Essential Utilities, Inc.

Previous wording

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, 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, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such 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.

Current wording

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, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, including those resulting from changes in government fiscal policies and regulations, the imposition of tariffs, the threat of cyber-attacks and data breaches, changes in capital requirements and funding, the success of growth initiatives, including pending 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, 2024 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such 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.

Previous wording

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.

Current wording

In January 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects for $165,000, which resulted in a gain on sale of $91,236. The sale is 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 the sale to finance its capital expenditures and water and wastewater acquisitions, in place of external funding from equity and debt issuances.

Previous wording

Since 2020, our industry has been significantly impacted by inflation, volatility in interest rates, and other macroeconomic factors. Interest rates remain elevated to curb inflation. In 2024, we experienced moderate macroeconomic pressures, which we 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.

Current wording

Our business is subject to various economic factors that affect our customers and our industry. The recent changes in government fiscal policies and regulations introduced by the new administration have resulted in heightened uncertainty for businesses and consumers, as well as volatility in financial markets. We will continue to evaluate the evolving macroeconomic environment, including those impacts resulting from the recent imposition, or proposed imposition, of tariffs and potential changes to environmental regulations, and to take action to mitigate the impact on our business, consolidated results of operations, and financial condition. Timely and adequate rate relief is important to our continued profitability and in providing a fair return to our shareholders. 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.

Previous wording

Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s condensed 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.

Current wording

Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s condensed 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 commercial paper notes, 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.

Previous wording

During the first nine months of 2024, we incurred $932,498 of capital expenditures, issued $1,394,411 of long-term debt, received $167,274 from the sale of assets, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $1,041,828. 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, including borrowings from our revolving credit facility, and proceeds from the sale of the non-utility energy projects were used for capital expenditures, repayment of existing indebtedness, and general corporate purposes. Cash flows from financing activities were higher during the first nine months of 2024 as compared to 2023, principally as a result of the decrease in the amount of the paydown of loans payable associated with the financing of inventory.

Current wording

During the first three months of 2025, we incurred $270,539 of capital expenditures, obtained $706,906 of proceeds from borrowings and made $550,000 of repayments to our long-term revolving credit facility, obtained proceeds of $1,244 and repaid $1,150 of long-term subsidiary debt, and made short-term debt net repayments of $97,252. 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. Net cash flows used in financing activities decreased by $123,633 during the first three months of 2025 as compared to 2024. The decrease is primarily due to higher financing activity cash inflow resulting from the issuance of common stock from the Company’s at-the-market equity sales program(“ATM”)and increase in borrowings from the Company’s revolving credit facility as compared to the prior period.

Previous wording

On August 13, 2024, the Company filed a prospectus supplement under the 2024 universal shelf registration statement relating to a new at-the-market equity sales program (“ATM”), under which we may issue and sell shares of our common stock up to an aggregate offering price of $1,000,000 (“2024 ATM”). This 2024 ATM replaced our previous ATM filed on October 14, 2022 (“2022 ATM”). During the three and nine months ended September 30, 2024, the Company issued 823,595 shares of common stock for net proceeds of approximately $32,000 under the 2024 ATM. As of September 30, 2024, the 2024 ATM had approximately $968,000 of equity available for issuance. As of December 31, 2023, the Company had issued 10,260,833 shares of common stock for net proceeds of $386,023 under the 2022 ATM. There were no common stock sales under the 2022 ATM in 2024. The Company used the net proceeds from the sales of shares through the 2022 and 2024 ATMs for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying a portion of outstanding indebtedness.

Current wording

On August 13, 2024, the Company established an ATM, under which we may issueand sell shares of our common stock up to an aggregate offering price of $1,000,000 (“2024 ATM”). During the three months ended March 31, 2025, we issued 1,627,009 shares of common stock for net proceeds of approximately $63,000 under the 2024 ATM. As of March 31, 2025, the 2024 ATM had approximately $900,000 of equity available for issuance. The Company used the net proceeds from the sales of shares through the 2024 ATM for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying a portion of outstanding indebtedness. In April 2025, the Company issued 3,664,762 common shares under the 2024 ATM for a total net proceeds of approximately $145,500.

Previous wording

At September 30, 2024, we had $8,436 of cash and cash equivalents compared to $4,612 at December 31, 2023. During the first nine months of 2024, we used the proceeds from long-term debt, the proceeds from issuance of common 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.

Current wording

At March 31, 2025, we had $20,784 of cash and cash equivalents compared to $9,156 at December 31, 2024. During the first three months of 2025, we used the proceeds from long-term debt and the proceeds from issuance of common stock, as well as internally generated funds, for capital expenditures, repayment of existing indebtedness, payment of dividends, and general corporate purposes.

Previous wording

At September 30, 2024 our $1,000,000 unsecured revolving credit facility, which expires in December 2027, had $824,226 available for borrowing. Additionally, at September 30, 2024, we had short-term lines of credit of $400,000, primarily used for working capital, of which $256,983 was available for borrowing. On June 12, 2024, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of its respective $100,000 and $300,000 364-day revolving credit agreements by extending the maturity dates to June 10, 2025 and revised the interest rate index from the Bloomberg Short-Term Bank Yield Index (BSBY) to the Secured Overnight Financing Rate (SOFR). Our short-term lines of credit of $400,000 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.

Current wording

At March 31, 2025 our $1,000,000 unsecured revolving credit facility, which expires in December 2027, had $417,368 available for borrowing. Additionally, at March 31, 2025, we had short-term lines of credit of $400,000, primarily used for working capital, of which $310,711 was available for borrowing. 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.

Previous wording

As of September 30, 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 October 3, 2024, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and changed its outlook from stable to negative; and, changed Peoples Natural Gas Companies’ senior secured notes rating from

Current wording

As of March 31, 2025, 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 October 3, 2024, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and changed its outlook from stable to negative; and, changed Peoples Natural Gas Companies’ senior secured notes rating from Baa1 to Baa2 and maintained a negative outlook. The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, its ability to fund capital expenditures in a balanced manner using both debt and equity, and its ability to generate cash flow. A material downgrade of our credit rating may result in the imposition of additional financial and/or other covenants, impact the market prices of equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to enhance our regulatory practices to address regulatory lag and recover capital project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.

Previous wording

Consolidated operating revenues increased by $24,000 or 5.8% as compared to the same period in 2023. Revenues from our Regulated Water and Regulated Natural Gas segments increased by $23,886 and $1,933, respectively. Revenues from our Other business segment decreased by $1,819. A detailed discussion of the factors contributing to the changes in segment revenue is included below under the section, Segment Results of Operations.

Current wording

Consolidated operating revenues increased by $171,557 or 28.0% as compared to the same period in 2024. Revenues from our Regulated Water, Regulated Natural Gas, and Other segments increased by $20,954, $146,466, and $4,137, respectively. A detailed discussion of the factors contributing to the changes in segment revenue is included below under the section, Segment Results of Operations.

Previous wording

an increase in customer assistance surcharge costs of $926 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues; and

Current wording

an increase in customer assistance surcharge costs of $8,464 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;

Previous wording

Purchased gas increased by $2,505 or 15.1%. Purchased gas represents the cost of gas sold by Peoples, which for the regulated gas business has a corresponding offset in revenue. The increase is the result of an increase in the average cost of gas of $3,656 and higher gas usage of $473 during the third quarter of 2024, offset by a decrease of $1,624 from the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

Current wording

Purchased gas increased by $54,966 or 42.4%. Purchased gas represents the cost of gas sold by the Company, which for the regulated natural gas business has a corresponding offset in revenue. The increase is the result of an increase in the average cost of gas of $27,025 and higher gas usage of $28,327 during the first quarter of 2025, offset by a decrease of $386 from the sale of our interest in three non-utility local microgrid and distributed energy projects in January 2024.

Previous wording

Depreciation and amortization expense increased by $6,566 or 7.6% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

Current wording

Depreciation and amortization expense increased by $9,573 or 10.7% principally due to continued capital expenditures to expand and improve our utility facilities, our acquisitions of new water and wastewater utility systems, and the implementation of new depreciation rates in our Regulated Natural Gas segment.

Previous wording

Interest expense, net of interest income, increased by $7,804 or 11.5%. Interest expense, net of interest income, increased by $4,227 in our Regulated Water segment and by $2,716 in our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense, net of interest income, in Other relates to our corporate operations, and this increased by $861 during the third quarter of 2024.

Current wording

Interest expense, net of interest income, increased by $9,552 or 13.2%. Interest expense, net of interest income, increased by $1,773 in our Regulated Water segment and by $784 in our Regulated Natural Gas segment. Interest expense, net of interest income, in Other relates to our corporate operations, and this increased by $6,995 primarily due to increased borrowings from the Company’s revolving credit facility during the first quarter of 2025 as compared to the prior period.

Previous wording

Allowance for funds used during construction (“AFUDC”) increased by $936 or by 6.4% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied in our Regulated Natural Gas segment.

Current wording

Allowance for funds used during construction (“AFUDC”) increased by $1,151 or by 24.6% primarily due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied, in our Regulated Water segment.

Previous wording

Gain on sale of assets was $92,067 and $184 for the nine months ended September 30, 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.

Current wording

For the three months ended March 31, 2025 and 2024, gain on sale of other assets totaled $237 and $91,625, 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 in its Regulated Natural Gas segment.

Previous wording

Revenues from our Regulated Water segment increased by $23,886 or 7.7% for the third quarter of 2024 as compared to the same period in 2023, mainly due to the following:

Current wording

Revenues from our Regulated Water segment increased by $20,954 or 7.5% for the first quarter of 2025 as compared to the same period in 2024, mainly due to the following:

Previous wording

additional water and wastewater revenues of $1,528 associated with a larger customer base due to utility acquisitions and organic growth.

Current wording

additional water and wastewater revenues of $1,498 associated with a larger customer base due to utility acquisitions and organic growth; offset by

Previous wording

an increase in volume consumption of $10,263; and

Current wording

a decrease in volume consumption of $2,994.

Previous wording

Depreciation and amortization increased by $3,182 or 5.8% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Current wording

Depreciation and amortization increased by $3,435 or 6.0% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Previous wording

Interest expense, net of interest income, increased by $4,227 or 13.7% for the quarter primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

Current wording

Interest expense, net of interest income, increased by $1,773 or 5.1% for the quarter primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

Previous wording

AFUDC increased by $1,489 due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Current wording

Allowance for funds used during construction (“AFUDC”) increased by $1,044 or by 28.3% primarily due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Previous wording

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

Current wording

Our Regulated Natural Gas segment recognizes revenues by selling gas directly to customers at approved rates or by transporting gas through our pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Natural gas sales to residential, commercial and industrial customers are seasonal, which results in higher demand for natural gas for heating purposes during the colder months. A weather normalization adjustment (“WNA”) mechanism is in place for our natural gas customers served in Kentucky, and, beginning in October 2024, for our natural gas customers in Pennsylvania. The WNA mechanism serves to minimize the effects of weather on the Company’s ability to collect revenues to cover operating expenses for its residential and small and medium commercial natural gas customers. The WNA mechanism adjust revenues earned for the variance between actual and normal weather and can have either positive (warmer than normal) or negative (colder than normal) effects on revenues.

Previous wording

an increase in purchased gas costs of $3,195; refer to purchased gas costs discussion below for further information;

Current wording

an increase in purchased gas costs of $51,417; refer to purchased gas costs discussion below for further information;

Previous wording

an increase of $5,906 due to higher rates and other surcharges.

Current wording

an increase of $44,679 due to higher rates and other surcharges;

Previous wording

an increase in customer assistance surcharge of $926, which has an equivalent offsetting amount in operations and maintenance expense; offset by

Current wording

an increase in customer assistance surcharge of $8,464, which has an equivalent offsetting amount in operations and maintenance expense; offset by

Previous wording

Operations and maintenance expense for the three months ended September 30, 2024 decreased by $1,004 or 2.0% primarily due to the following:

Current wording

Operations and maintenance expense for the three months ended March 31, 2025 increased by $9,758 or 21.3% primarily due to the following:

Previous wording

an increase in labor and employee benefits of $3,206 primarily due to higher salary and healthcare costs and lower capitalization during the 3rd quarter of 2024; and,

Current wording

an increase in labor and employee benefits of $2,702;

Previous wording

an increase in materials and supplies of $2,121; and

Current wording

a decrease in materials and supplies of $2,030;

Previous wording

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 condensed 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 increased by $3,195 or 22.2% due to an increase in the average cost of gas of $4,707, offset by lower gas usage of $760 during the current period compared to the prior period and $752 from the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

Current wording

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 condensed 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 increased by $51,417 or 41.0% due to an increase in the average cost of gas of $26,868 and higher gas usage of $24,935 due to colder weather conditions during the first quarter of 2025, offset by a decrease of $386 from the sale of our interest in three non-utility local microgrid and distributed energy projects in January 2024. During the quarter ended March 31, 2025, we experienced 2,730 actual heating degree days (HDDs), which was colder by 20% than prior year’s 2,280 HDDs for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service territory. HDDs are used in the natural gas industry to measure the relative coldness of weather and to estimate the demand for natural gas.

Previous wording

Taxes other than income taxes decreased by $1,036 or 15.7% largely due to lower sales and use taxes during the period.

Current wording

Taxes other than income taxes decreased by $1,466 or 20.3% largely due to lower sales and use tax and property taxes during the period.

Previous wording

Gain on sale of assets was $91,581 and $0 as of the nine months ended September 30, 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.

Current wording

Gain on sale of assets was $0 and $91,581 for the three-month period ended March 31, 2025 and 2024, 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.