&type=chunk) [Item 4. Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management confirms effective disclosure controls and procedures, noting ERP system updates - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[146](index=146&type=chunk) - A new ERP system was implemented for the Regulated Water business segment, leading to necessary updates in internal controls over financial reporting[147](index=147&type=chunk) - No other **material** changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[148](index=148&type=chunk) Part II – Other Information [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) No material legal proceedings are expected to adversely affect the Company's financial position - The Company is routinely involved in legal proceedings, but none are **expected to have a material adverse effect** on its financial position, results of operations, or cash flows[150](index=150&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) Refers to the 2021 Annual Report on Form 10-K for a comprehensive review of risk factors - Readers should refer to the Annual Report on Form 10-K for the year ended December 31, 2021, for a review of the Company's risk factors[151](index=151&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Summarizes common stock repurchases, primarily for employee stock-based compensation tax withholding Issuer Purchases of Equity Securities (Quarter Ended June 30, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----- | :------------------------------- | :--------------------------- | | 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 | - The Company repurchased **305** shares of common stock during the quarter ended June 30, 2022, at an average price of **$48.24** per share[153](index=153&type=chunk) - These repurchases were **primarily from** employees to cover withholding taxes upon the vesting of stock-based compensation, a feature available under the equity compensation plan[153](index=153&type=chunk) [Item 6. Exhibits](index=47&type=section&id=Item%206.%20Exhibits) Lists filed exhibits, including indentures, credit amendments, and CEO/CFO certifications - Exhibits include Fifth and Sixth Supplemental Indentures, Second and Sixth Amendments to Credit Agreements, and certifications from the CEO and CFO[154](index=154&type=chunk) - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are also part of the exhibits[154](index=154&type=chunk) [Signatures](index=48&type=section&id=Signatures) Contains signatures of authorized officers, certifying the report's filing on August 9, 2022 - The report was duly executed on August 9, 2022, by Christopher H Franklin, Chairman, President and Chief Executive Officer, and Daniel J Schuller, Executive Vice President and Chief Financial Officer[156](index=156&type=chunk)

Financial Data and Key Metrics Changes - The company reported year-to-date net income growth of 6.5% and quarterly earnings per share (EPS) were in line with expectations, with net income increasing from $80.9 million to $82.3 million, a 1.7% year-over-year increase [9][28] - Revenues for the second quarter reached $448.8 million, up 13% from the previous year, driven by contributions from the regulated water segment ($269.4 million) and the regulated natural gas segment ($167.7 million) [26][29] - Operations and maintenance (O&M) expenses increased to $135 million from $127.5 million, attributed to recent acquisitions, increased maintenance expenses, and higher water production costs due to inflation [27][30] Business Line Data and Key Metrics Changes - The regulated water segment contributed $269.4 million to revenues, while the regulated natural gas segment contributed $167.7 million, with both segments experiencing increased volumes and customer growth [26][29] - The gross margin increased year-over-year by $21.5 million, primarily due to additional revenues from rates and surcharges, customer growth, and increased volumes from both segments [26][29] Market Data and Key Metrics Changes - The company has signed asset purchase agreements for seven municipal acquisitions totaling over $418 million, which are pending regulatory approval [10][35] - The company is engaged in exclusive negotiations to purchase substantial wastewater assets from the Bucks County Water and Sewer Authority, with a bid of $1.1 billion for the wastewater system assets [10][39] Company Strategy and Development Direction - The company aims to invest approximately $1 billion annually in infrastructure rehabilitation and strengthening through 2024, focusing on water, wastewater, and natural gas systems [43] - The company is committed to achieving its ESG targets and has reported a 14% reduction in Scope 1 and Scope 2 emissions, driven by a switch to nearly 100% renewable electric power for its water segment operations [12][21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving full-year guidance of $1.75 to $1.80 per share and a 5% to 7% earnings growth per share expectation through 2024 [33][43] - The management acknowledged inflationary pressures but emphasized efforts to mitigate cost increases through capital projects that reduce operating expenses [70][93] Other Important Information - The company approved a 7% increase in the quarterly dividend, marking the 31st consecutive year of dividend increases [9][42] - The company is actively pursuing approximately 410,000 potential water and wastewater customers, indicating a strong pipeline for growth [40] Q&A Session Summary Question: Update on the Bucks County discussions and potential acquisition - Management indicated that the Bucks County Water and Sewer Authority Board wanted to ensure an ongoing revenue stream, leading to a retained capacity agreement for wastewater treatment capacity [45] Question: Impact of the Inflation Reduction Act on the business - Management stated that the company does not qualify for the alternative minimum tax and does not foresee significant impacts from the Inflation Reduction Act at this time [54] Question: M&A pipeline and public narratives - Management discussed their communication strategy to ensure their value proposition is conveyed effectively to municipalities, despite pushback from external groups [57][60] Question: Timing and impact of the DELCORA acquisition - Management confirmed that they are comfortable with their assumptions around DELCORA and expect to include it in their guidance for full-year 2023 [85] Question: Tax rate expectations - Management expects a slight benefit on the tax line for full-year 2022, with adjustments based on state tax rate changes [66][79]

[Part I – Financial Information](index=2&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) [Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements%3A) This section presents the unaudited consolidated financial statements for Essential Utilities, Inc. as of March 31, 2022, and for the three months ended March 31, 2022 and 2021 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2022, total assets increased to $14.88 billion from $14.66 billion at year-end 2021, primarily driven by an increase in net property, plant, and equipment Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$14,877,023** | **$14,658,278** | | Net property, plant and equipment | $10,394,684 | $10,251,866 | | Goodwill | $2,340,815 | $2,340,815 | | **Total Liabilities and Equity** | **$14,877,023** | **$14,658,278** | | Total stockholders' equity | $5,255,100 | $5,184,450 | | Long-term debt, excluding current portion | $5,910,363 | $5,815,211 | [Consolidated Statements of Operations and Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) For the three months ended March 31, 2022, operating revenues increased to $699.3 million from $583.6 million in the prior-year period, largely due to higher purchased gas costs Q1 Performance Comparison (in thousands, except per share amounts) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Operating revenues | $699,275 | $583,565 | | Operating income | $227,629 | $232,352 | | Net income | $199,376 | $183,689 | | Diluted EPS | $0.76 | $0.72 | [Consolidated Statements of Capitalization](index=6&type=section&id=Consolidated%20Statements%20of%20Capitalization) Total capitalization increased to $11.13 billion at March 31, 2022, from $10.96 billion at December 31, 2021, driven by growth in both total stockholders' equity and total long-term debt Capitalization Summary (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total stockholders' equity | $5,255,100 | $5,184,450 | | Total long-term debt | $6,042,109 | $5,947,357 | | **Total capitalization** | **$11,127,060** | **$10,963,954** | [Consolidated Statements of Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Equity) For the three months ended March 31, 2022, total stockholders' equity increased from $5.18 billion to $5.26 billion, primarily driven by net income partially offset by dividends - In Q1 2022, net income of **$199.4 million** was the primary driver of the increase in stockholders' equity[15](index=15&type=chunk) - Dividends declared and paid during Q1 2022 amounted to **$135.7 million** ($67.8M paid, $67.9M declared)[15](index=15&type=chunk) [Consolidated Statements of Cash Flow](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flow) For the first three months of 2022, net cash from operating activities increased to $310.6 million, while net cash used in investing and financing activities were $233.2 million and $29.6 million respectively Cash Flow Summary (in thousands) | Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $310,604 | $255,481 | | Net cash used in investing activities | ($233,232) | ($177,712) | | Net cash used in financing activities | ($29,641) | ($64,550) | | **Net change in cash** | **$47,731** | **$13,219** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosure on the company's accounting policies and financial activities, including revenue recognition, acquisitions, capitalization, segment performance, and income tax accounting changes Q1 2022 Revenue by Segment (in thousands) | Segment | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | | :--- | :--- | :--- | :--- | :--- | | Residential | $131,288 | $26,495 | $285,106 | - | | Commercial | $35,120 | $6,065 | $57,040 | - | | Gas transportation & storage | - | - | $79,174 | - | - In March 2022, the company acquired the Lower Makefield Township wastewater system for **$53 million**, serving approximately **11,000 customer connections**[34](index=34&type=chunk) - Several acquisitions are pending, including the DELCORA wastewater system for **$276.5 million**, with closing expected in late 2022 or early 2023, subject to regulatory approval and ongoing litigation[40](index=40&type=chunk)[43](index=43&type=chunk) - The company's effective tax rate was **(9.5)%** for Q1 2022, down from **2.5%** in Q1 2021, primarily due to an increased income tax benefit in the Regulated Natural Gas segment related to qualifying infrastructure deductions and a customer surcredit tax repair adjustment[88](index=88&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and results of operations, highlighting a 19.8% increase in consolidated operating revenues for Q1 2022, driven primarily by the Regulated Natural Gas segment [Financial Condition](index=33&type=section&id=Financial%20Condition) The company maintains a negative working capital position but believes internally generated funds and existing credit facilities are sufficient for the next twelve months - In Q1 2022, capital expenditures totaled **$183.3 million** and acquisition spending was **$50.0 million**[105](index=105&type=chunk) - As of March 31, 2022, the company had **$570.3 million** available on its primary revolving credit facility and an additional **$155.8 million** on other short-term lines[108](index=108&type=chunk) [Consolidated Results of Operations](index=34&type=section&id=Consolidated%20Results%20of%20Operations) Consolidated operating revenues for Q1 2022 increased by 19.8% to $699.3 million, primarily due to a 72.3% increase in purchased gas costs, while net income rose 8.5% to $199.4 million Q1 2022 vs Q1 2021 Consolidated Operations (in thousands) | Metric | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Operating revenues | $699,275 | $583,565 | 19.8% | | Operations and maintenance | $142,581 | $125,075 | 14.0% | | Purchased gas | $227,712 | $132,153 | 72.3% | | Net income | $199,376 | $183,689 | 8.5% | - The significant increase in purchased gas expense was primarily due to a **46.9% increase** in average gas commodity prices compared to the prior year[113](index=113&type=chunk) [Segment Results of Operations](index=35&type=section&id=Segment%20Results%20of%20Operations) This section provides a detailed performance review of the company's two main reportable segments, with Regulated Water seeing a 4.7% revenue increase and Regulated Natural Gas a 29.7% revenue increase Q1 2022 Segment Performance (in thousands) | Segment | Operating Revenues | Net Income (Loss) | | :--- | :--- | :--- | | Regulated Water | $239,198 | $60,543 | | Regulated Natural Gas | $445,183 | $139,486 | | Other | $14,894 | ($653) | [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is subject to market risks, including changes in interest rates and equity prices, in the normal course of business - The company acknowledges exposure to market risks such as interest rate and equity price changes; further information is available in the **2021 Form 10-K**[137](index=137&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with ongoing updates due to a new ERP system implementation - The CEO and CFO have certified that disclosure controls and procedures are effective as of the end of the reporting period[137](index=137&type=chunk) - The company is implementing a new ERP system for the Regulated Water business, leading to updates in internal controls; the customer billing system phase is planned for **H2 2023**[138](index=138&type=chunk) [Part II – Other Information](index=38&type=section&id=Part%20II%20%E2%80%93%20Other%20Information) [Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is party to various legal proceedings in the ordinary course of business, none of which are expected to have a material adverse effect on its financial position - There are no pending legal proceedings that are expected to have a material effect on the company's financial condition or results[141](index=141&type=chunk) [Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the detailed risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - For a discussion of risk factors, readers are directed to the company's **2021 Annual Report on Form 10-K**[142](index=142&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the quarter ended March 31, 2022, the company acquired 21,290 shares of its common stock at an average price of $47.56 per share, primarily to cover withholding taxes upon vesting of stock-based compensation Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | 256 | $53.61 | | Feb 2022 | 21,004 | $47.48 | | Mar 2022 | 30 | $47.93 | | **Total** | **21,290** | **$47.56** | - The shares were acquired from employees to satisfy tax withholding obligations related to vested stock-based compensation[144](index=144&type=chunk) [Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 1350, as well as Inline XBRL documents - Exhibits filed include CEO and CFO certifications and Inline XBRL data files[146](index=146&type=chunk) [Signatures](index=41&type=section&id=Signatures) The report is duly signed on May 10, 2022, by Christopher H. Franklin, Chairman, President and Chief Executive Officer, and Daniel J. Schuller, Executive Vice President and Chief Financial Officer - The report was signed and authorized by the CEO, Christopher H. Franklin, and the CFO, Daniel J. Schuller[148](index=148&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 Or ¨ 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 ESSENTIAL UTILITIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-1702594 (St ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q (Mark One) S QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2021 £ 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 ESSENTIAL UTILITIES, INC. (Exact name of registrant as specified in its cha ...

[Part I – Financial Information](index=2&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) This section presents the unaudited consolidated financial statements and management's discussion and analysis of Essential Utilities, Inc. for the interim periods [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section provides the unaudited consolidated financial statements, including balance sheets, statements of operations, capitalization, equity, and cash flows, along with detailed notes on accounting policies and financial performance for the specified periods [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section presents the consolidated balance sheets, highlighting key asset, liability, and equity changes between June 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights (June 30, 2021 vs. December 31, 2020) | Metric (in thousands of dollars) | June 30, 2021 | December 31, 2020 | Change | % Change | | :------------------------------- | :------------ | :---------------- | :----- | :------- | | **Assets** | | | | | | Net property, plant and equipment | 9,707,363 | 9,512,877 | 194,486 | 2.04% | | Total current assets | 304,732 | 380,220 | (75,488) | (19.85%) | | Regulatory assets | 1,400,215 | 1,362,788 | 37,427 | 2.75% | | Goodwill | 2,340,836 | 2,324,547 | 16,289 | 0.70% | | Total assets | 13,933,992 | 13,705,277 | 228,715 | 1.67% | | **Liabilities & Equity** | | | | | | Total stockholders' equity | 4,836,815 | 4,683,877 | 152,938 | 3.26% | | Long-term debt (net) | 5,648,232 | 5,507,744 | 140,488 | 2.55% | | Total current liabilities | 469,155 | 603,873 | (134,718) | (22.31%) | | Total liabilities and equity | 13,933,992 | 13,705,277 | 228,715 | 1.67% | [Consolidated Statements of Operations and Comprehensive Income (Three Months Ended June 30, 2021 and 2020)](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Three%20Months%20Ended%20June%2030%2C%202021%20and%202020)) This section details the consolidated statements of operations and comprehensive income for the three months ended June 30, 2021, and 2020, showing revenue, expenses, and net income trends Three Months Ended June 30 (in thousands, except per share amounts) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Operating revenues | 397,032 | 384,468 | 12,564 | 3.27% | | Total operating expenses | 267,704 | 261,349 | 6,355 | 2.43% | | Operating income | 129,328 | 123,119 | 6,209 | 5.04% | | Income before income taxes | 84,700 | 75,091 | 9,609 | 12.79% | | Provision for income taxes | 3,786 | 462 | 3,324 | 719.48% | | Net income | 80,914 | 74,629 | 6,285 | 8.42% | | Basic net income per common share | 0.32 | 0.29 | 0.03 | 10.34% | | Diluted net income per common share | 0.32 | 0.29 | 0.03 | 10.34% | [Consolidated Statements of Operations and Comprehensive Income (Six Months Ended June 30, 2021 and 2020)](index=6&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Six%20Months%20Ended%20June%2030%2C%202021%20and%202020)) This section presents the consolidated statements of operations and comprehensive income for the six months ended June 30, 2021, and 2020, reflecting significant financial performance changes Six Months Ended June 30 (in thousands, except per share amounts) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- |\n| Operating revenues | 980,597 | 640,053 | 340,544 | 53.20% | | Total operating expenses | 618,917 | 443,437 | 175,480 | 39.57% | | Operating income | 361,680 | 196,616 | 165,064 | 83.95% | | Income before income taxes | 273,155 | 119,748 | 153,407 | 128.11% | | Provision for income taxes (benefit) | 8,552 | (6,662) | 15,214 | -228.37% | | Net income | 264,603 | 126,410 | 138,193 | 109.32% | | Basic net income per common share | 1.04 | 0.52 | 0.52 | 100.00% | | Diluted net income per common share | 1.04 | 0.50 | 0.54 | 108.00% | [Consolidated Statements of Capitalization](index=7&type=section&id=Consolidated%20Statements%20of%20Capitalization) This section outlines the consolidated capitalization structure, including stockholders' equity and various debt instruments, as of June 30, 2021, and December 31, 2020 Consolidated Capitalization (in thousands of dollars) | Metric | June 30, 2021 | December 31, 2020 | Change | % Change | | :--------------------------------------- | :------------ | :---------------- | :----- | :------- | | Total stockholders' equity | 4,836,815 | 4,683,877 | 152,938 | 3.26% | | Long-term debt of subsidiaries | 3,097,995 | 3,014,280 | 83,715 | 2.78% | | Notes payable to bank (revolving credit) | 60,000 | 385,000 | (325,000) | (84.42%) | | Unsecured notes payable | 2,066,095 | 1,980,963 | 85,132 | 4.30% | | Total capitalization | 10,485,047 | 10,191,621 | 293,426 | 2.88% | [Consolidated Statements of Equity (Six Months Ended June 30, 2021)](index=8&type=section&id=Consolidated%20Statements%20of%20Equity%20(Six%20Months%20Ended%20June%2030%2C%202021)) This section details the changes in consolidated stockholders' equity for the six months ended June 30, 2021, including net income, dividends, and stock transactions Changes in Stockholders' Equity (Six Months Ended June 30, 2021, in thousands of dollars) | Item | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Total | | :------------------------------------------ | :----------- | :----------------------------- | :---------------- | :------------- | :------ | | Balance at December 31, 2020 | 124,285 | 3,379,057 | 1,261,862 | (81,327) | 4,683,877 | | Net income | - | - | 264,603 | - | 264,603 | | Dividends declared | - | - | (123,104) | - | (123,104) | | Issuance of common stock (DRIP) | 95 | 8,161 | - | - | 8,256 | | Repurchase of stock | - | - | - | (3,279) | (3,279) | | Equity compensation plan | 99 | (99) | - | - | - | | Exercise of stock options | 21 | 1,485 | - | - | 1,506 | | Stock-based compensation | - | 4,947 | (320) | - | 4,627 | | Other | - | (179) | - | 508 | 329 | | Balance at June 30, 2021 | 124,500 | 3,393,372 | 1,403,041 | (84,098) | 4,836,815 | [Consolidated Statements of Equity (Six Months Ended June 30, 2020)](index=9&type=section&id=Consolidated%20Statements%20of%20Equity%20(Six%20Months%20Ended%20June%2030%2C%202020)) This section presents the changes in consolidated stockholders' equity for the six months ended June 30, 2020, reflecting net income, dividends, and significant stock issuances Changes in Stockholders' Equity (Six Months Ended June 30, 2020, in thousands of dollars) | Item | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Total | | :------------------------------------------ | :----------- | :----------------------------- | :---------------- | :------------- | :------ | | Balance at December 31, 2019 | 111,935 | 2,636,555 | 1,210,072 | (77,702) | 3,880,860 | | Net income | - | - | 126,410 | - | 126,410 | | Dividends declared | - | - | (109,619) | - | (109,619) | | Issuance of common stock (Private Placement) | 11,999 | 718,136 | - | - | 730,135 | | Issuance of common stock (DRIP) | 93 | 7,968 | - | - | 8,061 | | Repurchase of stock | - | - | - | (4,343) | (4,343) | | Equity compensation plan | 114 | (114) | - | - | - | | Exercise of stock options | 30 | 1,037 | - | - | 1,067 | | Stock-based compensation | - | 3,990 | (241) | - | 3,749 | | Other | - | (43) | - | 91 | 48 | | Balance at June 30, 2020 | 124,171 | 3,366,695 | 1,226,622 | (81,954) | 4,635,534 | [Consolidated Statements of Cash Flow](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flow) This section provides the consolidated statements of cash flow for the six months ended June 30, 2021, and 2020, detailing operating, investing, and financing activities Consolidated Statements of Cash Flow (Six Months Ended June 30, in thousands of dollars) | Cash Flow Activity | 2021 | 2020 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | Net cash flows from operating activities | 412,868 | 245,202 | 167,666 | 68.38% | | Net cash flows used in investing activities | (403,781) | (3,759,935) | 3,356,154 | 89.26% | | Net cash flows (used in) from financing activities | (5,510) | 1,653,038 | (1,658,548) | (100.33%) | | Net change in cash and cash equivalents | 3,577 | (1,861,695) | 1,865,272 | 100.19% | | Cash and cash equivalents at end of period | 8,404 | 7,227 | 1,177 | 16.29% | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanatory notes to the consolidated financial statements, covering accounting policies, significant transactions, and financial instrument disclosures [Note 1 – Basis of Presentation](index=11&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) The unaudited consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC rules, and should be read with the 2020 Form 10-K. Management believes all necessary recurring accruals have been made for a fair presentation. The COVID-19 pandemic has not materially impacted estimates, assumptions, or forecasts due to the essential nature of the business, though future effects are uncertain. No changes to significant accounting policies were made since the 2020 Form 10-K - The financial statements are unaudited and prepared for interim reporting, consistent with GAAP and SEC rules[23](index=23&type=chunk) - Management believes all necessary recurring accruals have been made for a fair presentation of financial position, equity changes, results of operations, and cash flow[23](index=23&type=chunk) - The COVID-19 pandemic has not had a material impact on the Company's estimates, assumptions, and forecasts due to the essential nature of its business, but future impacts remain uncertain[25](index=25&type=chunk) [Note 2 – Revenue Recognition](index=12&type=section&id=Note%202%20%E2%80%93%20Revenue%20Recognition) Revenue is disaggregated by major source (water, wastewater, natural gas, other) and customer class (residential, commercial, fire protection, industrial, gas transportation, other water/wastewater). Tariff revenues are recognized over time as services are rendered, with rates approved by state utility commissions. Other utility revenues, including antenna fees and operation/maintenance contracts, are also recognized over time. Alternative revenue programs, such as weather-normalization adjustments for natural gas, are contracts with regulators, not customers, and are outside FASB revenue recognition guidance. Non-regulated natural gas operations and Aqua Resources also contribute to 'Other and Eliminations' revenues Operating Revenues Disaggregated by Source and Customer Class (Three Months Ended June 30, in thousands) | Revenue Source/Class | June 30, 2021 | June 30, 2020 | | :------------------- | :------------ | :------------ | | Water Revenues | 212,183 | 200,863 | | Wastewater Revenues | 32,504 | 30,149 | | Natural Gas Revenues | 142,886 | 146,880 | | Other Revenues | 9,459 | 6,576 | | **Consolidated Total** | **397,032** | **384,468** | Operating Revenues Disaggregated by Source and Customer Class (Six Months Ended June 30, in thousands) | Revenue Source/Class | June 30, 2021 | June 30, 2020 | | :------------------- | :------------ | :------------ | | Water Revenues | 405,114 | 385,643 | | Wastewater Revenues | 64,100 | 58,363 | | Natural Gas Revenues | 486,252 | 184,915 | | Other Revenues | 25,131 | 11,132 | | **Consolidated Total** | **980,597** | **640,053** | - The Company's performance obligation for tariff revenues is to provide potable water, wastewater treatment, or natural gas delivery and sale, satisfied over time as services are rendered[29](index=29&type=chunk) [Note 3 – Acquisitions](index=14&type=section&id=Note%203%20%E2%80%93%20Acquisitions) The Company completed the Peoples Gas Acquisition on March 16, 2020, for **$3.47 billion**, expanding its regulated utility business to include natural gas distribution. The purchase price allocation was finalized in Q1 2021, increasing goodwill by **$16.4 million**. The Company also completed several smaller water and wastewater utility acquisitions in 2020 and 2021 and has multiple pending acquisitions, including a significant DELCORA wastewater system acquisition for **$276.5 million**, which is subject to ongoing litigation and regulatory approval - Peoples Gas Acquisition completed on March 16, 2020, for **$3.47 billion**, expanding into natural gas distribution[35](index=35&type=chunk) Peoples Gas Acquisition Purchase Price Allocation Adjustments (in thousands of dollars) | Item | Previously Recognized as of Acquisition Date (a) | Measurement Period Adjustments | Recognized as of Acquisition Date (as Adjusted) | | :-------------------------------- | :--------------------------------------------- | :----------------------------- | :-------------------------------------------- | | Property, plant and equipment, net | 2,476,551 | - | 2,476,551 | | Current assets | 242,531 | (9,197) | 233,334 | | Regulatory assets | 286,751 | (22,293) | 264,458 | | Goodwill | 2,261,047 | 16,400 | 2,277,447 | | Total assets acquired | 5,341,951 | (15,090) | 5,326,861 | | Total liabilities assumed | 1,876,607 | (15,090) | 1,861,517 | | Net assets acquired | 3,465,344 | - | 3,465,344 | - Pending acquisitions include Shenandoah Borough (**$12.0 million**), Oak Brook (**$12.5 million**), East Whiteland Township and Willistown Township (**$72.4 million**), Village of Bourbonnais (**$32.1 million**), and Lower Makefield Township (**$53.0 million**)[46](index=46&type=chunk) - The DELCORA wastewater system acquisition for **$276.5 million** is pending, subject to regulatory approval and ongoing litigation with Delaware County, with closing expected in 2022[49](index=49&type=chunk) [Note 4 – Goodwill](index=19&type=section&id=Note%204%20%E2%80%93%20Goodwill) Goodwill increased by **$16.4 million** to **$2.34 billion** as of June 30, 2021, primarily due to measurement period adjustments related to the Peoples Gas Acquisition. A reclassification of $111 thousand from goodwill to utility plant acquisition adjustment also occurred, reflecting a mechanism for recovery through customer rates Changes in Goodwill by Business Segment (in thousands of dollars) | Segment | December 31, 2020 | Measurement Period Adjustments | Reclassification | June 30, 2021 | | :---------------- | :---------------- | :----------------------------- | :--------------- | :------------ | | Regulated Water | 58,659 | - | (111) | 58,548 | | Regulated Natural Gas | 2,261,047 | 16,400 | - | 2,277,447 | | Other | 4,841 | - | - | 4,841 | | **Consolidated** | **2,324,547** | **16,400** | **(111)** | **2,340,836** | - Goodwill increased by **$16.4 million** due to measurement period purchase price allocation adjustments from the Peoples Gas Acquisition[50](index=50&type=chunk) [Note 5 – Disposition](index=19&type=section&id=Note%205%20%E2%80%93%20Disposition) In October 2020, the Company sold its 49% investment in a joint venture, Aqua Infrastructure, which operated a private pipeline system for natural gas well drilling operations. A **$3.7 million** charge for the write-down of this investment was recorded in Q3 2020 - The Company sold its **49%** investment in a joint venture (Aqua Infrastructure) in October 2020, which supplied raw water to natural gas well drilling operations[52](index=52&type=chunk) - A charge of **$3.7 million** was recorded in Q3 2020 for the write-down of the investment associated with the sale[52](index=52&type=chunk) [Note 6 – Capitalization](index=20&type=section&id=Note%206%20%E2%80%93%20Capitalization) The Company filed a universal shelf registration in April 2021 for future equity and debt offerings. It has a forward equity sale agreement for **6.7 million shares** of common stock, expected to settle in August 2021, with proceeds for general corporate purposes and acquisitions. A private placement of **21.66 million common shares** was completed in March 2020, generating **$749.9 million**. Tangible equity units issued in April 2019 will automatically settle into common stock by April 2022. New long-term debt was issued in April 2021, including **$100 million** in first mortgage bonds by Aqua Ohio and **$400 million** in unsecured notes by the Company, used to repay existing indebtedness and for general corporate purposes - Filed a universal shelf registration in April 2021 for potential future offerings of common stock, preferred stock, debt securities, and other securities[54](index=54&type=chunk) - Entered into a forward equity sale agreement for **6.7 million shares** of common stock in August 2020, with settlement expected by August 9, 2021, at a forward price of **$44.77 per share** as of June 30, 2021[55](index=55&type=chunk)[56](index=56&type=chunk) - Completed a private placement of **21.66 million common shares** in March 2020, generating gross proceeds of **$749.9 million**[57](index=57&type=chunk) - Issued **$690 million** in tangible equity units in April 2019, which will automatically settle into common stock by April 30, 2022[61](index=61&type=chunk)[62](index=62&type=chunk) - Issued **$100 million** of first mortgage bonds by Aqua Ohio and **$400 million** of long-term debt by the Company in April 2021, used to repay existing debt and for general corporate purposes[64](index=64&type=chunk) [Note 7 – Financial Instruments](index=23&type=section&id=Note%207%20%E2%80%93%20Financial%20Instruments) The Company follows FASB guidance for fair value measurements, categorizing inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs). Loans payable, cash and cash equivalents, and assets underlying deferred compensation/non-qualified pension plans are recorded at carrying value, approximating fair value using Level 1 methods. Long-term debt fair value is determined using Level 2 methods by discounting future cash flows with current market interest rates. Customers' advances for construction fair value cannot be accurately estimated due to variable future payments - Fair value measurements are categorized into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[71](index=71&type=chunk) - Loans payable, cash and cash equivalents, and assets for deferred compensation/non-qualified pension plans approximate fair value using Level 1 methods[70](index=70&type=chunk) Long-term Debt Carrying Amounts and Estimated Fair Values (in thousands of dollars) | Metric | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Carrying amount | 5,769,090 | 5,630,243 | | Estimated fair value | 6,254,857 | 6,366,030 | - The fair value of long-term debt is determined by discounting future cash flows using current market interest rates for similar financial instruments (Level 2 methods)[72](index=72&type=chunk) [Note 8 – Net Income per Common Share](index=25&type=section&id=Note%208%20%E2%80%93%20Net%20Income%20per%20Common%20Share) Basic net income per common share is calculated based on weighted average common shares outstanding and the minimum shares from tangible equity units. Diluted net income per common share includes potentially dilutive securities like the forward equity sale agreement and employee stock-based compensation, calculated using the treasury stock method. All employee stock options were dilutive for the periods presented Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic computation | 254,769 | 254,167 | 254,667 | 245,144 | | Effect of dilutive securities: | | | | | | Forward equity sale agreement | 285 | - | 147 | - | | Issuance of common stock from private placement | - | - | - | 8,926 | | Employee stock-based compensation | 387 | 267 | 454 | 382 | | Diluted computation | 255,441 | 254,434 | 255,268 | 254,452 | - Basic EPS includes the weighted-average impact of **9.09 million shares** from tangible equity units for both periods[76](index=76&type=chunk) - All employee stock options were included in diluted EPS calculations as their exercise cost was less than the average market price[77](index=77&type=chunk) [Note 9 – Stock-based Compensation](index=26&type=section&id=Note%209%20%E2%80%93%20Stock-based%20Compensation) The Company's Amended and Restated Equity Compensation Plan authorizes **6.25 million shares** for various awards, including Performance Share Units (PSUs), Restricted Stock Units (RSUs), Stock Options, Restricted Stock, and Stock Awards. Compensation costs for PSUs, RSUs, and stock options are amortized over their vesting periods, while restricted stock awards are amortized over the restriction period, and stock awards are expensed immediately. Total stock-based compensation within operations and maintenance expenses for the six months ended June 30, 2021, was **$5.05 million** - The Amended and Restated Equity Compensation Plan authorizes **6.25 million shares** for issuance, with **2.13 million shares** available at June 30, 2021[78](index=78&type=chunk) Stock-based Compensation within Operations and Maintenance Expenses (in thousands of dollars) | Award Type | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance Share Units (PSUs) | 1,290 | 966 | 2,931 | 1,447 | | Restricted Stock Units (RSUs) | 761 | 554 | 1,365 | 1,032 | | Stock Options | 90 | 265 | 301 | 766 | | Restricted Stock | 12 | 99 | 106 | 117 | | Stock Awards | 175 | 170 | 350 | 345 | | **Total** | **2,328** | **2,054** | **5,053** | **3,707** | - The Company did not grant stock options or restricted stock for the six months ended June 30, 2021[83](index=83&type=chunk)[84](index=84&type=chunk) [Note 10 – Pension Plans and Other Postretirement Benefits](index=31&type=section&id=Note%2010%20%E2%80%93%20Pension%20Plans%20and%20Other%20Postretirement%20Benefits) The Company maintains qualified and nonqualified pension plans and other postretirement benefit plans, including those assumed from the Peoples Gas Acquisition. Net periodic benefit cost for pension benefits was a credit of **$(1.35) million** for the six months ended June 30, 2021, compared to a cost of **$2.54 million** in 2020, driven by improved investment returns. A plan amendment in Q2 2021, ending benefit accrual for a participant group, resulted in a **$20.73 million** decrease in pension benefit obligation and regulatory assets Net Periodic Benefit Cost (in thousands of dollars) | Benefit Type | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------- | :----------------------------- | :----------------------------- | | Pension Benefits | (1,352) | 2,536 | | Other Postretirement Benefits | 892 | 892 | - A plan amendment effective May 1, 2021, ended benefit accrual for a group of participants, leading to a **$20.73 million** decrease in pension benefit obligation and regulatory assets[91](index=91&type=chunk) - The Company made cash contributions of **$12.66 million** to its Pension Plan during the first six months of 2021 and plans to contribute an additional **$2.11 million** during the remainder of 2021[90](index=90&type=chunk) [Note 11 – Rate Activity](index=32&type=section&id=Note%2011%20%E2%80%93%20Rate%20Activity) During the first six months of 2021, the Company's water and wastewater utilities in New Jersey, Ohio, Virginia, and Indiana received base rate increases totaling **$2.64 million** annually. Its Kentucky gas utility also received a rate increase of **$0.75 million** annually. Additionally, infrastructure rehabilitation surcharges were approved for Pennsylvania and North Carolina water/wastewater divisions, expected to increase annual operating revenues by **$12.89 million** - Water and wastewater utility operating divisions in New Jersey, Ohio, Virginia, and Indiana were granted base rate increases designed to increase total operating revenues by **$2.64 million** annually[92](index=92&type=chunk) - A gas utility operating division in Kentucky was granted a rate increase designed to increase annual revenues by **$0.75 million**[92](index=92&type=chunk) - Infrastructure rehabilitation surcharges were approved for water and wastewater utility operating divisions in Pennsylvania and North Carolina, designed to increase total operating revenues by **$12.89 million** annually[92](index=92&type=chunk) [Note 12 – Taxes Other than Income Taxes](index=33&type=section&id=Note%2012%20%E2%80%93%20Taxes%20Other%20than%20Income%20Taxes) Taxes other than income taxes increased by **$6.29 million (17.5%)** for the six months ended June 30, 2021, compared to the same period in 2020. This increase was primarily driven by higher payroll taxes (**$2.77 million**) and other taxes (**$1.65 million**) associated with acquired operations, particularly the Peoples Gas Acquisition Components of Taxes Other than Income Taxes (in thousands of dollars) | Tax Type | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Property | 9,570 | 8,275 | 17,284 | 15,308 | | Gross receipts, excise and franchise | 3,949 | 3,579 | 7,633 | 6,701 | | Payroll | 4,718 | 4,693 | 11,474 | 8,973 | | Regulatory assessments | 847 | 698 | 1,685 | 1,398 | | Pumping fees | 1,464 | 1,487 | 2,590 | 2,568 | | Other | 572 | 701 | 1,495 | 921 | | **Total** | **21,120** | **19,433** | **42,161** | **35,869** | [Note 13 – Segment Information](index=33&type=section&id=Note%2013%20%E2%80%93%20Segment%20Information) The Company operates with two reportable segments: Regulated Water (eight operating segments aggregated) and Regulated Natural Gas (one operating segment from Peoples Gas Acquisition). An 'Other' category includes non-regulated natural gas operations, Aqua Infrastructure, Aqua Resources, and unallocated corporate costs. The Regulated Natural Gas segment significantly increased operating revenues and income for the six months ended June 30, 2021, due to the full period inclusion of Peoples Gas results - The Company has two reportable segments: Regulated Water (eight aggregated operating segments) and Regulated Natural Gas (one operating segment)[94](index=94&type=chunk) - The 'Other' category includes non-regulated natural gas operations, Aqua Infrastructure, Aqua Resources, and unallocated corporate costs[95](index=95&type=chunk) Segment Operating Results (Six Months Ended June 30, 2021 vs. 2020, in thousands of dollars) | Metric | Regulated Water 2021 | Regulated Water 2020 | Regulated Natural Gas 2021 | Regulated Natural Gas 2020 | Other 2021 | Other 2020 | Consolidated 2021 | Consolidated 2020 | | :-------------------------- | :------------------- | :------------------- | :------------------------- | :------------------------- | :--------- | :--------- | :---------------- | :---------------- | | Operating revenues | 476,530 | 450,283 | 484,677 | 184,915 | 19,390 | 4,855 | 980,597 | 640,053 | | Operating income (loss) | 198,233 | 186,299 | 153,545 | 36,530 | 9,902 | (26,213) | 361,680 | 196,616 | | Net income (loss) | 142,879 | 128,929 | 121,155 | 31,535 | 569 | (34,054) | 264,603 | 126,410 | | Capital expenditures | 247,911 | 217,373 | 156,252 | 75,458 | 394 | 259 | 404,557 | 293,090 | Total Assets by Segment (in thousands of dollars) | Segment | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Regulated water | 8,158,852 | 7,838,034 | | Regulated natural gas | 5,594,238 | 5,303,507 | | Other | 180,902 | 563,736 | | **Consolidated** | **13,933,992** | **13,705,277** | [Note 14 – Commitments and Contingencies](index=36&type=section&id=Note%2014%20%E2%80%93%20Commitments%20and%20Contingencies) The Company has accrued **$17.51 million** for loss contingencies as of June 30, 2021, with an estimated **$3.33 million** probable of recovery through insurance. A class action lawsuit related to a 'do not consume' advisory in Illinois is in discovery, but management does not expect a material adverse effect. Commitments from the Peoples Gas Acquisition include **$120 million** for pipe replacement (recoverable through rates) and **$23.004 million** in one-time customer rate credits, which have been granted - As of June 30, 2021, **$17.51 million** is accrued for loss contingencies, with an estimated **$3.33 million** probable of recovery through insurance[98](index=98&type=chunk) - A class action lawsuit in Illinois related to a 'do not consume' water advisory is ongoing, but management does not expect a material adverse effect on financial position, results of operations, or cash flows[99](index=99&type=chunk)[100](index=100&type=chunk) - Commitments from the Peoples Gas Acquisition include **$120 million** for pipe replacement (recoverable through customer rates) and **$23.004 million** in one-time customer rate credits, which were granted in 2020[102](index=102&type=chunk) [Note 15 – Income Taxes](index=37&type=section&id=Note%2015%20%E2%80%93%20Income%20Taxes) The Company's effective tax rate increased to **4.5%** for Q2 2021 (from **0.6%** in Q2 2020) and to **3.1%** for the six months ended June 30, 2021 (from **-5.6%** in 2020). This increase is attributed to higher income before income taxes and a lower tax deduction for qualifying infrastructure in Q2 2021, and an increased tax benefit from qualifying infrastructure for the six-month period. A settlement approved by the Pennsylvania Public Utility Commission dictates that **$160.655 million** in income tax benefits from a 'catch-up adjustment' for infrastructure investments will be refunded to utility customers over five years, starting August 2021 - Effective tax rate was **4.5%** for Q2 2021 (vs. **0.6%** in Q2 2020) and **3.1%** for the six months ended June 30, 2021 (vs. **-5.6%** in 2020)[104](index=104&type=chunk) - The increase in effective tax rate is due to higher income before income taxes and changes in tax deductions for qualifying infrastructure[104](index=104&type=chunk) - A settlement approved by the Pennsylvania Public Utility Commission will refund **$160.655 million** in income tax benefits from a 'catch-up adjustment' to utility customers over a five-year period, starting August 2021[103](index=103&type=chunk) [Note 16 – Recent Accounting Pronouncements](index=39&type=section&id=Note%2016%20%E2%80%93%20Recent%20Accounting%20Pronouncements) The Company is evaluating new FASB guidance on convertible instruments and contracts in an entity's own equity (effective after December 15, 2021) and reference rate reform (effective upon issuance, applicable through December 31, 2022) to determine their impact. Updated guidance simplifying income tax accounting was adopted on January 1, 2021, with no material impact on consolidated financial statements - Evaluating new FASB guidance on accounting for convertible instruments and contracts in an entity's own equity (effective after December 15, 2021)[108](index=108&type=chunk) - Evaluating new FASB guidance on reference rate reform (effective upon issuance, applicable through December 31, 2022)[109](index=109&type=chunk) - Adopted updated FASB guidance simplifying income tax accounting on January 1, 2021, which did not have a material impact on consolidated financial statements[110](index=110&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=40&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition and results of operations, including forward-looking statements, a general overview of the business, the impact of the COVID-19 pandemic, and a detailed analysis of financial performance for the three and six months ended June 30, 2021, compared to the prior year. It highlights the Company's growth strategy through acquisitions, particularly the Peoples Gas Acquisition, and discusses key financial metrics and operational drivers across its Regulated Water and Regulated Natural Gas segments [Forward-looking Statements](index=40&type=section&id=Forward-looking%20Statements) This section contains forward-looking statements regarding expected acquisition timings, legal proceedings, accounting pronouncements, and management's plans. These statements are subject to risks and uncertainties, including the COVID-19 pandemic, regulation, and capital markets, and readers are cautioned not to place undue reliance on them. The Company undertakes no obligation to update or revise these statements - The report contains forward-looking statements about acquisitions, legal proceedings, accounting pronouncements, and management's plans[114](index=114&type=chunk) - These statements are subject to risks and uncertainties, including the COVID-19 pandemic, regulation, and capital markets, which could cause actual results to differ materially[114](index=114&type=chunk) - The Company undertakes no obligation to update or revise forward-looking statements[114](index=114&type=chunk) [General Information](index=40&type=section&id=General%20Information) Essential Utilities, Inc. is a holding company providing regulated water, wastewater, and natural gas services to approximately five million people across ten states under the Aqua and Peoples brands. Its growth strategy focuses on acquiring regulated utilities and pursuing opportunistic market-based activities. The Company's most significant recent transaction was the March 2020 acquisition of Peoples, a natural gas distribution utility - Essential Utilities, Inc. provides regulated water, wastewater, and natural gas services to approximately five million people in ten states[116](index=116&type=chunk) - The Company's growth strategy targets acquisitions in the U.S. regulated sector (water, wastewater, natural gas) and opportunistic market-based activities[119](index=119&type=chunk) - The March 16, 2020, acquisition of Peoples, a natural gas distribution utility, marked the Company's entrance into the regulated natural gas business[119](index=119&type=chunk) [COVID-19 Pandemic](index=41&type=section&id=COVID-19%20Pandemic) The Company continues to monitor the COVID-19 pandemic, prioritizing employee safety and operational continuity for its essential services. It has implemented security measures, adjusted purchasing procedures to manage supply chain risks, and is monitoring customer utility billings. While some collection practices were temporarily curtailed by regulators, most states have allowed disconnections to resume. Despite ongoing risks, the Company has not experienced material financial or operational impacts related to COVID-19 as of the report date - The Company provides critical services and prioritizes employee safety, operational continuity, and customer support during the COVID-19 pandemic[122](index=122&type=chunk) - Adjusted purchasing procedures to secure necessary materials and continued its capital investment program without material impact[124](index=124&type=chunk) - As of the report date, the Company has not experienced any material financial or operational impacts related to COVID-19, despite ongoing risks[125](index=125&type=chunk) [Financial Condition](index=42&type=section&id=Financial%20Condition) The Company maintains a negative working capital position but expects adequate liquidity from internally generated funds, existing credit facilities, and proceeds from long-term debt and equity. In the first six months of 2021, it incurred **$404.56 million** in capital expenditures and issued **$760.18 million** in long-term debt. The Peoples Gas Acquisition in March 2020 was financed through various transactions, and related commitments include **$120 million** for pipe replacement and **$23.004 million** in customer rate credits. A **$160.655 million** income tax benefit from a 'catch-up adjustment' will be refunded to customers over five years - Management believes internally generated funds, existing credit facilities, and proceeds from long-term debt and equity will provide sufficient working capital for the next twelve months[127](index=127&type=chunk) - Incurred **$404.56 million** in capital expenditures and issued **$760.18 million** of long-term debt during the first six months of 2021[128](index=128&type=chunk) - The **$1.00 billion** unsecured revolving credit facility had **$916.69 million** available for borrowing at June 30, 2021[137](index=137&type=chunk) - A **$160.655 million** income tax benefit from a 'catch-up adjustment' for infrastructure investments will be refunded to utility customers over a five-year period starting August 2021[133](index=133&type=chunk) [Results of Operations](index=44&type=section&id=Results%20of%20Operations) The Company's results of operations show significant growth, particularly for the six months ended June 30, 2021, driven by the full inclusion of Peoples Gas Acquisition results. Consolidated operating revenues increased by **53.2%** and net income by **109.3%** for the six-month period. The Regulated Water segment also saw revenue growth from rate increases and customer base expansion, while the Regulated Natural Gas segment's performance was heavily influenced by the timing of the Peoples Gas acquisition and weather-related volume changes [Analysis of Second Quarter of 2021 Compared to Second Quarter of 2020](index=44&type=section&id=Analysis%20of%20Second%20Quarter%20of%202021%20Compared%20to%20Second%20Quarter%20of%202020) [Consolidated results (Q2 2021 vs. Q2 2020)](index=44&type=section&id=Consolidated%20results%20(Q2%202021%20vs.%20Q2%202020)) Consolidated operating revenues increased by **$12.56 million (3.3%)** for Q2 2021, leading to an **8.4% rise in net income** despite a higher income tax provision Consolidated Financial Performance (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------- | :----- | :----- | :----- | :------- | | Operating revenues | 397,032 | 384,468 | 12,564 | 3.27% | | Operating expenses | 267,704 | 261,349 | 6,355 | 2.43% | | Operating income | 129,328 | 123,119 | 6,209 | 5.04% | | Net income | 80,914 | 74,629 | 6,285 | 8.42% | | Effective income tax rate | 4.5% | 0.6% | 3.9% | 650.00% | - Operations and maintenance expenses decreased by **$1.09 million (0.8%)**, primarily due to reduced insurance claims, charitable trust contributions, and COVID-19 related expenses, offset by increased employee-related costs and production costs[141](index=141&type=chunk)[146](index=146&type=chunk) - Allowance for funds used during construction (AFUDC) increased by **$2.68 million (120.0%)** due to an increase in utility plant construction work in progress[145](index=145&type=chunk) [Regulated Water Segment (Q2 2021 vs. Q2 2020)](index=46&type=section&id=Regulated%20Water%20Segment%20(Q2%202021%20vs.%20Q2%202020)) The Regulated Water segment's revenues increased by **$14.09 million (6.0%)** for Q2 2021, driven by rate increases, customer base expansion, and higher volumes - Regulated Water segment revenues increased by **$14.09 million (6.0%)** for Q2 2021[149](index=149&type=chunk) - Revenue growth was primarily due to rate increases (**$7.85 million**), additional customers from acquisitions and organic growth (**$2.66 million**), and increased customer volumes (**$3.00 million**)[151](index=151&type=chunk) - Operations and maintenance expense increased by **$1.16 million (1.5%)**, driven by acquired systems, labor, and production costs, offset by decreased COVID-19 expenses[149](index=149&type=chunk)[151](index=151&type=chunk) [Regulated Natural Gas Segment (Q2 2021 vs. Q2 2020)](index=47&type=section&id=Regulated%20Natural%20Gas%20Segment%20(Q2%202021%20vs.%20Q2%202020)) The Regulated Natural Gas segment's operating revenues decreased by **$5.32 million (3.6%)** for Q2 2021 due to warmer weather and lower purchased gas adjustment revenues, significantly impacting net income Regulated Natural Gas Segment Gross Margin (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------- | :----- | :----- | :----- | :------- | | Operating revenues (GAAP) | 141,562 | 146,880 | (5,318) | (3.62%) | | Purchased gas | 39,788 | 41,593 | (1,805) | (4.34%) | | Gross margin (non-GAAP) | 101,774 | 105,287 | (3,513) | (3.34%) | - Operating revenues decreased by **$5.32 million (3.6%)** due to lower volumes from warmer weather and decreased purchased gas adjustment revenues[157](index=157&type=chunk)[160](index=160&type=chunk) - Net income for the Regulated Natural Gas segment decreased by **$16.09 million (89.4%)** due to factors including increased interest expense[159](index=159&type=chunk) [Analysis of First Six Months of 2021 Compared to First Six Months of 2020](index=48&type=section&id=Analysis%20of%20First%20Six%20Months%20of%202021%20Compared%20to%20First%20Six%20Months%20of%202020) [Consolidated results (Six Months 2021 vs. 2020)](index=48&type=section&id=Consolidated%20results%20(Six%20Months%202021%20vs.%202020)) Consolidated operating revenues increased by **$340.54 million (53.2%)** for the first six months of 2021, with net income surging by **$138.19 million (109.3%)** due to the full period inclusion of Peoples Gas Acquisition results Consolidated Financial Performance (Six Months Ended June 30, in thousands)

Financial Data and Key Metrics Changes - The company reported revenues of $397 million for Q2 2021, an increase of 3.3% year-over-year [17] - Net income grew by 8.4% from $74.6 million to $80.9 million, with GAAP earnings per share increasing from $0.29 to $0.32 [17][21] - Operations and maintenance (O&M) expenses decreased slightly to $127.5 million from $128.6 million in the same quarter last year [17][20] Business Line Data and Key Metrics Changes - The regulated water segment contributed $248.2 million to revenues, while the regulated natural gas segment contributed $141.6 million [17] - Water consumption increased by 4.2% in Q2 2021, with commercial usage rising by 20% as businesses reopened [19] - The regulated natural gas segment experienced a decrease in volume, contributing to a revenue decline of $4.9 million due to warmer weather [18] Market Data and Key Metrics Changes - The company completed rate cases or surcharge filings in multiple states, resulting in total annualized revenue of $16.7 million for the regulated water segment and $1.3 million for the regulated natural gas segment [26][27] - The company anticipates customer growth of 2% to 3% on average for the regulated water segment [34] Company Strategy and Development Direction - The company is focused on a municipal acquisition strategy, with 7 pending acquisitions totaling approximately $458.5 million [10][30] - The company plans to invest nearly $3 billion across its platform by 2023, aiming for rate base growth of 6% to 7% in water and 8% to 10% in gas [34] - The company is committed to ESG initiatives, including a multiyear target for employee diversity and a goal of 60% reduction in greenhouse gas emissions by 2035 [15][35] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing positive regulatory environment for fair market value transactions, despite some detractors [40] - The company expects to maintain its earnings guidance of $1.64 to $1.69 per share for the full year, despite anticipated expenses in the second half [34][24] - Management noted that the gas business typically does not generate significant revenue in Q3 but expects a rebound in Q4 with the heating season [25] Other Important Information - The company announced a 7% increase in its quarterly dividend, marking 31 years of consecutive increases [10] - The company published its 2020 ESG report, which includes detailed information on its natural gas segment for the first time [12] Q&A Session Summary Question: Impact of fair market value (FMV) on legislation and individual deals - Management believes there will be no rollback on FMV legislation and sees positive momentum as municipalities seek solutions for capital constraints [40][41] Question: Status of water quality accountability legislation in Pennsylvania - Management indicated that the legislation is still moving forward and expects it to progress through the legislature before the year ends [44] Question: Insights on the Texas acquisition process - The Texas deal was described as relatively smooth, taking about a year to complete [46] Question: Update on Pennsylvania commissioner appointments - Management noted a potential 2:1 Republican majority on the commission, which could influence pending applications [50] Question: Stability of gas customer count and weather conditions - Gas customer count is expected to remain stable, with organic growth in certain states, while weather conditions have been generally favorable [60][61] Question: Interaction between ESG profile and local utility commissions - Management acknowledged that ESG elements are increasingly discussed with regulators, particularly regarding greenhouse gas emissions and customer assistance programs [68][70]