On May 20, 2022, the Company issued $100,000$500,000 of first mortgage bonds consistinglong-term debt (the “Senior Notes”), less expenses of $5,815, due in 2052 with an interest rate of 5.30%. The Company used the following:
\

Amount
Interest Rate
Maturity
$25,000
3.64%
2032
$6,000
3.89%
2037
$15,000
3.90%
2038
$10,000
4.18%
2047
$22,000
4.22%
2049
$22,000
4.24%
2050
Thenet proceeds from these bonds werethe issuance of Senior Notes to (1) to repay $49,700 of borrowings under Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the Company’s existing five year unsecured revolving credit facility, and (2) for general corporate purposes.

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

Forward-looking Statements

General Information

Financial Condition

On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815, due in 2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay $49,700 of borrowings under the Aqua Pennsylvania in JulyPennsylvania’s 364-day revolving credit facility and January 2017$410,000 of borrowings under the Company’s existing five-year unsecured revolving credit facility, and $100,000 of first mortgage bonds by Aqua Illinois in July 2017.
(2) for general corporate purposes.

At SeptemberJune 30, 2017,2023, we had $4,139$11,642 of cash and cash equivalents compared to $3,763 $11,398at December 31, 2016.2022. During the first ninesix months of 2017,2023, we used the proceeds from long-term debt and the issuance of long-term debt andcommon stock, as well as internally generated funds to fund the cash requirements discussed above and to pay dividends.
27
Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

At SeptemberJune 30, 2017,2023 our $250,000$1,000,000 unsecured revolving credit facility, which expires in February 2021,December 2027, had $183,547$305,362 available for borrowing. At SeptemberAdditionally, at June 30, 2017,2023, we had short-term lines of credit of $135,500,$435,500, primarily used for working capital, of which $114,510$382,839 was available for borrowing. One of our short-term lines of credit is anOn June 29, 2023, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of its respective $100,000 and $300,000 364-day unsecured revolving credit facility with four banks, which is usedagreements by extending the maturity dates to provide working capital,June 27, 2024 and as of September 30, 2017, $80,000 was available for borrowing. In July we issued $180,000 of long-term debt,updated the proceeds of which were used to reduce our borrowings under our revolving credit facilities. Subsequently, in October we issued $75,000 of long-term debt,adjustment on the proceeds of which were used to reduce our borrowings under our revolving credit facilities.
Bloomberg Short-Term Bank Yield Index (BSBY) floating rate. Our short-term lines of credit of $135,500$435,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended June 30, 2023 and 2022 are presented below.

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Consolidated operating revenues decreased by $12,056 or 2.7% as compared to the same period in 2022. Revenues from our Regulated Water segment increased by $24,317. Revenues from our Regulated Natural Gas and Other business segment decreased by $28,746 and $7,627, respectively. A detailed discussion of the factors contributing to the changes in segment revenue is included below under the section, Segment Results of Operations.The decrease in our Other business segment revenue is due to lower revenues from our non-regulated natural gas operations primarily as a result of lower average gas prices and lower gas usage in the current period as compared to the prior period.

Consolidated operations and maintenance expense decreased by $1,473 or 1.1%, primarily due to:

Purchased gas decreased by $33,210 or 44.2%. Purchased gas represents the cost of gas sold by Peoples, which for the regulated gas business has a corresponding offset in revenue. The expense decreased primarily due to lower gas usage and lower average cost of gas withdrawn from storage during the second quarter of 2023 as compared to the same period in the prior year.

Taxes other than income taxes decreased by $1,372 or 6.3% largely due to the decrease in pumping fees in our Aqua Texas subsidiary.

Other expense, net - Interest expense, net of interest income increased by $13,815 or 25.4% for the quarter primarily due to the increase in average borrowings and higher interest rates on our revolving lines of credit and our 2022 and 2023 long term borrowings.

Allowance for funds used during construction (“AFUDC”) increaseddecreased by $1,647,$2,727 or by 44.3% due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Other income, inclusive of gain on sale of other assets, decreased by$358 or by 39.7% primarily due to lower net pension and an increasepost-retirement non-service benefit in the AFUDC rate as a result of an increase in the amount of AFUDC related2023 compared to equity.
2022.

Income tax benefit - Our effective income tax rate was 4.3%(0.3)% in the thirdsecond quarter of 20172023 and 10.3%9.0% in the thirdsecond quarter of 2016.2022. The decrease in the effective tax rate for the second quarter of the year is primarily attributed to the increase in income tax ratebenefits associated with the tax deduction for qualifying infrastructure in our Regulated Natural Gas segment.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Consolidated operating revenues increased by $15,119 or 1.3% for the six months ended June 30, 2023, as compared to the same period in 2022. Revenues from our Regulated Water segment increased by $52,419. Revenues from our Regulated Natural Gas segment and Other business segment decreased by $32,634 and $4,666, respectively. A detailed discussion of the factors contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations. The decrease in our Other business segment revenue is due to the effect of additional tax deductions recognized in the third quarter of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania.
Net income increased by $3,055 or 4.2%,lower revenues from our non-regulated natural gas operations primarily as a result of lower average gas prices and lower gas usage in the factors described above.
Analysis of First Nine Months of 2017 Comparedcurrent period as compared to First Nine Months of 2016
Revenuesthe prior period.

Consolidated operations and maintenance decreased by $16,863$6,060 or 2.7%2.2%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a to:

decrease in customer assistance surcharge costs of $5,300 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;

decrease in bad debt expense of $1,199 as a result of improvement in the age of receivables;

decrease in outside services, maintenance expenses, and other operating expenses in our Regulated Water segment of $4,463, primarily due to lower water consumption,main break activity and higher capitalization as a result of greater capital spend during the period;

decrease in insurance expense of $1,407 due to lower claims;

an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value;

decrease in postretirement benefit expense of $4,200 in our Regulated Water segment; offset by, an

increase in materials and supplies expense in our Regulated Natural Gas segment of $1,576;

increase in production costs for water and wastewater ratesoperations of $7,321, primarily due to higher chemical prices and infrastructure rehabilitation surchargesincreased purchased water costs;

additional operating costs associated with acquired and pending acquisitions of $4,586, additional water and wastewater revenues from organic growthutility systems of $2,296,$2,594; and, additional water and wastewater revenues

expenses of $1,257$273, associated with a larger customer base dueremediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to utility acquisitions. continue through 2023.

Purchased gas decreased by $19,384$4,607 or 8.5%, primarily due to1.5%. Purchased gas represents the cost of gas sold by Peoples for the regulated and non-regulated gas business and has a reductioncorresponding offset in operating expenses for Aqua Resourcesrevenue. The slight decrease is the result of $12,981 associated with the completionlower gas usage in first six months of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $4,459, a decrease in the Company’s self-insured employee medical benefit program expense of $4,239, and a decrease in postretirement benefits expense of $2,946,2023 offset by the prior year effecthigher average cost of a gain on salegas withdrawn from storage during the first quarter of a utility system of $1,215. The gain on sale of a utility system is reported in the consolidated statement of net income as a component of operations2023.

Depreciation and maintenance expense. The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source.
Depreciationamortization expense increased by $3,863$11,933 or 4.0%, primarily7.6% principally due to thecontinued capital expenditures to expand and improve our utility plant placed in service since September 30, 2016.
facilities and our acquisitions of new utility systems.

Taxes other than income taxes decreased by $1,501 or 3.4% largely due to the decrease in pumping fees in our Aqua Texas subsidiary.

Interest expense, net of interest income, increased by $1,296$32,637 or 3.0% primarily due to an increase in property taxes of $48930.4% for the period primarily due to the effect of a benefit recorded in 2016 for Ohio based on the final settlement of a property tax bill, and an increase in pumping fees of $319 in Texas due to higher rates and water production.
Interest expense increased by $4,988 or 8.3%, primarily due to an increase in average borrowings and higher interest rates on our revolving lines of credit and our 2022 and 2023 long term borrowings.
AFUDC increased

Allowance for funds used during construction (“AFUDC”) decreased by $4,124,$2,878 or by 24.0% due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Other income, inclusive of gain on sale of assets, decreased by$1,571 or by 60.4% compared to the same period in the prior year. During the first half of 2023, there were lower credits recognized from postretirement benefits as compared with the same period in the prior year.

Our effective income tax rate was (12.7)% in the first six months of 2023 and (3.4)% in the first six months of 2022. The decrease in the effective tax rate is primarily attributed to an increase in our income tax benefit associated with the AFUDC rate as a resulttax deduction for qualifying infrastructure in our Regulated Natural Gas segment.

Segment Results of an increase inOperations

Regulated Water Segment

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

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Revenues from our Regulated Water segment increased by $24,317 or 9.0% for the first quarter of 2023 as compared to the same period in 2022, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $19,699;

additional water and wastewater revenues of $2,956 associated with a larger customer base due to utility acquisitions and organic growth; and,

Operations and maintenance expense for the three months ended June 30, 2023 increased by $412 or 0.4% primarily due to the following:

Depreciation and amortization increased by $2,971 or 5.9% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Other expense, net – Interest expense, net, increased by $2,919 or 10.6% for the quarter primarily due to an increase in average borrowings and increased borrowing costs.

AFUDC decreased by $2,407 or by 45.0% due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Other income, inclusive of gain on sale of other assets, decreased by$1,297 or by 75.1% primarily due to lower net pension and post-retirement non-service benefit during the second quarter of 2023 compared to 2022.

Provision for income tax – Our effective income tax rate for our Regulated Water Segment was an expense of 15.0% in the second quarter of 2023, compared to an expense of 15.4% in the second quarter of 2022. The decrease in the effective tax rate is primarily the result of changes in the jurisdictional earnings mix.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Revenues increased by $52,419 or 10.3% for the first six months of 2023 as compared to the same period in 2022, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $38,997;

additional water and wastewater revenues of $7,850 associated with a larger customer base due to utility acquisitions and organic growth;

increase in volume consumption of $1,622 as a result of warmer weather conditions in 2023; and,

increase in non-utility revenue of $4,509, primarily due to higher developer fees earned during Q1 of 2023.

Operations and maintenance expense for the six months ended June 30, 2023 decreased by $2,874 or 1.6% primarily due to the following:

lower outside services, maintenance expenses and other operating expenses of $4,463, primarily due to lower water main break activity and higher capitalization as a result of greater capital spend during the period;

lower insurance expense of $1,131 due to lower claims;

decrease in bad debt expenses of $1,245 as a result of improvement in the age of receivables;

decrease in postretirement benefit expense of $4,200; offset by,

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,594;

increase in production costs for water and wastewater operations of $7,321; and,

expenses of $273, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.

Depreciation and amortization increased by $7,722 or 7.8% primarily due to continued capital investment, offset by a change in the amortization of a regulated liability in 2022.

Interest expense, net, increased by $5,078 or 9.2% for the quarter primarily due to an increase in average borrowings.

AFUDC decreased by $2,610 or 24.9% due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Regulated Natural Gas Segment

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

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Operating revenues from the Regulated Natural Gas segment decreased by $28,746 or by 17.1% due to:

Operations and maintenance expense for the three months ended June 30, 2023 decreased by $3,793 or 8.4% primarily due to the following:

Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Fluctuations in the cost of purchased gas impact operating revenues on a dollar-for-dollar basis, but do not impact gross margin. Purchased gas decreased by $23,727 or 37.4%. The expense decreased primarily due to lower gas usage and lower average cost of gas withdrawn from storage and during the second quarter of 2023 as compared to the same period in the prior year.

Depreciation and amortization increased by $3,057 or 10.5% primarily due to continued capital investment, offset by lower depreciation due to an increase in assets that are fully depreciated as of the current quarter.

Taxes other than income taxes decreased by $125 or 2.2%.

Other expense, net – Interest expense, net, increased by $1,811 or 9.4% for the quarter due to an increase in average borrowings, and an increase in average interest rates.

AFUDC decreased by $320 due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Income tax benefit – Our effective income tax rate decreased significantly in the second quarter of 2023, compared to the second quarter of 2022. The change in the effective tax rate is primarily attributed to an increase in the income tax benefit associated with the tax deduction for qualifying infrastructure in our Regulated Natural Gas segment.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Operating revenues from the Regulated Natural Gas segment decreased by $32,634 or 5.3% due to:

lower gas usage of $35,151, primarily due to warmer weather conditions in 2023 compared to the prior period;

decrease in customer assistance surcharge of $5,300, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,

Operations and maintenance expense for the six months ended June 30, 2023 decreased by $6,095 or 5.8% primarily due to the following:

decrease in customer assistance surcharge costs of $5,300, which has an equivalent offsetting amount in revenues;

an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value;

decrease in insurance expense of $1,878 due to lower claims; offset by,

increase in materials and supplies of $1,576.

Depreciation and amortization increased by $3,481 or 5.9% primarily due to continued capital investment in pipe replacement.

Taxes other than income taxes decreased by $695 or 5.9% mainly due to lower sales and use taxes.

Interest expense, net, increased by $8,666 or 21.8% due to an increase in average borrowings, and an increase in average interest rates.

AFUDC decreased by $268 due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Our effective income tax rate was 6.0%a benefit of 70.7% in the first nine monthshalf of 20172023 and 8.4%a benefit of 26.5% in the first nine monthshalf of 2016.2022. The change in the effective tax rate is primarily attributed to the increase in the income tax rate decreased due tobenefit associated with the effect of additional tax deductions recognized in the first nine months of 2017deduction for certain qualifying infrastructure improvements for Aqua Pennsylvania. in our Regulated Natural Gas segment.

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

Forward-looking Statements

General Information

Financial Condition

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended June 30, 2023 and 2022 are presented below.

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Consolidated operations and maintenance expense decreased by $1,473 or 1.1%, primarily due to:

Taxes other than income taxes decreased by $1,372 or 6.3% largely due to the decrease in pumping fees in our Aqua Texas subsidiary.

Other expense, net - Interest expense, net of interest income increased by $13,815 or 25.4% for the quarter primarily due to the increase in average borrowings and higher interest rates on our revolving lines of credit and our 2022 and 2023 long term borrowings.

Allowance for funds used during construction (“AFUDC”) increaseddecreased by $1,647,$2,727 or by 44.3% due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Other income, inclusive of gain on sale of other assets, decreased by$358 or by 39.7% primarily due to lower net pension and an increasepost-retirement non-service benefit in the AFUDC rate as a result of an increase in the amount of AFUDC related2023 compared to equity. 2022.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Consolidated operations and maintenance decreased by $16,863$6,060 or 2.7%2.2%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a to:

decrease in customer assistance surcharge costs of $5,300 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;

decrease in bad debt expense of $1,199 as a result of improvement in the age of receivables;

decrease in outside services, maintenance expenses, and other operating expenses in our Regulated Water segment of $4,463, primarily due to lower water consumption,main break activity and higher capitalization as a result of greater capital spend during the period;

decrease in insurance expense of $1,407 due to lower claims;

an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value;

decrease in postretirement benefit expense of $4,200 in our Regulated Water segment; offset by, an

increase in materials and supplies expense in our Regulated Natural Gas segment of $1,576;

increase in production costs for water and wastewater ratesoperations of $7,321, primarily due to higher chemical prices and infrastructure rehabilitation surchargesincreased purchased water costs;

additional operating costs associated with acquired and pending acquisitions of $4,586, additional water and wastewater revenues from organic growthutility systems of $2,296,$2,594; and, additional water and wastewater revenues

expenses of $1,257$273, associated with a larger customer base dueremediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to utility acquisitions. continue through 2023.

Taxes other than income taxes decreased by $1,501 or 3.4% largely due to the decrease in pumping fees in our Aqua Texas subsidiary.

Allowance for funds used during construction (“AFUDC”) decreased by $4,124,$2,878 or by 24.0% due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied,applied.

Other income, inclusive of gain on sale of assets, decreased by$1,571 or by 60.4% compared to the same period in the prior year. During the first half of 2023, there were lower credits recognized from postretirement benefits as compared with the same period in the prior year.

Segment Results of an increase inOperations

Regulated Water Segment

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Revenues from our Regulated Water segment increased by $24,317 or 9.0% for the first quarter of 2023 as compared to the same period in 2022, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $19,699;

additional water and wastewater revenues of $2,956 associated with a larger customer base due to utility acquisitions and organic growth; and,

Operations and maintenance expense for the three months ended June 30, 2023 increased by $412 or 0.4% primarily due to the following:

Depreciation and amortization increased by $2,971 or 5.9% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Other expense, net – Interest expense, net, increased by $2,919 or 10.6% for the quarter primarily due to an increase in average borrowings and increased borrowing costs.

AFUDC decreased by $2,407 or by 45.0% due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Other income, inclusive of gain on sale of other assets, decreased by$1,297 or by 75.1% primarily due to lower net pension and post-retirement non-service benefit during the second quarter of 2023 compared to 2022.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Revenues increased by $52,419 or 10.3% for the first six months of 2023 as compared to the same period in 2022, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $38,997;

additional water and wastewater revenues of $7,850 associated with a larger customer base due to utility acquisitions and organic growth;

increase in volume consumption of $1,622 as a result of warmer weather conditions in 2023; and,

increase in non-utility revenue of $4,509, primarily due to higher developer fees earned during Q1 of 2023.

Operations and maintenance expense for the six months ended June 30, 2023 decreased by $2,874 or 1.6% primarily due to the following:

lower outside services, maintenance expenses and other operating expenses of $4,463, primarily due to lower water main break activity and higher capitalization as a result of greater capital spend during the period;

lower insurance expense of $1,131 due to lower claims;

decrease in bad debt expenses of $1,245 as a result of improvement in the age of receivables;

decrease in postretirement benefit expense of $4,200; offset by,

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,594;

increase in production costs for water and wastewater operations of $7,321; and,

expenses of $273, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.

Depreciation and amortization increased by $7,722 or 7.8% primarily due to continued capital investment, offset by a change in the amortization of a regulated liability in 2022.

Interest expense, net, increased by $5,078 or 9.2% for the quarter primarily due to an increase in average borrowings.

AFUDC decreased by $2,610 or 24.9% due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Regulated Natural Gas Segment

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Operating revenues from the Regulated Natural Gas segment decreased by $28,746 or by 17.1% due to:

Operations and maintenance expense for the three months ended June 30, 2023 decreased by $3,793 or 8.4% primarily due to the following:

Depreciation and amortization increased by $3,057 or 10.5% primarily due to continued capital investment, offset by lower depreciation due to an increase in assets that are fully depreciated as of the current quarter.

Taxes other than income taxes decreased by $125 or 2.2%.

Other expense, net – Interest expense, net, increased by $1,811 or 9.4% for the quarter due to an increase in average borrowings, and an increase in average interest rates.

AFUDC decreased by $320 due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Operating revenues from the Regulated Natural Gas segment decreased by $32,634 or 5.3% due to:

lower gas usage of $35,151, primarily due to warmer weather conditions in 2023 compared to the prior period;

decrease in customer assistance surcharge of $5,300, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,

Operations and maintenance expense for the six months ended June 30, 2023 decreased by $6,095 or 5.8% primarily due to the following:

decrease in customer assistance surcharge costs of $5,300, which has an equivalent offsetting amount in revenues;

an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value;

decrease in insurance expense of $1,878 due to lower claims; offset by,

increase in materials and supplies of $1,576.

Depreciation and amortization increased by $3,481 or 5.9% primarily due to continued capital investment in pipe replacement.

Taxes other than income taxes decreased by $695 or 5.9% mainly due to lower sales and use taxes.

Interest expense, net, increased by $8,666 or 21.8% due to an increase in average borrowings, and an increase in average interest rates.

AFUDC decreased by $268 due to the decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Other income, inclusive of gain on sale of other assets, decreased by$358 or by 39.7% primarily due to lower net pension and an increasepost-retirement non-service benefit in the AFUDC rate as a result of an increase in the amount of AFUDC related2023 compared to equity.
2022.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September~~June 30, ~~2017~~2023

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

For the transition period from_______________ to _______________

Commission File Number 1-6659

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

(Exact name of registrant as specified in its charter)


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

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

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

N/A

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

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

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

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


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

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

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


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 24, 2023: 264,505,777

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

Table of Contents

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

TABLE OF CONTENTS


	Page
Part I – Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) – ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022	2


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

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

~~Consolidated Statements of~~ Comprehensive Income (unaudited) – ‎Three ~~and Nine~~ Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	5
4

Consolidated Statements of Operations and Comprehensive Income (unaudited) – ‎Six Months Ended June 30, 2023 and 2022	5

Consolidated Statements of Capitalization (unaudited) – ~~September~~‎June 30, ~~2017~~2023 and December 31, ~~2016~~2022	6


Consolidated ~~Statement~~Statements of Equity (unaudited) – ~~Nine~~‎Six Months Ended ~~September~~June 30, ~~2017~~2023	7


Consolidated Statements of Equity (unaudited) – ‎Six Months Ended June 30, 2022	8

Consolidated Statements of Cash Flow (unaudited) – ~~Nine~~‎Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	8
9

Notes to Consolidated Financial Statements (unaudited)	9
10

Item 2. Management’s Discussion and Analysis of Financial ‎Condition and Results of Operations	26
32

Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
47

Item 4. Controls and Procedures	31 47


Part II – Other Information

Item 1. Legal Proceedings	31
47

Item 1A. Risk Factors	31
47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
48
~~Item 6. Exhibits~~	32

~~Exhibit Index~~Item 5. Other Information	33
48

~~Signatures~~Item 6. Exhibits	34 49

Signatures	50

Table of Contents

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

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

September 30,

December 31,
Assets

2017

2016
Property, plant and equipment, at cost

$
6,857,093

$
6,509,117
Less: accumulated depreciation

1,580,619

1,507,502
Net property, plant and equipment

5,276,474

5,001,615
Current assets:

Cash and cash equivalents

4,139

3,763
Accounts receivable and unbilled revenues, net

104,894

97,394
Inventory, materials and supplies

16,557

12,961
Prepayments and other current assets

11,209

12,804
Assets held for sale

1,543

1,728
Total current assets

138,342

128,650

Regulatory assets

1,044,787

948,647
Deferred charges and other assets

36,169

30,845
Investment in joint venture

7,379

7,026
Goodwill

42,230

42,208
Total assets

$
6,545,381

$
6,158,991
Liabilities and Equity

Stockholders' equity:

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

$
90,334

$
90,155
Capital in excess of par value

804,753

797,513
Retained earnings

1,115,601

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

(73,229)

(71,113)
Accumulated other comprehensive income

806

669
Total stockholders' equity

1,938,265

1,850,068

Long-term debt, excluding current portion

1,974,327

1,759,962
Less: debt issuance costs

21,854

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

1,952,473

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

Current liabilities:

Current portion of long-term debt

84,704

150,671
Loans payable

20,990

6,535
Accounts payable

63,358

59,872
Accrued interest

23,210

18,367
Accrued taxes

21,745

25,607
Other accrued liabilities

38,943

40,484
Total current liabilities

252,950

301,536

Deferred credits and other liabilities:

Deferred income taxes and investment tax credits

1,391,096

1,269,253
Customers' advances for construction

107,715

91,843
Regulatory liabilities

239,469

250,635
Other

110,412

115,583
Total deferred credits and other liabilities

1,848,692

1,727,314

Contributions in aid of construction

553,001

542,468
Total liabilities and equity

$
6,545,381

$
6,158,991

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


	June 30,		December 31,
Assets	2023		2022
Property, plant and equipment, at cost	$	14,344,435	$	13,737,387
Less: accumulated depreciation		2,753,586		2,606,441
Net property, plant and equipment		11,590,849		11,130,946

Current assets:
Cash and cash equivalents		11,642		11,398
Accounts receivable, net		149,942		206,324
Unbilled revenues		75,737		170,504
Inventory - materials and supplies		45,300		46,592
Inventory - gas stored		63,216		153,143
Current assets held for sale		7,378		11,167
Prepayments and other current assets		36,557		39,759
Regulatory assets		16,938		19,272
Total current assets		406,710		658,159

Regulatory assets		1,518,079		1,342,753
Deferred charges and other assets, net		166,391		166,653
Funds restricted for construction activity		1,360		1,342
Goodwill		2,340,755		2,340,792
Non-current assets held for sale		34,419		32,124
Operating lease right-of-use assets		39,151		41,734
Intangible assets		4,221		4,604
Total assets	$	16,101,935	$	15,719,107

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

Table of Contents

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

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

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

~~(UNAUDITED)~~

Three Months Ended

September 30,

2017

2016
Operating revenues

$
215,008

$
226,593

Operating expenses:

Operations and maintenance

67,982

79,812
Depreciation

34,264

33,881
Amortization

42

389
Taxes other than income taxes

15,234

14,712
Total operating expenses

117,522

128,794

Operating income

97,486

97,799

Other expense (income):

Interest expense, net

22,411

20,168
Allowance for funds used during construction

(3,914)

(2,267)
Gain on sale of other assets

(43)

(62)
Equity earnings in joint venture

(593)

(1,621)
Income before income taxes

79,625

81,581
Provision for income taxes

3,400

8,411
Net income

$
76,225

$
73,170

Net income per common share:

Basic

$
0.43

$
0.41
Diluted

$
0.43

$
0.41

Average common shares outstanding during the period:

Basic

177,660

177,336
Diluted

178,124

177,817

Cash dividends declared per common share

$
0.2047

$
0.191

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF NET INCOME~~

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

~~(UNAUDITED)~~

Nine Months Ended

September 30,

2017

2016
Operating revenues

$
606,213

$
623,076

Operating expenses:

Operations and maintenance

207,963

227,347
Depreciation

101,508

97,645
Amortization

358

1,367
Taxes other than income taxes

44,390

43,094
Total operating expenses

354,219

369,453

Operating income

251,994

253,623

Other expense (income):

Interest expense, net

65,124

60,136
Allowance for funds used during construction

(10,570)

(6,446)
Gain on sale of other assets

(322)

(390)
Equity earnings in joint venture

(402)

(1,143)
Income before income taxes

198,164

201,466
Provision for income taxes

11,899

16,933
Net income

$
186,265

$
184,533

Net income per common share:

Basic

$
1.05

$
1.04
Diluted

$
1.05

$
1.04

Average common shares outstanding during the period:

Basic

177,583

177,243
Diluted

178,103

177,781

Cash dividends declared per common share

$
0.5873

$
0.5473

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Net income

$
76,225

$
73,170

$
186,265

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

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

42

20

137

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

-

-

-

(57)
Comprehensive income

$
76,267

$
73,190

$
186,402

$
184,502

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

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CAPITALIZATION~~

(In thousands of dollars, except per share amounts)

(UNAUDITED)

ShareBasedCompensationArrangementByShareBasedPaymentAwardEquityInstrumentsOtherThanOptionsVestedInPeriod

September 30,

December 31,

2017

2016
Stockholders' equity:

    Common stock, $.50 par value

$
90,334

$
90,155
    Capital in excess of par value

804,753

797,513
    Retained earnings

1,115,601

1,032,844
    Treasury stock, at cost

(73,229)

(71,113)
    Accumulated other comprehensive income

806

669
Total stockholders' equity

1,938,265

1,850,068

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

Interest Rate Range
Maturity Date Range

0.00% to  0.99%
2023 to 2033

4,196

4,661
1.00% to  1.99%
2019 to 2035

13,196

15,539
2.00% to  2.99%
2024 to 2033

19,689

19,668
3.00% to  3.99%
2019 to 2056

475,904

381,944
4.00% to  4.99%
2020 to 2054

556,681

487,318
5.00% to  5.99%
2019 to 2043

205,703

213,078
6.00% to  6.99%
2017 to 2036

44,000

52,985
7.00% to  7.99%
2022 to 2027

32,521

33,066
8.00% to  8.99%
2021 to 2025

6,214

6,565
9.00% to  9.99%
2018 to 2026

25,700

26,400
10.00% to 10.99%
2018

6,000

6,000

1,389,804

1,247,224

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

49,000

25,000
Unsecured notes payable:

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

100,000

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

245,000

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

122,800

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

152,427

159,809
Total long-term debt

2,059,031

1,910,633

Current portion of long-term debt

84,704

150,671
Long-term debt, excluding current portion

1,974,327

1,759,962
Less:  debt issuance costs

21,854

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

1,952,473

1,737,605

Total capitalization

$
3,890,738

$
3,587,673

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


	June 30,		December 31,
Liabilities and Equity	2023		2022
Stockholders' equity:
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 267,818,219 and 266,973,321 as of June 30, 2023 and December 31, 2022	$	133,909	$	133,486
Capital in excess of par value		3,827,199		3,793,262
Retained earnings		1,740,682		1,534,331
Treasury stock, at cost, 3,312,850 and 3,236,237 shares as of June 30, 2023 and December 31, 2022		(87,092)		(83,693)
Total stockholders' equity		5,614,698		5,377,386

Long-term debt, excluding current portion		6,661,014		6,418,039
Less: debt issuance costs		45,498		46,982
Long-term debt, excluding current portion, net of debt issuance costs		6,615,516		6,371,057
Commitments and contingencies (See Note 14)

Current liabilities:
Current portion of long-term debt		198,749		199,356
Loans payable		48,043		228,500
Accounts payable		178,902		238,843
Book overdraft		32,490		28,694
Accrued interest		50,625		47,063
Accrued taxes		26,232		34,393
Liabilities related to assets held for sale		3,081		3,263
Regulatory liabilities		96,669		35,276
Dividends payable		-		75,808
Other accrued liabilities		130,344		130,673
Total current liabilities		765,135		1,021,869

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		1,459,002		1,345,766
Customers' advances for construction		125,362		114,732
Regulatory liabilities		807,240		778,754
Asset retirement obligations		842		843
Operating lease liabilities		36,387		37,666
Non-current liabilities related to assets held for sale		803		974
Pension and other postretirement benefit liabilities		31,196		31,244
Other		24,648		28,562
Total deferred credits and other liabilities		2,485,480		2,338,541

Contributions in aid of construction		621,106		610,254
Total liabilities and equity	$	16,101,935	$	15,719,107

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

Table of Contents

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

~~CONSOLIDATED STATEMENT OF EQUITY~~

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Accumulated

Capital in

Other

Common

Excess of

Retained

Treasury

Comprehensive

Stock

Par Value

Earnings

Stock

Income

Total
Balance at December 31, 2016

$
90,155

$
797,513

$
1,032,844

$
(71,113)

$
669

$
1,850,068
Net income

-

-

186,265

-

-

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

-

-

-

-

137

137
Dividends

-

-

(104,286)

-

-

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

17

1,067

-

-

-

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

-

-

-

(2,116)

-

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

83

(83)

-

-

-

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

79

2,524

-

-

-

2,603
Stock-based compensation

-

4,379

(204)

-

-

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

-

-

982

-

-

982
Other

-

(647)

-

-

-

(647)
Balance at September 30, 2017

$
90,334

$
804,753

$
1,115,601

$
(73,229)

$
806

$
1,938,265

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

Nine Months Ended

September 30,

2017

2016
Cash flows from operating activities:

Net income

$
186,265

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

Depreciation and amortization

101,866

99,012
Deferred income taxes

9,774

15,345
Provision for doubtful accounts

3,476

3,533
Stock-based compensation

4,379

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

324

(1,824)
Gain on sale of other assets

(322)

(390)
Net change in receivables, inventory and prepayments

(13,550)

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

3,705

(241)
Pension and other postretirement benefits contributions

(15,421)

(8,145)
Other

1,565

8,404
Net cash flows from operating activities

282,061

288,634
Cash flows from investing activities:

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

(337,731)

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

(5,860)

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

1,144

6,545
Other

1,448

(32)
Net cash flows used in investing activities

(340,999)

(269,132)
Cash flows from financing activities:

Customers' advances and contributions in aid of construction

5,648

6,006
Repayments of customers' advances

(3,519)

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

14,455

31,269
Proceeds from long-term debt

441,294

234,288
Repayments of long-term debt

(293,270)

(181,359)
Change in cash overdraft position

(1,932)

(12,586)
Proceeds from issuing common stock

1,084

1,029
Proceeds from exercised stock options

2,603

3,836
Stock-based compensation windfall tax benefits

-

1,263
Repurchase of common stock

(2,116)

(2,905)
Dividends paid on common stock

(104,286)

(96,994)
Other

(647)

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

59,314

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

376

483
Cash and cash equivalents at beginning of period

3,763

3,229
Cash and cash equivalents at end of period

$
4,139

$
3,712

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

$
35,145

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

31,615

20,065

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

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

(In thousands of dollars, except per share amounts)

(UNAUDITED)


	Three Months Ended
	June 30,
	2023		2022
Operating revenues	$	436,700	$	448,756

Operating expenses:
Operations and maintenance		133,508		134,981
Purchased gas		41,933		75,143
Depreciation		84,937		77,425
Amortization		724		1,751
Taxes other than income taxes		20,348		21,720
Total operating expenses		281,450		311,020

Operating income		155,250		137,736

Other expense (income):
Interest expense		69,182		55,221
Interest income		(970)		(824)
Allowance for funds used during construction		(3,424)		(6,151)
Gain on sale of other assets		(220)		(478)
Other		(323)		(423)
Income before income taxes		91,005		90,391
Provision for income taxes (benefit)		(263)		8,100
Net income	$	91,268	$	82,291

Comprehensive income	$	91,268	$	82,291

Net income per common share:
Basic	$	0.35	$	0.31
Diluted	$	0.34	$	0.31

Average common shares outstanding during the period:
Basic		264,418		262,099
Diluted		264,818		262,558

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

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands of dollars, except per share amounts)

(UNAUDITED)



	Six Months Ended
	June 30,
	2023		2022
Operating revenues	$	1,163,150	$	1,148,031

Operating expenses:
Operations and maintenance		271,502		277,562
Purchased gas		298,248		302,855
Depreciation		167,860		155,303
Amortization		1,595		2,219
Taxes other than income taxes		43,226		44,727
Total operating expenses		782,431		782,666

Operating income		380,719		365,365

Other expense (income):
Interest expense		141,850		108,857
Interest income		(1,789)		(1,433)
Allowance for funds used during construction		(9,112)		(11,990)
Gain on sale of other assets		(469)		(478)
Other		(563)		(2,125)
Income before income taxes		250,802		272,534
Provision for income taxes (benefit)		(31,900)		(9,133)
Net income	$	282,702	$	281,667

Comprehensive income	$	282,702	$	281,667

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

Average common shares outstanding during the period:
Basic		264,306		262,026
Diluted		264,840		262,545

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

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITALIZATION

(In thousands of dollars, except per share amounts)

(UNAUDITED)



		June 30,		December 31,
		2023		2022
Stockholders' equity:
Common stock, $0.50 par value		$	133,909	$	133,486
Capital in excess of par value			3,827,199		3,793,262
Retained earnings			1,740,682		1,534,331
Treasury stock, at cost			(87,092)		(83,693)
Total stockholders' equity			5,614,698		5,377,386

Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range	Maturity Date Range
0.00% to 0.99%	2023 to 2033		1,566		1,875
1.00% to 1.99%	2023 to 2039		7,925		8,369
2.00% to 2.99%	2024 to 2058		208,931		209,755
3.00% to 3.99%	2023 to 2056		1,347,413		1,351,432
4.00% to 4.99%	2023 to 2059		1,400,281		1,403,313
5.00% to 5.99%	2023 to 2052		88,912		14,357
6.00% to 6.99%	2026 to 2036		31,000		31,000
7.00% to 7.99%	2025 to 2027		28,251		28,378
8.00% to 8.99%	2025		1,684		2,116
9.00% to 9.99%	2026		11,800		11,800
			3,127,763		3,062,395

Notes payable to bank under revolving credit agreement, variable rate, due 2027			677,000		490,000
Unsecured notes payable:
Notes at 2.40% due 2031			400,000		400,000
Notes at 2.704% due 2030			500,000		500,000
Notes ranging from 3.01% to 3.59% due 2029 through 2050			1,125,000		1,125,000
Notes at 4.28%, due 2049			500,000		500,000
Notes at 5.30%, due 2052			500,000		500,000
Notes at 5.95%, due 2023 through 2034			30,000		40,000
Total long-term debt			6,859,763		6,617,395

Current portion of long-term debt			198,749		199,356
Long-term debt, excluding current portion			6,661,014		6,418,039
Less: debt issuance costs			45,498		46,982
Long-term debt, excluding current portion, net of debt issuance costs			6,615,516		6,371,057

Total capitalization		$	12,230,214	$	11,748,443

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

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



			Capital in
	Common		Excess of		Retained		Treasury
	Stock		Par Value		Earnings		Stock		Total
Balance at December 31, 2022	$	133,486	$	3,793,262	$	1,534,331	$	(83,693)	$	5,377,386
Net income		-		-		191,434		-		191,434
Dividends of March 1, 2023 ($0.287 per share)		-		-		(1)		-		(1)
Dividends of June 1, 2023 declared ($0.287 per share)		-		-		(75,876)		-		(75,876)
Issuance of common stock under dividend reinvestment plan (97,315 shares)		49		4,068		-		-		4,117
Issuance of common stock from at-the-market sale agreements (399,128 shares)		200		19,094		-		-		19,294
Repurchase of stock (88,051 shares)		-		-		-		(3,911)		(3,911)
Equity compensation plan (222,782 shares)		111		(111)		-		-		-
Exercise of stock options (2,917 shares)		2		101		-		-		103
Stock-based compensation		-		3,410		(267)		-		3,143
Other		-		(20)		-		273		253
Balance at March 31, 2023	$	133,848	$	3,819,804	$	1,649,621	$	(87,331)	$	5,515,942
Net income		-		-		91,268		-		91,268
Dividends of June 1, 2023 ($0.287 per share)		-		-		(1)		-		(1)
Issuance of common stock under dividend reinvestment plan (102,676 shares)		51		3,901		-		-		3,952
Repurchase of stock (971 shares)		-		-		-		(42)		(42)
Equity compensation plan (17,054 shares)		9		(9)		-		-		-
Exercise of stock options (3,026 shares)		1		105		-		-		106
Stock-based compensation		-		3,515		(206)		-		3,309
Other		-		(117)		-		281		164
Balance at June 30, 2023	$	133,909	$	3,827,199	$	1,740,682	$	(87,092)	$	5,614,698

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

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



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

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

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands of dollars)

(UNAUDITED)


	Six Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Net income	$	282,702	$	281,667
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		169,455		157,522
Deferred income taxes		(34,711)		(13,810)
Provision for doubtful accounts		11,594		12,793
Stock-based compensation		6,950		5,471
Gain on sale of utility systems and other assets		(469)		(478)
Net change in receivables, deferred purchased gas costs, inventory and prepayments		300,648		6,742
Net change in payables, accrued interest, accrued taxes and other accrued liabilities		(90,739)		(4,222)
Pension and other postretirement benefits contributions		-		(14,564)
Other		(24,008)		(14,819)
Net cash flows from operating activities		621,422		416,302
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $2,587 and $3,013		(547,600)		(424,645)
Acquisitions of utility systems, net		(25,793)		(50,010)
Net proceeds from the sale of utility systems and other assets		613		485
Other		386		157
Net cash flows used in investing activities		(572,394)		(474,013)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction		9,375		5,796
Repayments of customers' advances		(1,958)		(901)
Net proceeds (repayments) of short-term debt		(180,457)		(60,297)
Proceeds from long-term debt		384,715		770,376
Repayments of long-term debt		(136,604)		(464,585)
Change in cash overdraft position		3,795		(61,061)
Proceeds from issuance of common stock under dividend reinvestment plan		8,069		8,171
Proceeds from issuance of common stock from at-the-market sale agreement		19,294		-
Proceeds from exercised stock options		209		1,239
Repurchase of common stock		(3,953)		(1,027)
Dividends paid on common stock		(151,686)		(138,108)
Other		417		517
Net cash flows from (used in) financing activities		(48,784)		60,120
Net change in cash and cash equivalents		244		2,409
Cash and cash equivalents at beginning of period		11,398		10,567
Cash and cash equivalents at end of period	$	11,642	$	12,976

Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for	$	124,503	$	94,473
Non-cash utility property contributions		25,980		8,789

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

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated balance sheets and statements of capitalization of ~~Aqua America,~~Essential Utilities, Inc. and subsidiaries ~~(the~~(collectively, the “Company”, “we”, “us” or “our”) at ~~September~~June 30, ~~2017,~~2023, the unaudited consolidated statements of ~~net income~~operations and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023, and ~~2016~~ the unaudited consolidated statements of cash ~~flow for the nine months ended September 30, 2017~~flows and ~~2016, and the consolidated statement~~ of equity for the ~~nine~~six months ended ~~September~~June 30, ~~2017 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are,~~2023 and 2022, have been prepared in accordance with accounting principles generally accepted in the ~~opinion of management, necessary to present a fair statement of its consolidated financial position, consolidated changes in equity, consolidated results of operations,~~United States (“GAAP”) for interim reporting and ~~consolidated cash flow~~the rules and regulations for ~~the periods presented.~~reporting on Quarterly Reports on Form 10-Q. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016. The~~2022. Interim results ~~of operations for interim periods may~~are not benecessarily indicative of results for a full year. In the ~~results that may be expected for the entire year. The December 31, 2016~~opinion of management, all adjustments, consisting of only recurring accruals, which are necessary to present a fair statement of its consolidated balance sheet data presented herein was derived from the Company’s December 31, 2016 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation in thesheets, consolidated statements of equity, consolidated statements of operations and comprehensive income, and consolidated cash ~~flows:~~

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

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

flow for the periods presented, have been made.

The preparation of financial statements often requires the selection of specific accounting methods and policies. ~~Further, significant~~Significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its consolidated balance sheets, the revenues and expenses in its consolidated statements of ~~net~~operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Furthermore, we are exposed to the uncertain state of the economy and macroeconomic conditions, including inflation and rising interest rates. As these continue to evolve, future events and effects related to these conditions cannot be determined with precision. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.

There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2022.

910

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 2 – ~~Goodwill~~Revenue Recognition

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


	Three Months Ended								Three Months Ended
	June 30, 2023								June 30, 2022
	Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues		Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues
Revenues from contracts with customers:
Residential	$	167,121	$	34,046	$	76,476	$	-	$	149,542	$	30,653	$	95,942	$	-
Commercial		46,774		8,656		16,297		-		41,025		6,973		18,853		-
Fire protection		10,185		-		-		-		9,547		-		-		-
Industrial		8,289		509		471		-		7,604		432		957		-
Gas transportation & storage		-		-		34,862		-		-		-		40,573		-
Other water		11,917		-		-		-		15,899		-		-		-
Other wastewater		-		2,730		-		-		-		3,507		-		-
Other utility		-		-		10,845		2,649		-		-		11,840		3,325
Revenues from contracts with customers		244,286		45,941		138,951		2,649		223,617		41,565		168,165		3,325
Alternative revenue program		767		29		32		-		1,109		(161)		176		-
Other and eliminations		-		-		-		4,045		(545)		-		-		11,505
Consolidated	$	245,053	$	45,970	$	138,983	$	6,694	$	224,181	$	41,404	$	168,341	$	14,830

	Six Months Ended								Six Months Ended
	June 30, 2023								June 30, 2022
	Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues		Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues
Revenues from contracts with customers:
Residential	$	314,373	$	67,536	$	368,706	$	-	$	280,830	$	57,148	$	381,048	$	-
Commercial		87,728		17,247		81,454		-		76,145		13,038		75,893		-
Fire protection		20,444		-		-		-		18,740		-		-		-
Industrial		16,146		1,087		2,260		-		14,785		776		2,799		-
Gas transportation & storage		-		-		102,515		-		-		-		119,747		-
Other water		20,761		-		-		-		33,250		-		-		-
Other wastewater		-		5,464		-		-		-		6,005		-		-
Other utility		-		-		23,922		8,808		-		-		35,066		6,240
Revenues from contracts with customers		459,452		91,334		578,857		8,808		423,750		76,967		614,553		6,240
Alternative revenue program		1,169		209		1,421		-		1,724		(188)		-		-
Other and eliminations		-		-		-		21,900		(545)		-		-		25,530
Consolidated	$	460,621	$	91,543	$	580,278	$	30,708	$	424,929	$	76,779	$	614,553	$	31,770

Note 3 – Acquisitions

Water and Wastewater Utility Acquisitions - Completed

In July 2023, the ~~changes~~Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves 2,887 customers for $12,291; La Rue, an Ohio municipality, which serves approximately 300 customers for $2,253; and, Southern Oaks Water System, which serves 765 customers in Texas for $3,321. Additionally, in July 2023, the ~~Company’s goodwill, by business segment:~~

Regulated

Segment

Other

Consolidated
Balance at December 31, 2016

$
37,367

$
4,841

$
42,208
Goodwill acquired

72

-

72
Reclassification to utility plant acquisition adjustment

(50)

-

(50)
Balance at September 30, 2017

$
37,389

$
4,841

$
42,230

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

Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist, to determine whether it is more likely than not that the fair value of a ~~reporting unit is less than its carrying amount. When testing goodwill~~portion of the water and wastewater utility assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,400 customers for ~~impairment,~~$1,424.

In June 2023, the Company ~~may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events. Alternatively,~~acquired the ~~Company may bypass this qualitative assessment~~wastewater utility assets of Union Rome, Ohio, which serves 4,679 customers for ~~some~~a cash purchase price of its reporting units and perform a quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash flow analysis. The Company tested the goodwill attributable to each of its reporting units for impairment as of July 31, 2017, in conjunction with the timing of its annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that none of the Company’s goodwill was impaired.$25,547.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 3 –~~ ~~Acquisitions~~

~~During the first nine months of 2017,~~In March 2023, the Company ~~completed four acquisitions of water and wastewater utility systems~~acquired the North Heidelberg Sewer Company in ~~various states adding 1,003 customers. The total~~Berks County, Pennsylvania, which serves 273 customer connections for a cash purchase price of $136.

In November 2022, the Company acquired certain water utility assets of Oak Brook, Illinois, which serve 2,037 customers for a cash purchase price of $12,500.

On July 29, 2022, the Pennsylvania Public Utility Commission issued an order (the “PUC Order”) approving the Company’s acquisition of the municipal wastewater assets of East Whiteland Township, Chester County, Pennsylvania, which serves 4,018 customers (the “East Whiteland Wastewater Assets”). On August 12, 2022, the Company acquired the East Whiteland Wastewater Assets for a cash purchase price of $54,374. Subsequently on August 25, 2022, the Office of Consumer Advocate (“OCA”) filed an appeal of the PUC Order to the Pennsylvania Commonwealth Court. On July 31, 2023, a decision was issued by the Pennsylvania Commonwealth Court, in which the Pennsylvania Commonwealth Court agreed with the OCA and reversed the PUC order which approved the acquisition. We are currently evaluating this decision by the Pennsylvania Commonwealth Court and while the final outcome of the decision cannot be predicted with certainty, the final resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves 11,323 customer connections in Lower Makefield, Falls and Middletown townships, and Yardley Borough, Bucks County, Pennsylvania, for a cash purchase price of $53,000.

The purchase price allocation for these ~~utility systems~~acquisitions consisted primarily of ~~$5,860 in cash, which resulted in $72 of goodwill being recorded.~~ acquired property, plant and equipment.

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

~~As part of the Company’s growth-through-acquisition strategy,~~Water and Wastewater Utility Acquisitions – Pending Completion

In June 2023, the Company ~~has~~ entered into a purchase ~~agreements~~agreement to acquire Westfield HOA wastewater assets, which serves approximately 225 customers within Westfield Homeowners Subdivision in Glenview, Illinois for $50.

In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately 2,300 customers in Greenville, Pennsylvania for $18,000.

In October 2021, the Company entered into a purchase agreement to acquire the ~~water or~~ wastewater utility ~~system~~ assets of ~~five municipalities~~the City of Beaver Falls, Pennsylvania which consists of approximately 7,600 customers for ~~a total combined purchase price in cash~~$41,250.

Table of ~~$145,700.~~ Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are secured. These pending acquisitions are expected to close in 2023 and in 2024. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.

In January 2021, the Company entered into a purchase agreement to acquire the wastewater utility system assets of Willistown Township, Pennsylvania, which consist of approximately 2,300 customers, for $17,500. On April 14, 2023, the Willistown Township supervisors exercised their right to terminate the agreement.

DELCORA Purchase Agreement

In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000 customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In May 2020, Delaware County, Pennsylvania, filed a lawsuit alleging that DELCORA does not have the legal authority to establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between DELCORA and the Company; (2) the County cannot terminate DELCORA prior to the closing of the transaction; and (3) the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of Pennsylvania. On March 3, 2022, the Commonwealth Court issued a decision finding that Delaware County can dissolve DELCORA if it so chooses, but the purchase agreement must be upheld regardless of who is operating the system. The case was remanded back to the trial court for the entry of an order consistent with the Commonwealth Court’s opinion. This order was issued on September 8, 2022 (“Remand Order”). Since then, the County has challenged the Remand Order through two separate actions described in the below bullet points. The effect of those proceedings has resulted in the Remand Order being on appeal to the Commonwealth Court. In the appeal of the Remand Order, Delaware County filed its brief on June 8, 2023, and the Company filed its briefs on July 21, 2023. DELCORA will submit its brief on August 21, 2023. However, Delaware County filed its Reply brief to the Company’s brief of August 4, 2023.

First, Delaware County filed an Application for Determination of Finality (“Application”) on October 13, 2022, with the Delaware County Court of Common Pleas. The Company filed its opposition to the Application on October 27, 2022, and on November 2, 2022, the Delaware County Court of Common Pleas denied Delaware County’s Application indicating that its previous order already constituted a final order that addressed the claims of all parties. On December 2, 2022, following the denial of its Application, Delaware County filed a Petition for Permission to Appeal (“Petition”) the Remand Order in the Commonwealth Court of Pennsylvania. On December 16, 2022, the Company filed an Answer in opposition to the Petition. The Commonwealth Court issued an Order denying the County’s Petition on February 2, 2023. The County filed an Application for Reconsideration of the Commonwealth Court’s February 2023 Order, which the Commonwealth Court granted on April 4, 2023. In that April 4,

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

2023 Order, the Commonwealth Court construed the Petition as a Notice of Appeal and has initiated a briefing schedule for this appeal.

Second, on November 2, 2022, Delaware County filed a Notice of Appeal (“Notice of Appeal”) from the Remand Order with the Delaware County Court of Common Pleas. On December 2, 2022, the Delaware County Court of Common Pleas issued an Opinion concluding that the County Court did not err in issuing the Remand Order. On January 13, 2023, Delaware County filed an Application in Commonwealth Court seeking confirmation of briefing deadlines with respect to the Notice of Appeal. In response, by Order dated January 24, 2023, the Commonwealth Court stated that “the record received from the Court of Common Pleas of Delaware County is currently under review for finality. A briefing schedule will be issued upon completion of this review.” The Company filed an Application to quash the County’s Appeal on February 7, 2023. On April 4, 2023, the Commonwealth Court granted the Company’s Application and quashed the appeal.

On January 25, 2023, DELCORA filed in the Delaware Court of Common Pleas a complaint for Declaratory Judgment against the Company and Delaware County seeking resolution of whether the County Ordinance dissolving DELCORA is a final action prohibiting DELCORA from carrying out the material transaction of the Asset Purchase Agreement and, in the event that DELCORA retains the ability to close the transaction, whether DELCORA is permitted to exist as a trust. The Company filed preliminary objections to DELCORA’s complaint, which are scheduled for a hearing on October 12, 2023.

Meanwhile, the administrative law judges (“ALJ”) in the regulatory approval process recommended that the Company’s application to acquire DELCORA be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was also appealed to the Commonwealth Court by Delaware County on April 29, 2021. A decision was issued by the Commonwealth Court on September 12, 2022, which dismissed the appeal of the County.

After the PUC issued the 2021 Order, on April 16, 2021, the ALJ issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a letter notifying the PUC of the March 3, 2022, Commonwealth Court decision (that originated in Delaware County Court of Common Pleas) and requested that the PUC move forward with processing the application. On July 14, 2022, the Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the proceeding. The ALJ established a procedural schedule for the remand proceeding.

On August 17, 2022, Receiver for the City of Chester filed suit in Delaware County Common Pleas Court against DELCORA premised upon the claimed reversionary interest of the City in some of DELCORA’s assets. The Company intervened in that matter on October 19, 2022 and on March 27, 2023 filed preliminary objections. A hearing on the objections is scheduled for August 28, 2023.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

On January 26, 2023, several parties involved in the PUC case filed a joint motion for stay based on DELCORA’s filing of the January 25, 2023 Complaint for Declaratory Judgment and referenced the City of Chester’s bankruptcy filing in which the City of Chester has asserted reversionary contract interests regarding some of DELCORA’s wastewater assets. On February 6, 2023, the ALJ stayed the PUC DELCORA application proceedings again.

On May 23, 2023, the Bankruptcy Court issued an order in the City of Chester’s bankruptcy filing staying the PUC proceedings until relief from the stay is granted by the Bankruptcy Court. The Company appealed the Bankruptcy Court stay order to the United States District Court for the Eastern District of Pennsylvania on June 6, 2023.

On June 16, 2023, the Company filed a Complaint against DELCORA in the Delaware County Court of Common Pleas requesting a declaratory judgment and injunctive relief regarding breach of the Asset Purchase Agreement in acting outside the ordinary course of business by attempting to enter into a new agreement with Philadelphia Water Department for the treatment of wastewater without the Company’s consent.

The purchase price for this pending acquisition is subject to certain adjustments at closing, and is subject to regulatory ~~approvals.~~approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of this acquisition with a mix of equity and debt financing, utilizing our revolving credit facility until permanent debt is secured. Closing ~~for these acquisitions are expected to occur by mid-year 2018, which~~of our acquisition of DELCORA is subject to the timing of the above-described regulatory approval ~~process. These acquisitions will add approximately 14,900 customers in two~~process and on-going litigation.

Table of ~~the states that the Company operates in.~~ Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

Pursuant to its strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portionsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of Berks, Chester, and Montgomery counties in Pennsylvania. The total purchase price for the utility system was $16,750, which consisted of the issuance of 439,943 shares of the Company’s common stock and $3,905 in cash. The purchase price allocation for this acquisition consisted primarily of acquired property, plant and equipment of $25,167, contributions in aid of construction of $16,565, and goodwill of $8,622. Additionally, during 2016, the Company completed eighteen acquisitions of water and wastewater utility systems in various states adding 2,469 customers. The total purchase price of these utility systems consisted of $5,518 in cash, which resulted in $1,756 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations. dollars, except per share amounts)

(UNAUDITED)

Note 4 – Assets Held for Sale

In the ~~first~~fourth quarter of ~~2017,~~2022, the Company decided to market for sale ~~a water~~the assets of its regulated natural gas system in West Virginia that serves approximately ~~265 customers. This water system~~13,000 customers and is part of the Company’s Regulated Natural Gas segment. On December 31, 2022, the Company entered into a definitive agreement with Hope Gas, Inc. for the sale of its membership interests in its West Virginia assets for cash at closing of $37,000. The purchase price is subject to certain adjustments at closing and is subject to applicable regulatory approvals. Closing on the sale is expected later in 2023, and completion of this transaction will conclude the Company’s operations in West Virginia. Based on an assessment of the sale price and the carrying value of the planned disposition, there is no anticipated impairment expected to be recognized because of this sale agreement. These assets and liabilities do not qualify as discontinued operations, are reported as ~~assets~~ held for sale in the Company’s consolidated balance ~~sheet.~~sheet, and consist of the following:


	June 30, 2023		December 31, 2022

Inventory - gas stored	$	592	$	2,807
Other current assets		1,778		3,284
Regulatory assets		5,008		5,076
Current assets held for sale	$	7,378	$	11,167

Property, plant and equipment, net		33,804		30,267
Regulatory assets and other		615		1,857
Non-current assets held for sale	$	34,419	$	32,124

Current liabilities related to assets held for sale	$	3,081	$	3,263

Regulatory liabilities		529		649
Other long-term liabilities		274		325
Non-current liabilities related to assets held for sale	$	803	$	974

Note 5 – Goodwill

The following table summarizes the ~~second quarter of 2016, the Company decided to market for sale two business units that are reported within~~changes in the Company’s ~~market-based subsidiary, Aqua Resources. One~~goodwill, by business ~~unit installed~~segment:



	Regulated Water		Regulated Natural Gas		Other		Consolidated
Balance at December 31, 2022	$	58,504	$	2,277,447	$	4,841	$	2,340,792
Reclassification to utility plant acquisition adjustment		(37)		-		-		(37)
Balance at June 30, 2023	$	58,467	$	2,277,447	$	4,841	$	2,340,755

The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable utility commission. The mechanism provides for the transfer over time, and ~~tested devices that prevent~~ the ~~contamination~~recovery through customer rates, of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.goodwill associated with some acquisitions upon achieving specific objectives.

]

1116

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 56 – Capitalization

At-the-Market Offering

On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. As of December 31, 2022, the Company issued 1,321,994 shares of common stock under the ATM for proceeds of $63,040, net of expenses. In January 2023, the Company issued 399,128 shares of common stock under the ATM for proceeds of $19,294, net of expenses. No shares were issued under the ATM in the second quarter of 2023.

Tangible Equity Units

On April 23, 2019, the Company issued $690,000, less expenses of $16,358, of its tangible equity units (the “Units”), with a stated amount of $50.00 per unit. This issuance was part of the permanent financing to close the Peoples Gas Acquisition. Each Unit consisted of a prepaid stock purchase contract and an amortizing note, each issued by the Company. The amortizing notes had an initial principal amount of $8.62909, or $119,081 in aggregate, and yielded interest at a rate of 3.00% per year, and paid equal quarterly per unit cash installments of $0.75 per amortizing note (except for the July 30, 2019 installment payment, which was $0.80833 per amortizing note), that constituted a payment of interest and a partial repayment of principal. This cash payment in the aggregate was equivalent to 6.00% per year with respect to each $50.00 stated amount of the Units. The amortizing notes represented unsecured senior obligations of the Company.

Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date, and, in exchange, the Company issued shares of its common stock. During April 2022, 981,919 stock purchase contracts were early settled by the holders of the contracts, resulting in the issuance of 1,166,107 shares of the Company’s common stock. On May 2, 2022, the remaining 6,621,315 stock purchase contracts were each mandatorily settled for 1.18758 shares of the Company’s common stock, and in the aggregate the Company issued 7,863,354 shares of its common stock. Additionally, the final quarterly installment payment was made, which resulted in the complete pay-off of the amortizing notes.

Long-term Debt and Loans Payable

On June 29, 2023, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of their respective $100,000 and $300,000, 364-day revolving credit agreements, as follows: (1) extended the maturity dates to June 27, 2024; and (2) updated the adjustment on the Bloomberg Short-Term Bank Yield Index (BSBY) Rate.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

In January 2023 and October ~~2017,~~2022, the Company’s subsidiary, Aqua Pennsylvania, issued $75,000 and $125,000 of first mortgage bonds, ~~of which $35,000 is~~ due in ~~2054, $20,000 is due in 2055,~~2043 and ~~$20,000 is due in 2057~~2052, and with interest rates of ~~4.06%, 4.07%,~~5.60% and ~~4.09%~~4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

~~In July 2017, Aqua Illinois~~

On December 14, 2022, the Company entered into a five year $1,000,000 unsecured revolving credit facility, which replaced the Company’s prior five year $1,000,000 unsecured revolving credit facility. The Company’s new unsecured revolving credit facility was used to repay ~~existing~~all indebtedness and fees under our prior unsecured revolving credit facility, and for other general corporate purposes.

~~In July 2017, Aqua Pennsylvania issued $80,000 of first mortgage bonds, of which $40,000 is due in 2055~~The facility includes a $100,000 sublimit for daily demand loan. Funds borrowed under this facility are classified as long-term debt and ~~$40,000 is due in 2057 with interest rates of 4.04% and 4.06%, respectively. The proceeds from these bonds were~~are used to ~~repay existing indebtedness~~provide working capital as well as support for letters of credit for insurance policies and other financing arrangements. As of June 30, 2023, the Company has the following sublimits and available capacity under the credit facility: $100,000 letter of credit sublimit, $82,362 of letters of credit available capacity, $0 borrowed under the swing-line commitment, $100,000 was available for ~~general corporate purposes.~~ borrowing under the swing-line commitment, $305,362 available for borrowing and $677,000 of funds borrowed under the agreement.

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

Note 67 – ~~Fair Value of~~ Financial Instruments

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

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

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

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the six months ended June 30, 2023 and 2022.

The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the carrying amount of the Company’s loans payable was ~~$20,990~~$48,043 and ~~$6,535,~~$228,500, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, is determined based on Level 1 methods and assumptions. As of June 30, 2023 and December 31, 2022, the carrying amounts of the Company's cash and cash equivalents was $11,642 and $11,398, respectively, which equates to their fair value. The Company’s assets underlying the deferred compensation ~~plan liability is~~and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the carrying amount of these securities was ~~$18,145~~$25,319 and ~~$17,072,~~$24,962, respectively, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net gain (loss) recognized during the period on equity securities	$	211	$	(459)	$	342	$	(737)
Less: net gain / loss recognized during the period on equity securities sold during the period		-		-		-		-
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date	$	211	$	(459)	$	342	$	(737)

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

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

September 30,

December 31,

2017

2016
Carrying Amount

$
2,059,031

$
1,910,633
Estimated Fair Value

2,185,051

2,018,933

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

The Company’s customers’ advances for construction have a carrying value of ~~$107,715~~$125,362 as of ~~September~~June 30, ~~2017,~~2023, and ~~$91,843~~$114,732 as of December 31, ~~2016.~~2022. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future ~~rate increases.~~rates. Portions of these ~~non-interest bearing~~non-interest-bearing instruments are payable annually through ~~2027~~2032, and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the ~~non-interest bearing~~non-interest-bearing feature.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 78 – Net Income per Common Share

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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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



	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	September 30,		September 30,		June 30,		June 30,
	2017	2016	2017	2016	2023	2022	2023	2022
Average common shares outstanding during the period for basic computation	177,660	177,336	177,583	177,243	264,418	262,099	264,306	262,026
Dilutive effect of employee stock-based compensation	464	481	520	538
Effect of dilutive securities:
Employee stock-based compensation					400	459	534	519
Average common shares outstanding during the period for diluted computation	178,124	177,817	178,103	177,781	264,818	262,558	264,840	262,545

~~For~~Based on the minimum number of shares to be issued upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units, the average common shares outstanding during the period for basic computation includes the weighted-average impact of the following shares: 2,830,021 shares for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023; and, ~~2016,~~5,912,617 shares for the three and six months ended June 30, 2022. On May 2, 2022, all of the ~~Company’s~~remaining stock purchase contracts under the tangible equity units were mandatorily settled.

The number of outstanding employee stock options that were not included in the ~~calculations~~diluted earnings per share calculation because the effect would have been anti-dilutive was: 150,062 for the three and six months ended June 30, 2023; and, 83,080 for the three and six months ended June 30, 2022. Additionally, the dilutive effect of performance share units and restricted share units granted are included in the Company’s calculation of diluted net income per share.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share ~~as the calculated cost to exercise the stock options was less than the average market price of the Company’s common stock during these periods.~~amounts)

(UNAUDITED)

Note 89 – Stock-based Compensation

Under the Company’s ~~2009 Omnibus~~Amended and Restated Equity Compensation Plan ~~as amended as of February 27, 2014~~ (the ~~“2009 Plan”~~“Plan”)~~, as~~ approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, ~~(the “2004 Plan”),~~ stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The ~~2009~~ Plan authorizes 6,250,000 shares for issuance under the ~~plan.~~Plan. A maximum of 3,125,000 shares under the ~~2009~~ Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the ~~2009~~ Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the ~~2009~~ Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the ~~2009~~ Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the ~~2009~~ Plan. Awards to employees and consultants under the ~~2009~~ Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors. In the case of awards to non-employee directors, the Board of Directors makes such awards. At ~~September~~June 30, ~~2017, 3,741,526~~2023, 1,506,793 shares were still available for issuance under the ~~2009~~ Plan. No further grants may be made under the Company’s 2004 Equity Compensation Plan.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Stock-based compensation within operations and maintenance expenses	$	1,962	$	1,692	$	4,405	$	3,342
Income tax benefit		492		485		1,104		952

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Stock-based compensation within operations and maintenance expenses

$
1,035

$
1,012

$
2,875

$
2,504
Income tax benefit

420

411

1,167

1,013

The following table summarizes the PSU transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2023:



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Share Units	Fair Value		Share Units	Fair Value
Nonvested share units at beginning of period	476,896	$	27.96	556,462	$	42.77
Granted	125,202		30.79	161,981		45.06
Performance criteria adjustment	(64,398)		27.75	9,521		42.60
Actual vested				(168,549)		53.77
Forfeited	(16,306)		28.26	(9,837)		43.94
Share units vested in prior period and issued in current period	32,400		25.31
Share units issued	(125,999)		36.37
Nonvested share units at end of period	427,795	$	26.13	549,578		40.05

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 was ~~$30.79~~$45.06 and ~~$28.89,~~$42.31, respectively. The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months. The accrual of compensation costs is based on the Company’s estimate of the final expected value of the award and is adjusted as required for the portion based on the performance-based condition. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs. The recording of compensation expense for PSUs has no impact on net cash flows.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, which is generally three years, beginning on the date of grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs. The following table provides the compensation ~~cost~~expense and income tax benefit for ~~stock-based compensation related to~~ RSUs:



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Stock-based compensation within operations and maintenance expenses	$	311	$	299	$	915	$	763	$	759	$	727	$	1,440	$	1,504
Income tax benefit		129		124		378		315		190		209		361		428

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of 33% annually, starting one year from the grant date and expire 10 years from the grant ~~date.~~date, subject to satisfaction of designated performance goals. The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock options:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Stock-based compensation within operations and maintenance expenses

$
73

$
-

$
177

$
-
Income tax benefit

43

15

167

249

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~



	Three Months Ended				Six Months Ended
	June 30,					June 30,
	2023		2022		2023		2022
Stock-based compensation within operations and maintenance expenses	$	222	$	141	$	299	$	241
Income tax benefit		56		41		75		69

The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:


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


	2023		2022
Expected term (years)		5.5		5.5
Risk-free interest rate		4.03%		1.92%
Expected volatility		27.80%		26.50%
Dividend yield		2.53%		2.37%
Grant date fair value per option	$	11.37	$	9.34

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes stock option transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2023:



		Weighted		Weighted				Weighted		Weighted
		Average		Average	Aggregate			Average		Average	Aggregate
		Exercise		Remaining	Intrinsic			Exercise		Remaining	Intrinsic
	Shares	Price		Life (years)	Value		Shares	Price		Life (years)	Value
Outstanding at beginning of period	427,335	$	15.55				820,061	$	36.29
Granted	120,127		30.47				74,632		45.39
Forfeited	(2,439)		30.47				(2,076)		45.31
Expired / Cancelled	(2,812)		14.26
Expired							(664)		35.20
Exercised	(157,621)		16.51				(5,943)		35.21
Outstanding at end of period	384,590	$	19.73	3.9	$	5,175	886,010	$	37.04	6.0	$	3,347

Exercisable at end of period	266,902	$	15.00	1.4	$	4,855	763,196	$	35.71	5.5	$	3,347


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Stock-based compensation within operations and maintenance expenses	$	13	$	13	$	25	$	25
Income tax benefit		4		3		7		7


	Number	Weighted
	of	Average
	Shares	Fair Value
Nonvested restricted stock at beginning of period	1,170	$	42.75
Granted	-		-
Vested	-		-
Nonvested restricted stock at end of period	1,170	$	42.75

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Stock-based compensation within operations and maintenance expenses	$	570	$	165	$	780	$	357
Income tax benefit		160		47		219		103

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Stock-based compensation within operations and maintenance expenses

$
150

$
131

$
412

$
375
Income tax benefit

62

54

171

155

The following table summarizes stock award transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2023:



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Stock Awards	Fair Value		Stock Awards	Fair Value
Nonvested stock awards at beginning of period	-	$	-	-	$	-
Granted	12,529		32.92	18,676		41.78
Vested	(12,529)		32.92	(18,676)		(41.78)
Nonvested stock awards at end of period	-	$	-	-		-

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~


	Pension Benefits
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Service cost	$	400	$	707	$	801	$	1,414
Interest cost		4,309		3,202		8,617		6,403
Expected return on plan assets		(5,673)		(5,894)		(11,345)		(11,789)
Amortization of prior service cost		171		134		342		268
Amortization of actuarial loss		809		436		1,618		871
Net periodic benefit cost (credit)	$	16	$	(1,415)	$	33	$	(2,833)

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

	Other
	Postretirement Benefits
		Three Months Ended				Six Months Ended
		June 30,				June 30,
	2023		2022		2023		2022
Service cost	$	337	$	477	$	674	$	955
Interest cost		1,119		843		2,238		1,685
Expected return on plan assets		(1,093)		(1,126)		(2,186)		(2,251)
Amortization of actuarial loss		(330)		(334)		(659)		(668)
Net periodic benefit cost (credit)	$	33	$	(140)	$	67	$	(279)

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

Pension Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
794

$
784

$
2,382

$
2,394
Interest cost

3,108

3,251

9,324

9,787
Expected return on plan assets

(4,270)

(4,215)

(12,810)

(12,696)
Amortization of prior service cost

145

145

435

435
Amortization of actuarial loss

2,001

1,797

6,003

5,354
Settlement charge

-

-

-

3,028
Special termination benefit charge

-

-

-

302
Net periodic benefit cost

$
1,778

$
1,762

$
5,334

$
8,604

Other

Postretirement Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
255

$
253

$
765

$
761
Interest cost

737

726

2,211

2,202
Expected return on plan assets

(647)

(645)

(1,941)

(2,001)
Amortization of prior service cost

(127)

(137)

(381)

(411)
Amortization of actuarial loss

291

220

873

707
Net periodic benefit cost

$
509

$
417

$
1,527

$
1,258

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

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

There were no cash contributions made to the form of benefit payments offered to participants of the qualified defined benefit pension plan and non-qualified retirement plans upon retirement or termination. During the first quarter of 2016, the lump sum payments paid to participants who elected this option for payments from the non-qualified retirement plans resulted in a settlement charge.

~~The Company made cash contributions of $15,421 to its~~ Pension Plan during the first six months of ~~2017, which completed~~2023.

Note 11 – Rate Activity

On July 27, 2023, the Company’s ~~2017 cash contributions.~~ regulated water and wastewater operating subsidiary in Virginia, Aqua Virginia, filed an application with the State Corporation Commission designed to increase revenues by $6,911 annually.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~Note 10 –~~ ~~Water~~On June 5, 2023, the Company’s regulated water and ~~Wastewater Rates~~

~~During~~wastewater operating subsidiary in North Carolina, Aqua North Carolina, received an order from the North Carolina Utilities Commission designed to increase rates by $14,001 in the first ~~nine months~~year of ~~2017,~~new rates being implemented, then an additional $3,743 and $4,130 in the ~~Company’s~~second and third years, respectively. In February 2023, the Company had implemented interim rates, based on an estimate of the final outcome of the order, and no refunds or additional billings are required for the difference between interim and final approved rates.

On March 28, 2023, the Company received authorization, in advance of the final order being approved, to implement infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $7,685 in its water and wastewater utility operating divisions in ~~Indiana~~Texas effective on April 1, 2023. The additional revenue billed and collected prior to the final order is subject to refund based on the outcome of the ruling.

In January 2023, the Company’s two water utility operating divisions in Ohio ~~were granted~~that are regulated by local regulatory authorities implemented base rate increases designed to increase total operating revenues on an annual basis by ~~$7,403.~~$1,569. Further, one of the Company’s wastewater divisions in Indiana implemented a base rate increase designed to increase operating revenues on an annual basis by $134. Lastly, during the first ~~nine~~six months of ~~2017,~~2023, the ~~Company’s operating divisions in Illinois, New Jersey, and North Carolina received approval to bill~~ Company implemented infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by ~~$3,659.~~$1,919 in its water and wastewater utility operating divisions in Illinois and by $1,483 and $20,887 in its natural gas operating divisions in Kentucky and Pennsylvania, respectively.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

On December 30, 2022, our water and wastewater utility operating divisions in Ohio filed an application with the Public Utilities Commission of Ohio designed to increase rates by $9,816 annually.

On September 21, 2022, our regulated water and wastewater utility operating divisions in Ohio received an order from the Public Utilities Commission of Ohio designed to increase operating revenues by $5,483 annually. New rates for water and sewer service went into effect on September 21, 2022.

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

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

Note 1112 – Taxes Other than Income Taxes

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



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Property	$	6,955	$	7,007	$	20,608	$	20,119	$	8,431	$	8,239	$	16,535	$	16,253
Gross receipts, excise and franchise		3,969		3,409		10,507		9,468		4,175		4,017		8,205		8,117
Payroll		2,066		2,140		7,322		7,775		4,935		4,778		11,567		11,439
Regulatory assessments		674		639		1,933		1,991		1,715		1,812		3,398		3,577
Pumping fees		1,526		1,442		3,820		3,501		181		1,947		1,647		3,323
Other		44		75		200		240		911		927		1,874		2,018
Total taxes other than income	$	15,234	$	14,712	$	44,390	$	43,094	$	20,348	$	21,720	$	43,226	$	44,727

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1213 – Segment Information

The Company has ~~ten~~eleven operating segments and ~~one~~two reportable ~~segment.~~segments. The Regulated ~~segment, the Company’s single reportable~~Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies, which are organized by the states where the Company provides water and wastewater services. ~~These~~The eight water and wastewater utility operating segments are aggregated into one reportable segment, because each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment. The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services.

~~Two~~In addition to the Company’s two reportable segments, we include two of our operating segments ~~are included~~ within the Other category below. These segments are not quantitatively significant and are comprised of ~~Aqua Resources~~our non-regulated natural gas operations and Aqua ~~Infrastructure.~~Resources. Our non-regulated natural gas operations consist of utility service line protection solutions and repair services to households and the operation of gas marketing and production entities. Aqua Resources ~~provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to its utility companies’ service territories; and~~ offers, through a third party, water and sewer ~~line repair~~ service ~~and~~line protection solutions and repair services to households. ~~Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.~~ In addition to these segments, Other is comprised of ~~other~~ business activities not included in the reportable ~~segment, including~~segments, corporate costs that have not been allocated to the Regulated ~~segment~~Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense. ~~Additionally, contained~~The Company reports these corporate costs within ~~total assets for~~Other as they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment operating performance used by the ~~Other category, in~~Company to measure the ~~table below, is a regulatory asset for postretirement benefits for the underfunded status~~underlying performance of the ~~Company’s pension and other postretirement benefit plans and an intercompany receivable.~~ operating segments.

2028

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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



	Three Months Ended						Three Months Ended						Three Months Ended								Three Months Ended
	September 30, 2017						September 30, 2016						June 30, 2023								June 30, 2022
	Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated
Operating revenues	$	214,032	$	976	$	215,008	$	222,231	$	4,362	$	226,593	$	293,672	$	138,983	$	4,045	$	436,700	$	269,355	$	167,729	$	11,672	$	448,756
Operations and maintenance expense		70,772		(2,790)		67,982		73,013		6,799		79,812		93,227		41,114		(833)		133,508		92,815		44,907		(2,741)		134,981
Depreciation		34,533		(269)		34,264		34,025		(144)		33,881
Operating income (loss)		94,142		3,344		97,486		100,563		(2,764)		97,799
Interest expense, net		20,753		1,658		22,411		19,167		1,001		20,168
Purchased gas														-		39,665		2,268		41,933		-		63,392		11,751		75,143
Depreciation and amortization														53,231		32,188		242		85,661		50,260		29,131		(215)		79,176
Interest expense, net (a)														30,523		20,982		16,707		68,212		27,604		19,171		7,622		54,397
Allowance for funds used during construction		3,914		-		3,914		2,267		-		2,267		(2,940)		(484)		-		(3,424)		(5,347)		(804)		-		(6,151)
Income tax expense (benefit)		3,138		262		3,400		9,027		(616)		8,411
Provision for income taxes (benefit)														15,859		(13,314)		(2,808)		(263)		13,847		(5,170)		(577)		8,100
Net income (loss)		74,208		2,017		76,225		74,681		(1,511)		73,170		90,027		13,630		(12,389)		91,268		76,342		11,478		(5,529)		82,291

	Nine Months Ended						Nine Months Ended						Six Months Ended								Six Months Ended
	September 30, 2017						September 30, 2016						June 30, 2023								June 30, 2022
	Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated		Regulated Water		Regulated Natural Gas		Other		Consolidated
Operating revenues	$	602,341	$	3,872	$	606,213	$	606,323	$	16,753	$	623,076	$	560,972		580,278	$	21,900	$	1,163,150	$	508,553		612,912	$	26,566	$	1,148,031
Operations and maintenance expense		210,842		(2,879)		207,963		210,014		17,333		227,347		176,029		98,264		(2,791)		271,502		178,903		104,359		(5,700)		277,562
Depreciation		102,340		(832)		101,508		98,445		(800)		97,645
Operating income (loss)		246,361		5,633		251,994		255,431		(1,808)		253,623
Interest expense, net		60,277		4,847		65,124		57,061		3,075		60,136
Purchased gas														-		281,521		16,727		298,248		-		280,698		22,157		302,855
Depreciation and amortization														106,698		62,316		441		169,455		98,976		58,835		(289)		157,522
Interest expense, net (a)														60,236		48,489		31,336		140,061		55,159		39,823		12,442		107,424
Allowance for funds used during construction		10,570		-		10,570		6,446		-		6,446		(7,886)		(1,226)		-		(9,112)		(10,496)		(1,493)		(1)		(11,990)
Income tax expense (benefit)		12,243		(344)		11,899		18,610		(1,677)		16,933
Provision for income taxes (benefit)														29,373		(56,798)		(4,475)		(31,900)		21,346		(31,645)		1,166		(9,133)
Net income (loss)		184,733		1,532		186,265		186,579		(2,046)		184,533		167,429		137,176		(21,903)		282,702		136,885		150,964		(6,182)		281,667
Capital expenditures		337,321		410		337,731		269,046		973		270,019		329,862		215,212		2,526		547,600		216,612		207,394		639		424,645

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~cash flows. Further, the Company has~~ insurance coverage for certain of these loss contingencies, and as of ~~September~~June 30, ~~2017,~~2023, estimates that approximately ~~$5,415~~$1,428 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other ~~assets.~~assets, net.

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

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

In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled ~~$1,451~~$2,327 at ~~September~~June 30, ~~2017~~2023 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

~~Note 14 –~~ ~~Income Taxes~~

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~examinations. Although~~Note 15 – Income Taxes

The Company’s effective tax rate was (0.3)% and (12.7)% for the ~~timing~~three and six months ended June 30, 2023, respectively. The Company’s effective tax rate was 9.0% and (3.4)% for the three and six months ended June 30, 2022, respectively. The decreases in the effective tax rate for the second quarter and first half of ~~income tax audit resolutions and negotiations with taxing authorities is highly uncertain,~~ the ~~Company does not anticipate a significant change~~year are primarily attributed to the ~~total amount of unrecognized~~increase in income tax benefits ~~within~~associated with the tax deduction for qualifying infrastructure. In determining its interim tax provision, the Company reflects its estimated permanent and flow-through tax differences for the taxable year. The Company uses the flow-through method to account for the tax deduction for qualifying utility infrastructure at its regulated Pennsylvania and New Jersey subsidiaries.

The statutory Federal tax rate is 21.0% for the six months ended June 30, 2023 and 2022. For states with a corporate net income tax, the state corporate net income tax rates range from 2.5% to 9.99% for all periods presented. On July 8, 2022, Pennsylvania enacted House Bill 1342 into law, which among other things, reduces Pennsylvania’s corporate income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through 2031, when it reaches to 4.99%. The Company evaluated the impacts of the tax rate change and recorded, in the year ended December 31, 2022, a reduction to our deferred tax liabilities of $244,537 with a corresponding reduction primarily to our regulatory assets.

In April 2023, the Internal Revenue Service issued Revenue Procedure 2023-15 which provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized for tax purposes. The Company is evaluating the safe harbor and intends to adopt the methodology on its 2023 tax return. Based on the tax legislative guidance that was issued, the Company reevaluated the uncertain tax positions and ultimately released a portion of its historical income tax reserves. Concurrently, the Company deferred this tax benefit from the reserve release as a regulatory liability, as the accounting treatment is expected to be determined in the next ~~12 months.~~rate case.

Note 1516 – Recent Accounting Pronouncements

Pronouncement adopted during the year:

In ~~March 2017,~~October 2021, the FASB issued updated accounting guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reported as an employee cost within operating income, net of amounts capitalized. The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the service cost component of net benefit cost. The Company is evaluating the requirements of the updated guidance to determine the impact of adoption, and does not believe it will have a material impact on its results of operations or financial position.

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

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

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~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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

~~In February 2016, the FASB issued updated~~ accounting guidance on accounting for ~~leases, which requires lessees to establish~~acquired revenue contracts with customers in a ~~right-of-use asset and a lease liability on the balance sheet~~business combination. The guidance specifies for all ~~leases with terms longer than 12 months. For income statement purposes, leases will be classified as either operating or finance. Operating leases will result~~acquired revenue contracts, regardless of their timing of payment, the circumstances in ~~straight-line expense while finance leases will result~~which the acquirer should recognize contract assets and contract liabilities that are acquired in a ~~front-loaded expense pattern.~~business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting guidance is effective for fiscal years beginning after December 15, ~~2018, and interim periods within those fiscal years,~~2022 with early adoption ~~available.~~permitted. The Company ~~is evaluating the requirements of the updated~~adopted this guidance effective January 1, 2023, and will apply it prospectively to ~~determine the impact of adoption.~~business combinations occurring on or after that date.

In January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The updated guidance is effective for interim and annual periods beginning after December 31, 2017. The Company does not expect the provisions of the updated guidance to have a material impact on its results of operations or financial position.

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~~NOTES TO CONSOLIDATED~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

(In thousands of dollars, except per share amounts)

~~(UNAUDITED)~~

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

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~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among ~~others:~~others, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, the COVID-19 pandemic, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2022, and the Form 10-Q for the quarter ended March 31, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such ~~report.~~reports. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

~~Aqua America,~~Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or ~~wastewater~~natural gas services to ~~what we estimate to be almost three~~an estimated five million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and ~~Virginia. Our~~Kentucky under the Aqua and Peoples brands. One of our largest operating ~~subsidiary,~~subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of ~~people~~water or wastewater customers we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven ~~other~~additional states. ~~In addition,~~Additionally, commencing on March 16, 2020, with the ~~Company’s~~completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based ~~activities are~~businesses, conducted through ~~Aqua Infrastructure, LLC~~its non-regulated subsidiaries, that provide utility service line protection solutions and ~~Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply~~repair services ~~for firms in~~to households and gas marketing and production activities. During the fourth quarter of 2022, the Company signed an agreement to sell its regulated natural gas ~~drilling industry. Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our~~ utility ~~companies’ service territories; and offers, through a third party, water and wastewater line repair service and protection solutions to households.~~ assets in

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

~~During 2016, we completed the sale of business units within Aqua Resources~~West Virginia, which ~~provided liquid waste hauling and disposal services, and inspection, cleaning and repair~~represent approximately two percent of ~~storm and sanitary wastewater lines. Additionally, in 2016, we decided to market for sale two business units that are reported within~~ the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completedregulated natural gas customers.

For many years, starting in ~~January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.~~

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

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

Recent Developments

Macroeconomic Factors

Macroeconomic factors and uncertainties continue to affect the overall business climate as well as our business. Inflation, higher interest rates, and supply chain pressures resulted to an increase in our operating and capital spending requirements in 2022 and 2023 to date, which we expect to continue through the remainder of 2023. We continue to pursue enhancements to our regulatory practices to facilitate the efficient recovery of the increased cost of providing services and infrastructure improvements in our rates and mitigate the inherent regulatory lag associated with traditional rate making processes.

Environmental Compliance

Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. On March 14, 2023, the U.S. Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The Company submitted comments on the proposed rulemaking, and it is expected that the EPA will finalize the regulation by early 2024.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

We expect that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and operating expenses. The Company continues to advocate for actions to hold polluters accountable and is part of the Multi-District Litigation and other legal actions against multiple PFAS manufacturers and polluters to attempt to ensure that the ultimate responsibility for the cleanup of these contaminants is attributed to the polluters. Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by state utility commissions as appropriate for inclusion in establishing rates; however, we are also actively applying for grants and low interest loans, whenever possible, to reduce the overall cost to customers.

Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.

Our operating cash flow can be significantly affected by changes in operating working capital, especially during periods with significant changes in natural gas commodity prices and also the timing of our natural gas inventory purchases. Cash flow from operations was $621,422 for the first half of 2023, compared to $416,302 for the first half of 2022. The net change in working capital and other assets and liabilities resulted in an increase in cash from operations of $185,901 for the first half of 2023 compared to a decrease of $12,299 for the first half of 2022. The net change in working capital for the first half of 2023 as compared to the first half of 2022 was primarily due to a larger change in inventory – gas stored during the first half of 2023 as a result of a higher cost of gas.

During the first ~~nine~~six months of ~~2017,~~2023, we ~~had $337,731~~incurred $547,600 of capital expenditures, expended ~~$5,860~~$25,793 for the acquisition of ~~water and~~a wastewater utility ~~systems,~~system, issued ~~$441,294~~$384,715 of long-term debt, ~~and~~ repaid short-term debt, and made sinking fund contributions and other ~~loan~~long-term debt repayments in aggregate of ~~$293,270.~~$317,061. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The proceeds from the issuance of long-term debt, ~~was comprised principally of the funds borrowed under~~including borrowings from our revolving credit facility, were used for capital expenditures, repayment of existing indebtedness, general corporate purposes, and acquisitions. Cash flows used in financing activities were higher during the ~~issuances~~first half of ~~$80,000~~2023 principally as a result of a greater amount for the paydown of loans payable associated with the financing of inventory.

In January 2023 and ~~$50,000~~October 2022, Aqua Pennsylvania issued $75,000 and $125,000 of first mortgage bonds, bydue in 2043 and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. As of December 31, 2022, the Company had issued 1,321,994 shares of common stock for net proceeds of $63,040 under the ATM. In January 2023, the Company issued 399,128 shares of common stock for net proceeds of $19,294 under the ATM. No shares were issued under the ATM in the quarter ended June 30, 2023.

As of June 30, 2023, our credit ratings remained at investment grade levels. In July 2023, S&P affirmed an A credit rating for the Company and its subsidiaries, Aqua Pennsylvania and Peoples Natural Gas Companies, and revised its outlook from stable to negative for the companies, citing weakening financial measures as a result of inflationary pressures and our significant capital spending. However, as can be noted in their report, S&P continues to assess our business risk profile as excellent, considering our low-risk and rate-regulated water and gas distribution operations in credit-supportive regulatory environments, our geographic and regulatory diversity, our large and stable residential and commercial customer base, and our solid and reliable operations. In May 2022, Moody’s Investors Service (“Moody’s”) affirmed its Baa2 rating on the Company with a stable outlook. The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt will be adequate to provide sufficient working capitalability to maintain ~~normal operations~~its credit rating depends, among other things, on adequate and timely rate relief, its ability to ~~meet~~fund capital expenditures in a balanced manner using both debt and equity, and its ability to generate cash flow. A material downgrade of our ~~financing requirements for at least the next twelve months.~~

~~Results of Operations~~

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

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

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

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

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

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(In thousands of dollars, except per share amounts)

and/or other covenants, impact the market prices of equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to enhance our regulatory practices to address regulatory lag and recover capital project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating revenues	$	436,700	$	448,756	$	1,163,150	$	1,148,031
Operations and maintenance expense	$	133,508	$	134,981	$	271,502	$	277,562
Purchased gas	$	41,933	$	75,143	$	298,248	$	302,855
Net income	$	91,268	$	82,291	$	282,702	$	281,667

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		30.6%		30.1%		23.3%		24.2%
Purchased gas		9.6%		16.7%		25.6%		26.4%
Depreciation and amortization		19.6%		17.6%		14.6%		13.7%
Taxes other than income taxes		4.7%		4.8%		3.7%		3.9%
Interest expense, net of interest income		15.6%		12.1%		12.0%		9.4%
Net income		20.9%		18.3%		24.3%		24.5%

Effective tax rate		-0.3%		9.0%		-12.7%		-3.4%

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

decrease in customer assistance surcharge costs of $2,761 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;

decrease in insurance expense of $1,326 in our Regulated Natural Gas segment;

decrease in outside services, maintenance expenses and other operating expenses in our Regulated Water segment of $4,366, primarily due to lower water main break activity and higher capitalization as a result of greater capital spend during the period; offset by,

increase in production costs for water and wastewater operations of $4,428, primarily due to higher chemical prices and increased purchased water costs;

increase in transportation costs of $730;

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $964; and,

increase in employee related costs, primarily due to higher headcount and employee benefits, net of lower pension cost;

expenses of $161, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.

Depreciation and amortization expense increased by $6,485 or 8.2% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

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(In thousands of dollars, except per share amounts)

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~~Operations and maintenance expenses~~ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

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(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating revenues	$	293,672	$	269,355	$	560,972	$	508,553
Operations and maintenance expense	$	93,227	$	92,815	$	176,029	$	178,903
Segment net income	$	90,027	$	76,342	$	167,429	$	136,885

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		31.7%		34.5%		31.4%		35.2%
Depreciation and amortization		18.1%		18.7%		19.0%		19.5%
Taxes other than income taxes		4.8%		5.8%		5.3%		6.2%
Interest expense, net of interest income		10.4%		10.2%		10.7%		10.8%
Segment net income		30.7%		28.3%		29.8%		26.9%

Effective tax rate		15.0%		15.4%		14.9%		13.5%

increase in volume consumption of $1,866 as a result of warmer weather conditions in the second quarter of 2023.

decrease in outside services, maintenance expenses and other operating expenses of $4,366; primarily due to lower water main break activity and higher capitalization as a result of greater capital spend during the period; offset by,

increase in production costs for water and wastewater operations of $4,428, primarily due to higher chemical prices and increased purchased water costs;

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $964; and,

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(In thousands of dollars, except per share amounts)

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(In thousands of dollars, except per share amounts)

Our effective income tax rate for our Regulated Water Segment was an expense of 14.9% in the first six months of 2023, compared to an expense of 13.5% in the first six months of 2022. The increase the effective tax rate is primarily the result of changes in the jurisdictional earnings mix.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the periods ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating revenues	$	138,983	$	167,729	$	580,278	$	612,912
Operations and maintenance expense	$	41,114	$	44,907	$	98,264	$	104,359
Purchased gas	$	39,665	$	63,392	$	281,521	$	280,698
Segment net income	$	13,630	$	11,478	$	137,176	$	150,964

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		29.6%		26.8%		16.9%		17.0%
Purchased gas		28.5%		37.8%		48.5%		45.8%
Depreciation and amortization		23.2%		17.4%		10.7%		9.6%
Taxes other than income taxes		3.9%		3.3%		1.9%		1.9%
Interest expense, net of interest income		15.1%		11.4%		8.4%		6.5%
Segment net income		9.8%		6.8%		23.6%		24.6%

Effective tax rate		-4213.3%		-82.0%		-70.7%		-26.5%

impact of lower gas cost of $23,727 during the quarter as compared to the prior period;

lower gas usage of $4,663, primarily due to warmer weather conditions in 2023 compared to the prior period; and,

decrease in customer assistance surcharge of $2,761, which has an equivalent offsetting amount in operations and maintenance expense.

decrease in customer assistance surcharge costs of $2,761, which has an equivalent offsetting amount in revenues; and,

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(In thousands of dollars, except per share amounts)

decrease in insurance expense of $1,326 due to lower claims.

an increase of $3,499 due to higher rates and other surcharges, largely resulting from the weather normalization charge in Kentucky and favorable merchant function charge rider in Pennsylvania during the first quarter of the year.

The Regulated Natural Gas segment is subject to seasonal fluctuations with the peak usage period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each degree that the average of the high and low temperatures for a day is below 65 degrees

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(In thousands of dollars, except per share amounts)

Fahrenheit in a specific geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas needed for heating based on the extent to which the average temperature falls below a reference temperature above which no heating is required (65 degrees Fahrenheit). During the first half of 2023, we experienced actual HDDs of 2,931 days, which was warmer by 16.5% than the actual HDDs of 3,512 days in the first six months of 2022 for Pittsburgh Pennsylvania, which we use as a proxy for our western Pennsylvania service territory. As a result, the operating revenue impact of the lower demand for gas volume was $35,151 and is largely attributed to the warmer weather experienced during the first half in 2023.

Purchased gas increased by $823 or 0.3%. The slight increase is the result of lower gas usage in first six months of 2023 offset by the higher average cost of gas withdrawn from storage during the first quarter of 2023.

Table of Contents

~~Net income increased by $1,732 or 0.9%, primarily as a result~~

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of ~~the factors described above.~~ dollars, except per share amounts)

Impact of Recent Accounting Pronouncements

We describe the impact of recent accounting pronouncements in Note ~~15,~~ 16, Recent Accounting Pronouncements, to the consolidated financial statements in this report.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. ~~There have been no significant changes in our exposure to market risks since December 31, 2016.~~ Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2022, filed March 1, 2023, for additional ~~information.~~information on market risks.

Item 4 – Controls and Procedures

~~(a)~~

~~Evaluation of Disclosure Controls and Procedures~~

(a)Evaluation of Disclosure Controls and Procedures

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

~~(b)~~

~~Changes in Internal Control over Financial Reporting~~

(b)Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during ~~our most recent fiscal~~the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

~~There have been no material changes to~~Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2022, under “Part 1, Item 1A – Risk ~~Factors.”~~Factors” and in our Form 10-Q for the quarter ended March 31, 2023.

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

The following table summarizes the Company’s purchases of its common stock for the quarter ended ~~September~~June 30, ~~2017:~~2023:

Issuer Purchases of Equity Securities

Total

Maximum

Number of

Number of

Shares

Shares

Purchased

that May

as Part of

Yet be

Total

Publicly

Purchased

Number

Average

Announced

Under the

of Shares

Price Paid

Plans or

Plan or
Period

Purchased (1)

per Share

Programs

Programs
July 1-31, 2017

196

$
33.46

-

-
August 1-31, 2017

513

$
33.86

-

-
September 1-30, 2017

-

$
-

-

-
Total

709

$
33.75

-

-


	Issuer Purchases of Equity Securities
				Total	Maximum
				Number of	Number of
				Shares	Shares
				Purchased	that May
				as Part of	Yet be
	Total			Publicly	Purchased
	Number	Average		Announced	Under the
	of Shares	Price Paid		Plans or	Plan or
Period	Purchased (1)	per Share		Programs	Programs
April 1-30, 2023	194	$	44.76	-	-
May 1-31, 2023	305	$	42.52	-	-
June 1-30, 2023	472	$	41.59	-	-
Total	971	$	42.51	-	-

~~(1)~~

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

(1)These amounts consist of 971 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation. This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the award vesting.

Item 5 - Other Information

During the quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

‎

Item 6 – Exhibits

~~The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.~~

~~Table of Contents~~

~~EXHIBIT INDEX~~


~~Exhibit No.~~		~~Description~~
~~4.1~~Exhibit No.		Description
10.1*		~~Bond Purchase~~Seventh Amendment to Credit Agreement, dated ~~July 10, 2017 by~~June 29, 2023, between Aqua Pennsylvania and ~~among Aqua Illinois, Inc.~~PNC Bank, National Association, Citizens Bank, N.A., ~~Teachers Insurance~~TD Bank, N.A., and ~~Annuity Association of America~~The Huntington National Bank
~~4.2~~
10.2*		~~Bond Purchase~~Second Amendment to Credit Agreement, dated ~~July 20, 2017~~June 29, 2023, by and ~~among Aqua Pennsylvania, Inc., New York Life Insurance Company, New York Life Insurance~~between PNG Companies, LLC and ~~Annuity Corporation, New York Life Insurance~~PNC Bank National Association, TD Bank, N.A. and ~~Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3), New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3-2)~~Citizens Bank N.A.
~~31.1~~
31.1*		Certification of Chief Executive Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of ~~1934.~~1934
~~31.2~~
31.2*		Certification of Chief Financial Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of ~~1934.~~1934
~~32.1~~
32.1*		Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section ~~1350.~~1350
~~32.2~~
32.2*		Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section ~~1350.~~1350
~~101.INS~~		~~XBRL Instance Document~~
~~101.SCH~~101.INS		Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (included in Exhibit 101)

*Filed herewith

‎

SIGNATURES

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

~~November 2, 2017~~August 8, 2023


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



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



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



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Stock Units	Fair Value		Stock Units	Fair Value
Nonvested stock units at beginning of period	109,273	$	28.48	180,306	$	45.94
Granted	41,293		30.37	73,696		45.61
Stock units vested and issued	(26,914)		26.18	(52,611)		49.26
Forfeited	(2,287)		30.52	(3,794)		44.99
Nonvested stock units at end of period	121,365	$	29.60	197,597		44.94




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

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



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

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

December 31,

Carrying amount

Estimated fair value