On January 8, 2024, the Company has entered into purchase agreements to acquireissued $500,000 of long-term debt (the “2024 Senior Notes”), less expenses of $4,610, due in 2034 with an interest rate of 5.375%. The Company used the water or wastewater utility system assets of five municipalities for a total combined purchase price in cash of $145,700. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and is subject to regulatory approvals. Closing for these acquisitions are expected to occur by mid-year 2018, which is subject to the timing of the regulatory approval process. These acquisitions will add approximately 14,900 customers in two of the states that the Company operates in.
Pursuant to its strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in Pennsylvania. The total purchase price for the utility system was $16,750, which consisted ofnet proceeds from the issuance of 439,943 shares2024 Senior Notes (1) to repay a portion of the borrowings under the Company’s common stockexisting five year unsecured revolving credit facility, and $3,905(2) for general corporate purposes.

The Company’s effective tax rate was a benefit of 4.2 % and 19.8% for the ninethree 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 2032March 31, 2024 and 2023, respectively. The Company’s Federal and state NOL carryforwards are reduced by an unrecognizeddecrease in income tax position, on a gross basis, of $64,738 and $85,523, respectively. The amountsbenefit is primarily attributed to the gain recognized from the sale of the Company’s Federalinterest in three non-utility local microgrid and state NOL carryforwards prior to being reduceddistributed energy projects in the first quarter of 2024 partially offset by the unrecognizedincrease in tax positions were $145,947benefit associated with the tax deduction for continued qualifying infrastructure investment. In determining its interim tax provision, the Company reflects its estimated permanent and $685,880 respectively.flow-through tax differences for the taxable year. The Company recordsuses the flow-through method to account for the tax deduction for qualifying utility infrastructure at its unrecognizedregulated Pennsylvania and New Jersey subsidiaries.

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

Forward-looking Statements

General Information

Environmental Compliance

Liquidity and Capital Resources

At September 30, 2017,March 31, 2024, we had $4,139$35,200 of cash and cash equivalents compared to $3,763$4,612 at December 31, 2016.2023. During the first ninethree months of 2017,2024, we used the proceeds from long-term debt, the proceeds

from issuance of long-term debtcommon stock, and proceeds from the sale of the non-utility energy projects, 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 September 30, 2017,March 31, 2024 our $250,000$1,000,000 unsecured revolving credit facility, which expires in February 2021,December 2027, had $183,547$725,162 available for borrowing. At September 30, 2017,Additionally, at March 31, 2024, we had short-term lines of credit of $135,500,$435,500, primarily used for working capital, of which $114,510$348,000 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 March 31, 2024 and 2023 are presented below.

Three months ended March 31, 2024 compared with three months ended March 31, 2023

Consolidated operating revenues decreased by $114,381 or 15.7% as compared to the same period in 2023. Revenues from our Regulated Water segment increased by $12,594. Revenues from our Regulated Natural Gas segment and Other business segment decreased by $116,964 and $10,011, 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 $1,094 or 0.8%, primarily due to:

Purchased gas decreased by $126,640 or 49.4%. Purchased gas represents the cost of gas sold by Peoples, which for the regulated gas business has a corresponding offset in revenue. The decrease is the result of the impact of lower average cost of gas of $107,916, and the impact of lower gas usage of $18,724 due to warmer weather conditions during the first quarter of 2024 as well as the sale of Peoples West Virginia.

Taxes other than income taxes increased by $2,146 or 9.4% largely due to an increase in property taxes and payroll taxes in our Regulated Natural Gas segment.

Other expense, net - Interest expense, net of interest income increased by $435 or 0.6% for the quarter. Interest expense increased by $5,077 in our Regulated Water segment and decreased by $2,151 for our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense in Other relates to our corporate operations, and this decreased by $2,491 primarily due to lower average borrowings on our revolving credit facility during the first quarter of 2024.

Income tax benefit - Our effective income tax rate was 4.3%a benefit of 4.2% and 19.8% in the thirdfirst quarter of 20172024 and 10.3%2023, respectively. The decrease in the thirdincome tax benefit is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2016. The effective2024 partially offset by the increase in income tax rate decreasedbenefit associated with the tax deduction for continued qualifying infrastructure investment.

Segment Results of Operations

Regulated Water Segment

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

Three months ended March 31, 2024 compared with three months ended March 31, 2023

Revenues from our Regulated Water segment increased by $12,594 or 4.7% for the first quarter of 2024 as compared to the same period in 2023, mainly 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%, primarily as a result of the factors described above.
Analysis of First Nine Months of 2017 Compared to First Nine Months of 2016
Revenues decreased by $16,863 or 2.7%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a decrease in customer water consumption, offset by following:

an increase in water and wastewater rates, andincluding infrastructure rehabilitation surcharges, of $4,586, additional water and wastewater revenues from organic growth of $2,296, and $11,378;

additional water and wastewater revenues of $1,257$2,990 associated with a larger customer base due to utility acquisitions. acquisitions and organic growth;

Operations and maintenance expenses decreased by $19,384 or 8.5%, primarily due to a reduction in operating expensesexpense for Aqua Resources of $12,981 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $4,459, a 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, offset by the prior year effect of a gain on sale of a utility system of $1,215. The gain on sale of a utility system is reported in the consolidated statement of net income as a component of operations and maintenance expense. The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source.
Depreciation expensethree months ended March 31, 2024 increased by $3,863$7,881 or 4.0%,9.5% primarily due to the utility plant placedfollowing:

Depreciation and amortization increased by $3,727 or 7.0% 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 $5,077 or 17.1% for 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 Texasquarter primarily due to higher ratespush down debt borrowings and water production.
Interest expenseoperating company debt issuances for the Regulated Water segment and increased borrowing costs.

AFUDC decreased by $4,988$1,258 or 8.3%, primarilyby 25.4% due to an increase in average borrowings.
AFUDC increased by $4,124, due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied, andapplied.

Provision for income tax – Our effective income tax rate for our Regulated Water Segment was an expense of 24.6% in the first quarter of 2024, compared to an expense of 14.9% in the first quarter of 2023. The increase in the AFUDCeffective tax rate as ais primarily the result of an increasechanges in the amountjurisdictional earnings mix, decrease in the amortization of AFUDC relatedcertain regulatory liabilities associated with deferred taxes, and a decrease in the income tax benefit associated with the tax deduction for qualifying infrastructure.

Regulated Natural Gas Segment

Our Regulated Natural Gas segment recognizes revenues by selling gas directly to equity. 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 March 31, 2024 compared with three months ended March 31, 2023

Operating revenues from the Regulated Natural Gas segment decreased by $116,964 or by 26.5% due to:

Operations and maintenance expense for the three months ended March 31, 2024 decreased by $11,233 or 19.7% 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. Purchased gas decreased by $116,314 or 48.1% as a result of the impact of: (1) decrease in the average cost of gas of $107,122; (2) lower gas usage of $5,994 due to warmer weather conditions during the first quarter of 2024; and (3) the sale of Peoples West Virginia of $3,198 in October 2023.

Depreciation and amortization increased by $2,283 or 7.6% primarily due to continued capital investment.

Taxes other than income taxes increased by $1,599 or 28.4% primarily due an increase in property taxes and payroll taxes.

Income tax benefit – Our effective income tax rate was 6.0%a benefit of 16.1% in the first nine monthsquarter of 2017 and 8.4%2024, compared to a benefit of 54.3% in the first nine monthsquarter of 2016.2023. The effectivedecrease in the income tax rate decreased duebenefit is primarily attributed to the effectgain recognized from the sale of additional tax deductions recognizedthe Company’s interest in three non-utility local microgrid and distributed energy projects in the first nine monthsquarter of 20172024 partially offset by the increase in income tax benefit associated with the tax deduction for certaincontinued qualifying infrastructure improvements for Aqua Pennsylvania. investment.

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

Forward-looking Statements

General Information

Environmental Compliance

Liquidity and Capital Resources

At September 30, 2017,March 31, 2024, we had $4,139$35,200 of cash and cash equivalents compared to $3,763$4,612 at December 31, 2016.2023. During the first ninethree months of 2017,2024, we used the proceeds from long-term debt, the proceeds

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended March 31, 2024 and 2023 are presented below.

Three months ended March 31, 2024 compared with three months ended March 31, 2023

Consolidated operations and maintenance expense decreased by $1,094 or 0.8%, primarily due to:

Taxes other than income taxes increased by $2,146 or 9.4% largely due to an increase in property taxes and payroll taxes in our Regulated Natural Gas segment.

Segment Results of Operations

Regulated Water Segment

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

Three months ended March 31, 2024 compared with three months ended March 31, 2023

an increase in water and wastewater rates, andincluding infrastructure rehabilitation surcharges, of $4,586, additional water and wastewater revenues from organic growth of $2,296, and $11,378;

additional water and wastewater revenues of $1,257$2,990 associated with a larger customer base due to utility acquisitions. acquisitions and organic growth;

Depreciation and amortization increased by $3,727 or 7.0% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

AFUDC decreased by $4,988$1,258 or 8.3%, primarilyby 25.4% due to an increase in average borrowings. AFUDC increased by $4,124, due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied, andapplied.

Regulated Natural Gas Segment

Three months ended March 31, 2024 compared with three months ended March 31, 2023

Operating revenues from the Regulated Natural Gas segment decreased by $116,964 or by 26.5% due to:

Operations and maintenance expense for the three months ended March 31, 2024 decreased by $11,233 or 19.7% primarily due to the following:

Depreciation and amortization increased by $2,283 or 7.6% primarily due to continued capital investment.

Taxes other than income taxes increased by $1,599 or 28.4% primarily due an increase in property taxes and payroll taxes.

AFUDC decreased by $4,988$1,258 or 8.3%, primarilyby 25.4% due to an increase in average borrowings.
AFUDC increased by $4,124, due to an increasethe decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied, andapplied.

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 30, 2017~~March 31, 2024

☐£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 April 26, 2024: 273,523,533

~~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 30, 2017~~March 31, 2024 and December 31, ~~2016~~2023	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 30, 2017~~March 31, 2024 and ~~2016~~2023	5
4



Consolidated Statements of Capitalization (unaudited) – ~~September 30, 2017~~‎March 31, 2024 and December 31, ~~2016~~2023	6
5

Consolidated ~~Statement~~Statements of Equity (unaudited) – ~~Nine~~‎Three Months Ended ~~September 30, 2017~~March 31, 2024	7
6

Consolidated Statements of Equity (unaudited) – ‎Three Months Ended March 31, 2023	7

Consolidated Statements of Cash Flow (unaudited) – ~~Nine~~‎Three Months Ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023	8


Notes to Consolidated Financial Statements (unaudited)	9


Item 2. Management’s Discussion and Analysis of Financial ‎Condition and Results of Operations	26
27

Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
38

Item 4. Controls and Procedures	31 38


Part II – Other Information

Item 1. Legal Proceedings	31
38

Item 1A. Risk Factors	31
39
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	32

Item ~~6. Exhibits~~5. Other Information	32
39
~~Exhibit Index~~	33

~~Signatures~~Item 6. Exhibits	34 40

Signatures	41

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.


	March 31,		December 31,
Assets	2024		2023
Property, plant and equipment, at cost	$	15,208,072	$	14,977,021
Less: accumulated depreciation		2,952,487		2,879,949
Net property, plant and equipment		12,255,585		12,097,072

Current assets:
Cash and cash equivalents		35,200		4,612
Accounts receivable, net		164,638		144,300
Unbilled revenues		102,793		101,436
Inventory - materials and supplies		48,947		47,494
Inventory - gas stored		17,849		65,173
Prepayments and other current assets		34,619		99,884
Regulatory assets		15,488		29,080
Total current assets		419,534		491,979

Regulatory assets		1,899,984		1,766,892
Deferred charges and other assets, net		97,865		102,388
Funds restricted for construction activity		1,391		1,381
Goodwill		2,340,733		2,340,738
Operating lease right-of-use assets		35,739		37,416
Intangible assets		3,513		3,593
Total assets	$	17,054,344	$	16,841,459

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.


	March 31,		December 31,
Liabilities and Equity	2024		2023
Stockholders' equity:
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 276,878,103 and 276,595,228 as of March 31, 2024 and December 31, 2023	$	138,438	$	138,297
Capital in excess of par value		4,142,610		4,137,696
Retained earnings		1,888,521		1,706,675
Treasury stock, at cost, 3,354,887 and 3,299,191 shares as of March 31, 2024 and December 31, 2023		(88,442)		(86,485)
Total stockholders' equity		6,081,127		5,896,183

Long-term debt, excluding current portion		6,903,544		6,870,593
Less: debt issuance costs		47,415		44,508
Long-term debt, excluding current portion, net of debt issuance costs		6,856,129		6,826,085
Commitments and contingencies (See Note 14)

Current liabilities:
Current portion of long-term debt		67,247		67,415
Loans payable		87,500		160,123
Accounts payable		161,210		221,191
Book overdraft		10,938		13,358
Accrued interest		86,512		53,084
Accrued taxes		36,911		40,641
Regulatory liabilities		14,216		31,270
Dividends payable		83,999		83,929
Other accrued liabilities		130,073		126,916
Total current liabilities		678,606		797,927

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		1,733,947		1,628,324
Customers' advances for construction		125,191		128,755
Regulatory liabilities		838,084		820,910
Asset retirement obligations		851		848
Operating lease liabilities		32,415		34,425
Pension and other postretirement benefit liabilities		37,363		38,850
Other		23,699		24,086
Total deferred credits and other liabilities		2,791,550		2,676,198

Contributions in aid of construction		646,932		645,066
Total liabilities and equity	$	17,054,344	$	16,841,459

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
	March 31,
	2024		2023
Operating revenues	$	612,069	$	726,450

Operating expenses:
Operations and maintenance		136,900		137,994
Purchased gas		129,675		256,315
Depreciation		88,716		82,923
Amortization		1,088		871
Taxes other than income taxes		25,024		22,878
Total operating expenses		381,403		500,981

Operating income		230,666		225,469

Other expense (income):
Interest expense		73,273		72,668
Interest income		(989)		(819)
Allowance for funds used during construction		(4,681)		(5,688)
Gain on sale of other assets		(91,625)		(249)
Other		(442)		(240)
Income before income taxes		255,130		159,797
Income tax benefit		(10,642)		(31,637)
Net income	$	265,772	$	191,434

Comprehensive income	$	265,772	$	191,434

Net income per common share:
Basic	$	0.97	$	0.72
Diluted	$	0.97	$	0.72

Average common shares outstanding during the period:
Basic		273,377		264,192
Diluted		273,738		264,751

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)



		March 31,		December 31,
		2024		2023
Stockholders' equity:
Common stock, $0.50 par value		$	138,438	$	138,297
Capital in excess of par value			4,142,610		4,137,696
Retained earnings			1,888,521		1,706,675
Treasury stock, at cost			(88,442)		(86,485)
Total stockholders' equity			6,081,127		5,896,183

Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range	Maturity Date Range
0.00% to 0.99%	2024 to 2033		2,885		2,935
1.00% to 1.99%	2024 to 2039		7,352		7,538
2.00% to 2.99%	2024 to 2058		207,403		207,917
3.00% to 3.99%	2024 to 2056		1,312,241		1,313,932
4.00% to 4.99%	2024 to 2059		1,242,557		1,245,727
5.00% to 5.99%	2024 to 2061		313,406		312,745
6.00% to 6.99%	2026 to 2036		31,000		31,000
7.00% to 7.99%	2025 to 2027		28,061		28,125
8.00% to 8.99%	2025		1,086		1,289
9.00% to 9.99%	2026		11,800		11,800
			3,157,791		3,163,008

Notes payable to bank under revolving credit agreement, variable rate, due 2027			258,000		720,000
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 5.375%, due 2034			500,000		-
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 2024 through 2034			30,000		30,000
Total long-term debt			6,970,791		6,938,008

Current portion of long-term debt			67,247		67,415
Long-term debt, excluding current portion			6,903,544		6,870,593
Less: debt issuance costs			47,415		44,508
Long-term debt, excluding current portion, net of debt issuance costs			6,856,129		6,826,085

Total capitalization		$	12,937,256	$	12,722,268

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

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



			Capital in
	Common		Excess of		Retained		Treasury
	Stock		Par Value		Earnings		Stock		Total
Balance at December 31, 2023	$	138,297	$	4,137,696	$	1,706,675	$	(86,485)	$	5,896,183
Net income		-		-		265,772		-		265,772
Dividends of March 1, 2024 ($0.3071 per share)		-		-		(1)		-		(1)
Dividends of June 1, 2024 declared ($0.3071 per share)		-		-		(83,998)		-		(83,998)
Issuance of common stock under dividend reinvestment plan (117,210 shares)		59		3,823		-		-		3,882
Repurchase of stock (62,872 shares)		-		-		-		(2,231)		(2,231)
Equity compensation plan (160,694 shares)		80		(80)		-		-		-
Exercise of stock options (4,971 shares)		2		173		-		-		175
Stock-based compensation		-		1,049		73		-		1,122
Other		-		(51)		-		274		223
Balance at March 31, 2024	$	138,438	$	4,142,610	$	1,888,521	$	(88,442)	$	6,081,127

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

‎

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands of dollars, except per share amounts)

(UNAUDITED)



			Capital in
	Common		Excess of		Retained		Treasury
	Stock		Par Value		Earnings		Stock			Total
Balance at December 31, 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

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

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Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands of dollars)

(UNAUDITED)


	Three Months Ended
	March 31,
	2024		2023
Cash flows from operating activities:
Net income	$	265,772	$	191,434
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		89,804		83,794
Deferred income taxes		(12,323)		(33,257)
Provision for doubtful accounts		7,756		4,532
Stock-based compensation		1,061		3,422
Gain on sale of utility systems and other assets		(91,625)		(249)
Net change in receivables, deferred purchased gas costs, inventory and prepayments		122		219,624
Net change in payables, accrued interest, accrued taxes and other accrued liabilities		(18,212)		(58,361)
Other		(1,642)		(9,311)
Net cash flows from operating activities		240,713		401,628
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,807 and $1,428		(252,998)		(243,730)
Acquisitions of utility systems, net		-		(136)
Net proceeds from the sale of utility systems and other assets		166,563		337
Other		(48)		321
Net cash flows used in investing activities		(86,483)		(243,208)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction		4,094		7,010
Repayments of customers' advances		(2,171)		(984)
Net repayments of short-term debt		(72,623)		(206,000)
Proceeds from long-term debt		618,008		229,770
Repayments of long-term debt		(586,649)		(114,889)
Change in cash overdraft position		(2,420)		(8,624)
Proceeds from issuance of common stock under dividend reinvestment plan		3,882		4,117
Proceeds from issuance of common stock from at-the-market sale agreement		-		19,294
Proceeds from exercised stock options		175		103
Repurchase of common stock		(2,231)		(3,911)
Dividends paid on common stock		(83,930)		(75,808)
Other		223		253
Net cash flows used in financing activities		(123,642)		(149,669)
Net change in cash and cash equivalents		30,588		8,751
Cash and cash equivalents at beginning of period		4,612		11,398
Cash and cash equivalents at end of period	$	35,200	$	20,149

Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for	$	91,576	$	86,136
Non-cash utility property contributions		5,740		13,126

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

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated balance sheets and statements of capitalization of ~~Aqua America,~~Essential Utilities, Inc. and subsidiaries ~~(the~~(collectively, the “Company”, “we”, “us” or “our”) at ~~September 30, 2017,~~March 31, 2024, and the unaudited consolidated statements of ~~net income~~operations and comprehensive income, cash flows and equity for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023, have been prepared in accordance with accounting principles generally accepted in the ~~consolidated statements of cash flow~~United States (“GAAP”) for ~~the nine months ended September 30, 2017 and 2016,~~interim reporting and the ~~consolidated statement of equity~~rules and regulations for the nine months ended September 30, 2017 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present a fair statement of its consolidated financial position, consolidated changes in equity, consolidated results of operations, and consolidated cash flow 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~~2023. 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.~~ 2023.

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 2 – ~~Goodwill~~Revenue Recognition

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


	Three Months Ended								Three Months Ended
	March 31, 2024								March 31, 2023
	Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues		Water Revenues		Wastewater Revenues		Natural Gas Revenues		Other Revenues
Revenues from contracts with customers:
Residential	$	151,831	$	35,594	$	206,926	$	-	$	147,252	$	33,490	$	292,230	$	-
Commercial		41,737		8,983		42,171		-		40,954		8,591		65,157		-
Fire protection		10,381		-		-		-		10,259		-		-		-
Industrial		8,142		542		890		-		7,857		578		1,789		-
Gas transportation & storage		-		-		70,491		-		-		-		67,653		-
Other water		15,607		-		-		-		8,844		-		-		-
Other wastewater		-		3,624		-		-		-		2,734		-		-
Other utility		-		-		2,702		2,810		-		-		13,077		6,159
Revenues from contracts with customers		227,698		48,743		323,180		2,810		215,166		45,393		439,906		6,159
Alternative revenue program		656		(13)		1,151		-		402		180		1,389		-
Other and eliminations		-		-		-		7,844		-		-		-		17,855
Consolidated	$	228,354	$	48,730	$	324,331	$	10,654	$	215,568	$	45,573	$	441,295	$	24,014

Note 3 – Acquisitions

Water and Wastewater Utility Acquisitions - Completed

In July 2023, the Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves approximately 2,900 customers for $12,291; La Rue, an Ohio municipality, which serves approximately 300 customers for $2,253; and, Southern Oaks Water System, which serves approximately 800 customers in Texas for $3,321. Additionally, in July 2023, the Company completed their acquisition of a portion of the water and wastewater utility assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,500 customers for $1,424.

In June 2023, the Company acquired the wastewater utility assets of Union Rome, Ohio, which serves approximately 4,300 customers for a cash purchase price of $25,547.

In March 2023, the Company acquired the North Heidelberg Sewer Company in Berks County, Pennsylvania, which serves approximately 300 customer connections for a cash purchase price of $136.

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

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

Water and Wastewater Utility Acquisitions – Pending Completion

In December 2023, the Company entered into a purchase agreement to acquire North Versailles wastewater assets in North Versailles Township, Pennsylvania which serves approximately 4,400 customers for between $25,000 and $30,000.

Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

In September 2023, the Company entered into a purchase agreement to acquire Greenville Municipal Water Authority’s water system in Greenville, Pennsylvania which serves approximately 3,000 customers for $18,000.

In June 2023, the Company entered into a purchase agreement to acquire Westfield HOA wastewater assets, which serves approximately 200 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 wastewater utility assets of the City of Beaver Falls, Pennsylvania which consists of approximately 7,600 equivalent retail customers for $41,250.

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 2024. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.

East Whiteland Purchase Agreement

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. On September 26, 2023, the Pennsylvania Commonwealth Court denied our motion for reargument. On October 26, 2023, the Company, the Pennsylvania Public Utility Commission, and East Whiteland Township filed an appeal to the Pennsylvania Supreme Court. East Whiteland Township filed to Supplement its Petition for Allowance of Appeal on January 2, 2024. On January 16, 2024, the Company, the OCA and the PUC filed Answers to East Whiteland Township’s Petition. The Company is currently waiting to see if the Supreme Court will grant allocatur. Management believes the final resolution of this matter will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

DELCORA Purchase Agreement

In 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

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Southeast Pennsylvania for $276,500. There are several legal proceedings involving the Company as a result of the purchase agreement that are on-going. For additional information, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The purchase price for this pending acquisition is subject to certain adjustments at closing, and is subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of this acquisition with a mix of equity and debt financing, utilizing our revolving credit facility until permanent debt is secured. Closing of our acquisition of DELCORA is subject to regulatory approval and on-going litigation.

Note 4 –Dispositions

On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which served approximately 13,000 customers or about two percent of the Company’s regulated natural gas customers (“Peoples Gas West Virginia”). Initially the sale closed for an estimated purchase price of $39,965, subject to working capital and other adjustments. In March 2024, the Company received an additional $1,213 from the buyer. The additional proceeds were based on finalizing closing working capital and other adjustments, resulting in a final purchase price of $41,178 and a loss of an inconsequential amount. The sale of Peoples Gas West Virginia had no major effect on the Company’s operations and did not meet the requirements to be classified as discontinued operations.

In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $165,000. As of December 31, 2023, balances associated with these projects of $63,182 were included in prepayments and other current assets in the consolidated balance sheets. The sale was completed in January 2024, and the Company recognized a gain of $91,236 during the first quarter of 2024 which is included in other expense (income) in the accompanying consolidated statement of operations.

Note 5 – Goodwill

The following table summarizes the changes in 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



	Regulated Water		Regulated Natural Gas		Other		Consolidated
Balance at December 31, 2023	$	58,450	$	2,277,447	$	4,841	$	2,340,738
Reclassification to utility plant acquisition adjustment		(5)		-		-		(5)
Balance at March 31, 2024	$	58,445	$	2,277,447	$	4,841	$	2,340,733

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

Goodwill is 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 for impairment,

Note 6 – Capitalization

In March 2024, the Company ~~may assess qualitative factors, including macroeconomic conditions, industry~~filed a new universal shelf registration through a filing with the Securities and ~~market considerations, cost factors, overall financial performance,~~Exchange Commission (SEC) to allow for the potential future offer and ~~entity specific events. Alternatively,~~sale by the Company, may bypass this qualitative assessment for some 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.from

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 3 –~~ ~~Acquisitions~~time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. This registration statement is effective for three years and replaces a similar filing that expires in the second quarter of 2024.

~~During the first nine months of 2017,~~At-the-Market Offering

On October 14, 2022, the Company ~~completed four acquisitions~~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 ~~systems in various states adding 1,003 customers. The total purchase price~~acquisitions and repaying outstanding indebtedness. During the three months ended March 31, 2024, there were no common stock sales under the ATM. As of ~~these utility systems consisted of $5,860 in cash, which resulted in $72 of goodwill being recorded. The pro forma effect of~~March 31, 2024, approximately $110,000 remained available for sale under the ~~businesses acquired is not material either individually or collectively to the Company’s results of operations.~~ ATM.

~~As part of the Company’s growth-through-acquisition strategy,~~Long-term Debt and Loans Payable

In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in ~~cash.~~aggregate principal amount of first mortgage bonds. 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 systemsbonds consisted of ~~$5,518~~$175,000 of 5.48% first mortgage bonds due in ~~cash, which resulted~~2053; and $50,000 of 5.56% first mortgage bonds due 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.~~

~~Note 4~~ – ~~Assets Held for Sale~~

2061. In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265 customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet.

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

]

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~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~Note 5 –~~ ~~Capitalization~~

~~In October 2017,~~2023, Aqua Pennsylvania issued $75,000 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~~ with an interest ~~rates~~rate of ~~4.06%, 4.07%, and 4.09%, respectively.~~5.60%. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

~~In July 2017, Aqua Illinois issued $100,000 of first mortgage bonds consisting of the following:~~

\

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

~~The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.~~

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

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

Note 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.~~

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~~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 three months ended March 31, 2024 and 2023.

The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016,~~2023, the carrying amount of the Company’s loans payable was ~~$20,990~~$87,500 and ~~$6,535,~~$160,123, 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 March 31, 2024 and December 31, 2023, the carrying amounts of the Company's cash and cash equivalents was $35,200 and $4,612, 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 30, 2017~~March 31, 2024 and December 31, ~~2016,~~2023, the carrying amount

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

of these securities was ~~$18,145~~$28,357 and ~~$17,072,~~$26,442, respectively, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.

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



	Three Months Ended
	March 31,
	2024		2023
Net gain recognized during the period on equity securities	$	421	$	131
Less: net gain recognized during the period on equity securities sold during the period		-		-
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date	$	421	$	131

The ~~fair value of cash and cash equivalents, which~~net gain 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~~$125,191 as of ~~September 30, 2017,~~March 31, 2024, and ~~$91,843~~$128,755 as of December 31, ~~2016.~~2023. 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~~2033, 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
	September 30,		September 30,		March 31,
	2017	2016	2017	2016	2024	2023
Average common shares outstanding during the period for basic computation	177,660	177,336	177,583	177,243	273,377	264,192
Dilutive effect of employee stock-based compensation	464	481	520	538
Effect of dilutive securities:
Employee stock-based compensation					361	559
Average common shares outstanding during the period for diluted computation	178,124	177,817	178,103	177,781	273,738	264,751

~~For the three and nine months ended September 30, 2017 and 2016, all~~The number of ~~the Company’s~~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: 268,273 for the three months ended March 31, 2024; and 152,138 for the three months ended March 31, 2023. 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 30, 2017, 3,741,526~~March 31, 2024, 1,227,138 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
	March 31,
	2024		2023
Stock-based compensation within operations and maintenance expenses	$	106	$	2,443
Income tax benefit		26		612

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~~three months ended ~~September 30, 2017:~~March 31, 2024:



	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	531,437	$	40.03
Granted	125,202		30.79	226,971		38.10
Performance criteria adjustment	(64,398)		27.75	(142,772)		30.22
Actual vested				(96,425)		43.40
Forfeited	(16,306)		28.26	(4,271)		42.63
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	514,940		41.25

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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~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 was ~~$30.79~~$38.10 and ~~$28.89,~~$45.06, 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
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2024		2023
Stock-based compensation within operations and maintenance expenses	$	311	$	299	$	915	$	763	$	846	$	681
Income tax benefit		129		124		378		315		211		171

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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
	March 31,
	2024		2023
Stock-based compensation within operations and maintenance expenses	$	131	$	77
Income tax benefit		33		19

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~~


	2024		2023
Expected term (years)		5.5		5.5
Risk-free interest rate		4.00%		4.03%
Expected volatility		28.30%		27.80%
Dividend yield		3.43%		2.53%
Grant date fair value per option	$	8.12	$	11.37

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~~three months ended ~~September 30, 2017:~~March 31, 2024:



		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				882,442	$	37.03
Granted	120,127		30.47				119,548		35.78
Forfeited	(2,439)		30.47
Expired / Cancelled	(2,812)		14.26
Expired							(527)		35.94
Exercised	(157,621)		16.51				(4,971)		35.25
Outstanding at end of period	384,590	$	19.73	3.9	$	5,175	996,492	$	36.89	5.8	$	1,380

Exercisable at end of period	266,902	$	15.00	1.4	$	4,855	803,853	$	36.29	5.0	$	1,228


	Number	Weighted
	of	Average
	Shares	Fair Value
Nonvested restricted stock at beginning of period	1,412	$	35.42
Granted	-		-
Vested	-		-
Nonvested restricted stock at end of period	1,412	$	35.42

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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. There were no stock awards granted and vested during the three months ended March 31, 2024.

The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2024		2023
Stock-based compensation within operations and maintenance expenses	$	150	$	131	$	412	$	375	$	-	$	210
Income tax benefit		62		54		171		155		-		59

Number

Weighted

of

Average

Stock Awards

Fair Value
Nonvested stock awards at beginning of period

-

$
-
Granted

12,529

32.92
Vested

(12,529)

32.92
Nonvested stock awards at end of period

-

$
-

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~~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
	March 31,
	2024		2023
Service cost	$	357	$	401
Interest cost		3,908		4,308
Expected return on plan assets		(4,696)		(5,672)
Amortization of prior service cost		81		171
Amortization of actuarial loss		751		809
Net periodic benefit cost	$	401	$	17

	Other
	Postretirement Benefits
		Three Months Ended
		March 31,
	2024		2023
Service cost	$	363	$	337
Interest cost		1,112		1,119
Expected return on plan assets		(1,105)		(1,093)
Amortization of actuarial gain		(267)		(329)
Net periodic benefit cost	$	103	$	34

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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

Pension Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
794

$
784

$
2,382

$
2,394
Interest cost

3,108

3,251

9,324

9,787
Expected return on plan assets

(4,270)

(4,215)

(12,810)

(12,696)
Amortization of prior service cost

145

145

435

435
Amortization of actuarial loss

2,001

1,797

6,003

5,354
Settlement charge

-

-

-

3,028
Special termination benefit charge

-

-

-

302
Net periodic benefit cost

$
1,778

$
1,762

$
5,334

$
8,604

Other

Postretirement Benefits

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Service cost

$
255

$
253

$
765

$
761
Interest cost

737

726

2,211

2,202
Expected return on plan assets

(647)

(645)

(1,941)

(2,001)
Amortization of prior service cost

(127)

(137)

(381)

(411)
Amortization of actuarial loss

291

220

873

707
Net periodic benefit cost

$
509

$
417

$
1,527

$
1,258

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

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

There were 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~~three months of ~~2017, which completed~~2024.

Note 11 – Rate Activity

On January 19, 2024, Aqua New Jersey filed an application with the New Jersey Board of Public Utilities designed to increase water rates by $8,328 or 17.3% on an annual basis. The Company anticipates a final order to be issued by August 2024.

On January 2, 2024, Aqua Illinois filed an application with the Illinois Commerce Commission designed to increase water and wastewater rates by $19,196 or 18.9% on an annual basis. The Company anticipates a final order to be issued by December 2024.

On December 29, 2023, Peoples Natural Gas filed an application with the Pennsylvania Public Utility Commission designed to increase natural gas rates by $156,024 or 18.7% on an annual basis. The Company anticipates a final order to be issued by September 2024.

On December 13, 2023, the Company’s ~~2017 cash contributions.~~ 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 $4,850 annually. New rates for water and sewer service went into effect on December 13, 2023.

On September 28, 2023, the Company’s regulated water and wastewater operating subsidiary in Texas, Aqua Texas, received a final order from the Public Utility Commission of Texas approving infrastructure rehabilitation surcharges designed to increase revenues by $8,388 annually. The rates authorized on March 28, 2023 and implemented on an interim basis effective April 1, 2023 did not change with the final order.

On July 27, 2023, the Company’s 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 or 29.5% on an annual basis. In February 2024, the Company implemented interim rates which may be subject to refund for the difference between interim and final approved rates pending the final order.

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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~~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 year of new rates being implemented, then by an additional $3,743 and $4,130 in the 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.

During the first ~~nine~~three months of ~~2017,~~2024, two of the Company’s water utility operating divisions in ~~Indiana and~~ Ohio ~~were granted~~implemented base rate increases designed to increase total operating revenues on an annual basis by ~~$7,403.~~$1,627. Further, during the first ~~nine~~three months of ~~2017,~~2024, 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.~~$7,445 in its water and wastewater utility operating divisions in Pennsylvania and Illinois, and by $1,220 its natural gas operating division in Kentucky.

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
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2024		2023
Property	$	6,955	$	7,007	$	20,608	$	20,119	$	8,877	$	8,104
Gross receipts, excise and franchise		3,969		3,409		10,507		9,468		4,155		4,030
Payroll		2,066		2,140		7,322		7,775		7,658		6,632
Regulatory assessments		674		639		1,933		1,991		1,900		1,684
Pumping fees		1,526		1,442		3,820		3,501		1,496		1,466
Other		44		75		200		240		938		962
Total taxes other than income	$	15,234	$	14,712	$	44,390	$	43,094	$	25,024	$	22,878

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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.

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~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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



	Three Months Ended						Three Months Ended						Three Months Ended								Three Months Ended
	September 30, 2017						September 30, 2016						March 31, 2024								March 31, 2023
	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	$	279,894	$	324,331	$	7,844	$	612,069	$	267,300	$	441,295	$	17,855	$	726,450
Operations and maintenance expense		70,772		(2,790)		67,982		73,013		6,799		79,812		90,683		45,917		300		136,900		82,802		57,150		(1,958)		137,994
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														-		125,542		4,133		129,675		-		241,856		14,459		256,315
Depreciation and amortization														57,194		32,411		199		89,804		53,467		30,128		199		83,794
Interest expense, net (a)														34,790		25,356		12,138		72,284		29,713		27,507		14,629		71,849
Allowance for funds used during construction		3,914		-		3,914		2,267		-		2,267		(3,688)		(993)		-		(4,681)		(4,946)		(742)		-		(5,688)
Income tax expense (benefit)		3,138		262		3,400		9,027		(616)		8,411
Net income (loss)		74,208		2,017		76,225		74,681		(1,511)		73,170

	Nine Months Ended						Nine Months Ended
	September 30, 2017						September 30, 2016
	Regulated		Other		Consolidated		Regulated		Other		Consolidated
Operating revenues	$	602,341	$	3,872	$	606,213	$	606,323	$	16,753	$	623,076
Operations and maintenance expense		210,842		(2,879)		207,963		210,014		17,333		227,347
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
Allowance for funds used during construction		10,570		-		10,570		6,446		-		6,446
Income tax expense (benefit)		12,243		(344)		11,899		18,610		(1,677)		16,933
Provision for income taxes (benefit)														20,810		(29,150)		(2,302)		(10,642)		13,514		(43,484)		(1,667)		(31,637)
Net income (loss)		184,733		1,532		186,265		186,579		(2,046)		184,533		63,905		209,940		(8,073)		265,772		77,402		123,546		(9,514)		191,434
Capital expenditures		337,321		410		337,731		269,046		973		270,019		152,231		100,767		-		252,998		159,394		81,669		2,667		243,730

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other 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. The Company has accrued for the penalty and other fees that will be paid as a result of a conditional settlement that was reached with the regulators. The settlement was subject to court approval. However, the court declined to approve the settlement agreement. The Company is considering its options in the light of this decision. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorney’s fees, and “damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park, Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. The Company has 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 ~~these loss contingencies~~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 ~~these matters are~~this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

A number of the Company’s subsidiaries are parties to several lawsuits against manufacturers of certain per- and polyfluoroalkyl substances or compounds (“PFAS”) for damages, contribution and reimbursement of costs incurred and continuing to be incurred to address the presence of such PFAS in public water supply systems owned and operated by these utility subsidiaries throughout its service area. One such suit to which the Company is a party is a multi-district litigation (the “MDL”) lawsuit which commenced on December 7, 2018, in the United States District Court for the District of South Carolina. In August 2023, a potential class action settlement involving defendants The Chemours Company, Corteva, Inc., and DuPont de Nemours, Inc. to resolve claims brought in the MDL against them by public water systems, including the Company, and a similar class action settlement with defendant 3M Company received preliminary approval from the MDL court. In February and April 2024, the MDL court issued its final approval of the DuPont and 3M settlements, respectively. The Company is monitoring and evaluating the ongoing litigation and settlement activity with the PFAS manufacturers for potential impacts to the various claims that the Company has asserted.

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.

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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 30, 2017, estimates that approximately $5,415 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.

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~~$1,846 at ~~September 30, 2017~~March 31, 2024 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

Note 1415 – Income Taxes

~~During~~

The statutory Federal tax ~~benefit as~~rate is 21.0% for the three months ended March 31, 2024 and 2023. For states with a ~~reduction to its deferred~~corporate net 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~~state corporate net income tax ~~expense~~rates range from 2.5% to 9.50% for all periods presented.

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 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 costsdistribution property must be capitalized ~~for book and deducted as an expense~~ for tax purposes.

AsThe Company evaluated the safe harbor and intends to adopt the methodology on its 2023 tax return. In the second quarter of ~~September 30, 2017,~~2023, based on the ~~total gross unrecognized~~ tax ~~benefit~~legislative guidance that 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,issued, the Company ~~had unrecognized tax benefits of $28,099.~~

~~Accounting rules for~~reevaluated the uncertain tax positions ~~specify that~~related to the Regulated Water Segment and ultimately released a portion of its historical income tax ~~positions~~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 rate case.

Note 16 – Recent Accounting Pronouncements and Disclosure Rules

Pronouncements to be adopted upon the effective date:

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for ~~which the timing of resolution~~annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is ~~uncertain should be classified as long-term liabilities. Judgment~~permitted. The Company is ~~required in~~currently evaluating the ~~Company’s uncertain tax positions~~impact of this ASU on its consolidated financial statements and ~~determining~~related disclosures.

In November 2023, the ~~provision for income taxes. Management believes~~FASB issued ASU 2023-07 Segment Reporting – Improving Reportable Segment Disclosures (Topic 280). The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that ~~an adequate provision has been made for~~are regularly provided to the chief operating decision maker (CODM), a description of other segment items by reportable segment, and 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~~additional measures of a segment’s profit or loss used by the ~~timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change~~CODM when deciding how to ~~the total amount of unrecognized income tax benefits within the next 12 months.~~

~~Note 15 –~~ ~~Recent Accounting Pronouncements~~

In March 2017, 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.allocate resources. The ~~guidance~~ASU also 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 forall annual ~~reporting periods beginning after December 15, 2017, and interim periods within that reporting period, and is~~disclosures currently required by Topic 280 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.included in interim periods. 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.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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

In February 2016, the FASB issued updated accounting guidance on accounting for leases, which requires lessees to establish a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The updated accounting guidanceupdate is effective for fiscal years beginning after December 15, ~~2018,~~2023, and interim periods within ~~those~~ fiscal years beginning after December 15, 2024, with early adoption ~~available.~~permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is ~~evaluating~~currently assessing the ~~requirements~~timing and impact of adopting the updated provisions.

In March 2024, the U.S. Securities and Exchange Commission (SEC) issued its final climate disclosure rule, which requires the disclosure of Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports and registration statements, when material. A number of petitions have been filed in federal courts seeking to challenge the SEC’s climate disclosure rule. As a result, in April 2024, the SEC placed a pause on its implementation of the ~~updated guidance to determine~~new rule. We are currently evaluating the impact of ~~adoption.~~

~~In January 2016,~~ the ~~FASB issued updated accounting guidance~~new rule and, depending 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 provisionsoutcome of the ~~updated guidance to have a material impact on its results of operations or financial position.~~ proceedings, will include the required disclosures once it becomes effective.

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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.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among ~~others:~~others, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, the threat of cyber-attacks and data breaches, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, impact of public health threats, 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~~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 5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, 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, the Company’s market-based activities are conducted through Aqua Infrastructure, LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply services for firms in theOur Peoples subsidiaries provide natural gas ~~drilling industry. Aqua Resources provides water~~distribution services to customers in western Pennsylvania 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.

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~~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)~~

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

Aqua America, Inc., which prior to its name change 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 acquisitionKentucky. Approximately 95% of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012. Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled thetotal number of ~~regulated~~natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based businesses, conducted through its non-regulated subsidiaries, that provide utility service line protection solutions and ~~has extended our regulated operations from southeastern Pennsylvania~~repair services to ~~include operations in seven other states.~~households and gas marketing and production activities. 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.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which represented approximately two percent of the Company’s regulated natural gas customers. Initially the sale closed for an estimated purchase price of $39,965, subject to working capital and other adjustments. In March 2024, the Company received an additional $1,213 from the buyer. The additional proceeds were based on finalizing closing working capital and other adjustments, resulting in a final purchase price of $41,178 and a loss of an inconsequential amount. In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $165,000. The sale was completed in January 2024, and the Company recognized a gain of $91,236 in the first quarter of 2024. These transactions are consistent with the Company’s long-term strategy of focusing on its core business and will allow the Company to prioritize the growth of its utilities in states where it has scale. The Company used the proceeds from these transactions to finance its capital expenditures and water and wastewater acquisitions, in place of external funding from equity and debt issuances.

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.

~~Financial Condition~~Recent Developments

~~During~~Macroeconomic Factors

Our industry has been significantly impacted by inflation, higher interest rates, and other macroeconomic factors. This resulted in an increase in our operating and capital spending requirements in 2022 and 2023. As of the current period, inflation decelerated compared with the prior year, however, is still above historical levels. Additionally, interest rates remain elevated to curb inflation. We experienced moderate macroeconomic pressures during the first ~~nine months~~quarter of ~~2017,~~2024, which we ~~had $337,731~~expect to continue through the remainder of 2024. 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.

On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) announced the final National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The NPDWR established the maximum contaminant levels (MCLs) in drinking water and allows for a five-year window to comply. In 2023, the Company performed its initial analysis of the NPDWR and estimated an investment of at least $450,000 of capital expenditures ~~expended $5,860~~to install additional treatment facilities over the Compliance Period in order to comply (i.e. 2029 pending no delays due to lawsuits). This figure could increase as plans for construction execution are refined or if additional sites require treatment in the future. Additionally, the Company estimated annual operating expenses of approximately five percent of the installed capital expenditures, in today’s dollars, related to testing, treatment, and disposal. These were preliminary estimates and actual capital expenditures and expenses may differ based upon a variety of factors, including supply chain issues and site-by-site

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

requirements. 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.

On April 19, 2024, the U.S. Environmental Protection Agency (“EPA”) announced a final rule that designated two PFAS chemicals, perfluorooctanoic acid (“PFOA”) and perfluorooctanesulfonic acid (“PFOS”), as hazardous substances under the under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund. This final action will address PFOA and PFOS contamination by enabling investigation and cleanup of these harmful chemicals and ensuring that leaks, spills, and other releases are reported. In addition to the final rule, EPA issued a separate CERCLA enforcement discretion policy that makes it clear that EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties. The policy identifies examples for operators of public water systems and wastewater systems or entities performing a public service role in providing safe drinking water, handling municipal solid waste, treating or managing stormwater and wastewater, disposing of pollution control residuals, or ensuring beneficial application of wastewater products as a fertilizer substitute. The potential liabilities to the Company, if any, resulting from this rule are currently being evaluated.

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 ~~acquisition~~cleanup of these contaminants is attributed to the polluters and is seeking damages and other costs to address the contamination of its public water supply systems by PFAS. The Company is also monitoring ongoing litigation and settlement activity with manufacturers of PFAS in these proceedings. For more information, see Part I - Item I - Note 14 to the Company’s consolidated financial statements.

Our regulated water and ~~wastewater utility systems, issued $441,294~~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.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

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 $240,713 for the first quarter of 2024, compared to $401,628 for the first quarter of 2023. The net change in working capital and other assets and liabilities resulted in a decrease in cash from operations of $19,732 for the first quarter of 2024 compared to an increase of $151,952 for the first quarter of 2023. The change in working capital in 2024 as compared to 2023 was primarily driven by the year over year decrease in accounts receivable, unbilled revenues and deferred purchased gas cost balances, and most significantly in gas inventory, as a result of lower gas prices in the current period as compared with the prior period for our Regulated Natural Gas segment.

During the first three months of 2024, we incurred $252,998 of capital expenditures, issued $618,008 of long-term debt, received $166,563 from the sale of assets, repaid short-term debt, and made sinking fund contributions and other ~~loan~~long-term debt repayments in aggregate of ~~$293,270.~~$659,272. 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, and proceeds from the ~~issuances~~sale of ~~$80,000~~the non-utility energy projects were used for capital expenditures, repayment of existing indebtedness, and general corporate purposes. Cash flows used in financing activities were lower during the first three months of 2024 principally as a result of the decrease in the amount of the paydown of loans payable associated with the financing of inventory.

On January 8, 2024, the Company issued $500,000 of long-term debt (the “2024 Senior Notes”), less expenses of $4,610, due in 2034 with an interest rate of 5.375%. In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in aggregate principal amount of first mortgage bonds. The bonds consisted of $175,000 of 5.48% first mortgage bonds due in 2053; and $50,000 of 5.56% first mortgage bonds due in 2061. In January 2023, Aqua Pennsylvania issued $75,000 of first mortgage bonds, ~~by Aqua Pennsylvania~~due in ~~July~~2043, and ~~January 2017~~with an interest rate of 5.60%. The proceeds from these borrowings were used to repay existing indebtedness and ~~$100,000~~for general corporate purposes.

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 ~~first mortgage bonds by Aqua Illinois in July 2017.~~ 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). During the three months ended March 31, 2024, there were no sales of common stock under the ATM. As of March 31, 2024, the Company had issued 10,260,833 shares of common stock for net proceeds of $386,023 under the ATM. As of March 31, 2024, approximately $110,000 remained available for sale under the ATM. The Company used 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.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

In March 2024, the Company filed a new universal shelf registration through a filing with the Securities and Exchange Commission (SEC) to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. This registration statement is effective for three years and replaces a similar filing that expires in the second quarter of 2024.

As of March 31, 2024, our credit ratings remained at investment grade levels. On March 19, 2024, S&P lowered its credit rating for the Company, Aqua Pennsylvania, and Peoples Natural Gas Companies from A to A-, citing weakening financial measures as a result of inflationary pressures and our significant capital spending; and revised its outlook from negative to stable for the companies. 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. On August 29, 2023, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and stable outlook; and, affirmed Peoples Natural Gas Companies’ senior secured notes rating of Baa1 and revised its outlook from stable to negative. 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~~credit rating may result in the ~~next twelve months.~~

~~Results~~imposition of ~~Operations~~

~~Analysis~~additional financial and/or other covenants, impact the market prices of ~~Third Quarter of 2017 Compared~~equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to ~~Third Quarter of 2016~~

~~Revenues decreased by $11,585 or 5.1%, primarily due~~enhance our regulatory practices to ~~a decrease in customer water consumption,~~address regulatory lag and ~~a decrease in market-based activities revenue of $3,431 associated with the dispositions of business units, offset by an increase in water~~recover capital project costs 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~~increases in operating ~~expenses for Aqua Resources of $4,249 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production~~ costs ~~of $2,928, a decrease in the Company’s self-insured employee medical benefit program expense of $2,425,~~efficiently 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. timely through various rate-making mechanisms.

~~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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~~AQUA AMERICA,~~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)



	Three Months Ended March 31,
	2024		2023		Increase (Decrease)		% change
Operating revenues	$	612,069	$	726,450	$	(114,381)	-15.7%
Operations and maintenance expense	$	136,900	$	137,994	$	(1,094)	-0.8%
Purchased gas	$	129,675	$	256,315	$	(126,640)	-49.4%
Net income	$	265,772	$	191,434	$	74,338	38.8%

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		22.4%		19.0%
Purchased gas		21.2%		35.3%
Depreciation and amortization		14.7%		11.5%
Taxes other than income taxes		4.1%		3.1%
Interest expense, net of interest income		11.8%		9.9%
Net income		43.4%		26.4%

Effective tax rate		-4.2%		-19.8%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

decrease in customer assistance surcharge costs of $2,797 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;

decrease in operation and maintenance expense of $1,712 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024;

decrease in outside services and other expenses due to higher capitalization as a result of greater capital spend in the current period compared to the prior period; offset by

an increase in employee related costs of $2,003, primarily resulting from higher salary costs and increased contributions to the Company’s defined contribution plan;

increase in bad debt expense of $3,224;

an increase in production costs for water and wastewater operations of $2,397, primarily due to increased purchased water, wastewater, and power costs; and

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,127.

Depreciation and amortization expense increased by $6,010 or 7.2% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

Allowance for funds used during construction ~~(“AFUDC”) increased by $1,647,~~(AFUDC) was $4,681 and $5,688 during the first quarter of 2024 and 2023, respectively. The decrease in 2024 is primarily due to ~~an increase~~a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied for our Regulated Water segment.

Gain on sale of assets was $91,625 and ~~an increase~~$249 during the first quarters of 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in ~~the AFUDC rate as~~three non-utility local microgrid and distributed energy projects and recognized a ~~result~~gain of ~~an increase in the amount~~$91,236.

Table of ~~AFUDC related to equity.~~ Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended March 31, 2024 and 2023:


	Three Months Ended March 31,
	2024		2023		Increase (Decrease)		% change
Operating revenues	$	279,894	$	267,300	$	12,594	4.7%
Operations and maintenance expense	$	90,683	$	82,802	$	7,881	9.5%
Segment net income	$	63,905	$	77,402	$	(13,497)	-17.4%

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		32.4%		31.0%
Depreciation and amortization		20.4%		20.0%
Taxes other than income taxes		5.8%		5.9%
Interest expense, net of interest income		12.4%		11.1%
Segment net income		22.8%		29.0%

Effective tax rate		24.6%		14.9%

an increase in volume consumption of $1,092; offset by

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

a decrease in non-utility revenue of $2,930, primarily due to higher developer fees earned in the first quarter of 2023.

increase in ~~service since September 30, 2016.~~

~~Taxes other than income taxes increased by $1,296 or 3.0%~~production costs for water and wastewater operations of $2,397, primarily due to an increased purchased water, wastewater, and power costs;

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,127;

increase in ~~property taxes~~bad debt expense of ~~$489~~$4,458; and

increase in employee related costs of $1,814 primarily resulting from higher salary costs and increased contributions to the Company’s defined contribution plan.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the periods ended March 31, 2024 and 2023:


	Three Months Ended March 31,
	2024		2023		Increase (Decrease)		% change
Operating revenues	$	324,331	$	441,295	$	(116,964)	-26.5%
Operations and maintenance expense	$	45,917	$	57,150	$	(11,233)	-19.7%
Purchased gas	$	125,542	$	241,856	$	(116,314)	-48.1%
Segment net income	$	209,940	$	123,546	$	86,394	69.9%

Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance		14.2%		13.0%
Purchased gas		38.7%		54.8%
Depreciation and amortization		10.0%		6.8%
Taxes other than income taxes		2.2%		1.3%
Segment net income		64.7%		28.0%

Effective tax rate		-16.1%		-54.3%

decrease in purchased gas costs of $116,314 during the quarter as compared to the prior period, refer to purchased gas costs discussion below for further information;

decrease in customer assistance surcharge of $2,797, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,

an increase of $2,479 due to higher rates and other surcharges.

decrease in customer assistance surcharge costs of $2,797, which has an equivalent offsetting amount in revenues;

decrease in bad debt expense of $1,261;

decrease in outside services and other expenses due to higher capitalization as a result of greater capital spend in the current period.

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Other expense, net – Interest expense, net, decreased by $2,151 or 7.8% due to interest incurred in the first quarter of 2023 on refunded gas cost collections, partially offset by an increase in interest expense resulting from higher push down debt borrowings of the Regulated Natural Gas segment with Essential Utilities, Inc.

Gain on sale of assets was $91,581 and $0 during the first quarters of 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects and recognized a gain of $91,236.

~~Net income increased by $1,732 or 0.9%, primarily as a result of the factors described above.~~

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~~2023, filed February 29, 2024, 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 March 31, 2024 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. Although~~For a discussion of the ~~results of~~Company’s legal proceedings, ~~cannot be predicted with certainty, there are no pending legal proceedings~~see Part I – Item I – Note 14 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~~Company’s consolidated financial ~~position, results of operations or cash flows.~~ statements.

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~~2023, under “Part 1, Item 1A – Risk ~~Factors.”~~Factors”.

Item 5 - Other Information

(a) Amendments to the Form of Stock Award Agreements

On May 2, 2024, the Board of Directors approved amendments to the forms of award agreements for the grant of Restricted Stock Units (“RSUs”), Performance-based Share Units (“PSUs”) and stock options to acquire shares of common stock to certain officers of the Company, including the named executive officers. The amendments amend the definition of “Retirement” under the award agreements to mean (i) the executive’s voluntary termination of employment after (A) the executive has attained age fifty-five (55) and has five (5) full years of service with the Company or (B) a combination of age and years of service equal to at least 60, and (ii) the executive has provided the Company at least six (6) months’ advance written notice

of such Retirement. In the event of a Retirement, all outstanding awards under the award agreement accelerate and vest in full. However, if a change in control of the Company occurs, the provisions in the award agreement with respect to the impact of a change in control supersede this amended Retirement provision. The changes to the award agreements will apply prospectively to any new awards made to the designated officers.

~~Item 2 – Unregistered Sales~~(c) Security Trading Plans of ~~Equity Securities~~Directors and ~~Use of Proceeds~~Executive Officers

~~The following table summarizes the Company’s purchases of its common stock for~~During the quarter ended ~~September 30, 2017:~~March 31, 2024, 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”.

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

-

-

~~(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.

‎

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 Agreement, dated July 10, 2017 by~~Form of 2025 Restricted Stock Unit Grant Terms and ~~among Aqua Illinois, Inc., Teachers Insurance~~Conditions for Certain Officers and ~~Annuity Association of America~~Executive Officers
~~4.2~~
10.2*!		~~Bond Purchase Agreement, dated July 20, 2017 by~~Form of 2025 Stock Option Terms and ~~among Aqua Pennsylvania, Inc., New York Life Insurance Company, New York Life Insurance~~Conditions for Certain Officers and Annuity Corporation, New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3), New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3-2)Executive Officers
~~31.1~~
10.3*!		Form of 2025 Performance Stock Unit Terms and Conditions for Certain Officers and Executive Officers

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 March 31, 2024, formatted in Inline XBRL (included in Exhibit 101)

*Filed herewith.

! Indicates management contract or compensatory plan or arrangement.

‎

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~~May 8, 2024


		~~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	192,217	$	45.06
Granted	41,293		30.37	102,306		36.60
Stock units vested and issued	(26,914)		26.18	(63,982)		44.45
Forfeited	(2,287)		30.52	(1,600)		42.40
Nonvested stock units at end of period	121,365	$	29.60	228,941		41.46




									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


	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	-	-

December 31,

Carrying amount

Estimated fair value