NYSE: WTRGEssential Utilities, Inc.2022 Annual ReportINTEGRITY | INFRASTRUCTURE | INVESTMENT | INNOVATION | INCLUSION | INFLUENCEYEAR INREVIEW2022 2022 YEAR IN REVIEW
O U R F O O T P R I N T
10
STATES
5.5 million
PEOPLE SERVED
3,200
EMPLOYEES
O U R I M PA C T
4,000+
EMPLOYEE
VOLUNTEER HOURS
$4.5M
IN CHARITABLE
DONATIONS
445+
COMMUNITY
ORGANIZATIONS SUPPORTED
O U R I N V E S T M E N T
430+
MILES OF PIPELINE
RETIRED OR REPLACED
$1B+
IN INFRASTRUCTURE
IMPROVEMENT
3
CLOSED WATER &
WASTEWATER ACQUSITIONS
S I G N E D A C Q U I S I T I O N A G R E E M E N T S
3
WATER & WASTEWATER
SYSTEMS
6,700+
TOTAL CUSTOMER
EQUIVALENTS
$26.9M
TOTAL PURCHASE
PRICE
1 | 2022 Annual Report
Dear Fellow Shareholders:
As I reflect on 2022, I’m proud of our team and
the progress we made in our continuous quest to
improve. Throughout the year, we adeptly navigated
external challenges including rising interest rates
and inflation, continued societal change, evolving
public sentiment on free enterprise, and supply
chain issues. By remaining agile, adjusting our
plans and leaning on our experienced management
team, we continued to make incremental and
meaningful progress in our pursuit of excellence.
Our remarkable 136-year heritage of dependable
service, consistent innovation and high performance
has been guided by our core values of integrity,
respect and excellence. We remained focused
throughout this period of vast change on our core
mission – delivering high quality water, wastewater
and natural gas service to our customers.
A key component of our commitment is our expansive
capital investment program. In 2022, we invested more
than $1 billion to replace aging water, wastewater
and natural gas infrastructure. This investment
improves quality and safety, increases reliability
and enhances compliance for our customers.
We continue to execute our growth strategy by
offering solutions to municipal governments
overwhelmed by the financial, operational and
compliance challenges associated with running
water and wastewater utilities. Across the country,
there are nearly 50,000 water systems and 16,000
wastewater systems, presenting an opportunity for
Essential as we offer a fair market price, compliance
and excellent service following an acquisition.
In 2022, we continued to acquire and sign asset
purchase agreements for new water and wastewater
systems that will add new customers to our
footprint. We do not intend to acquire additional
natural gas utilities, but our strong gas platform in
western Pennsylvania will play an important role
in our acquisition strategy as we expand our water
and wastewater footprint into the same area.
In the nearly three years since our milestone
transaction to become Essential Utilities, our
natural gas segment has outperformed our
financial, operational and safety expectations
thanks to the laser focus of our dedicated
workforce and strong management team. This
strong performance is an asset to the company as
we expand our water segment by acquisition.
As we look to the future, we firmly believe energy
independence in the United States will require
that natural gas remains a key component of our
energy mix. With our gas segment’s ideal location
and innovative focus, we’re proud to participate
in the development of a regional energy hub. The
importance of reliable and accessible natural gas
is more evident as we watch the European Union
grapple with its dependence on Russian reserves,
and we know natural gas will play a crucial role in
communities across the country for decades to come.
A Word
from Our
Chairman
& CEO
Throughout this report, you will read in detail about
the innovative solutions we bring to the problems
and opportunities our country faces, now and
into the future. We pride ourselves on meaningful
innovation and believe real operational excellence
is achieved through continuous improvement.
Lastly, we continue to be an industry leader in our
environmental, social and governance (ESG) efforts,
setting and achieving ambitious goals to ensure we
are well-positioned to solve our nation’s infrastructure
challenges while protecting our natural environment.
We are committed to reducing our carbon footprint by
60 percent from a 2019 baseline by 2035, which we will
achieve through extensive gas pipeline replacement,
renewable energy purchasing, methane leak detection
and remediation, and natural gas and electric-powered
vehicle replacement. By the close of 2022, we achieved
a more than 23 percent reduction in emissions.
We are also dedicated to creating a culture of
inclusion at Essential, valuing differences as a
competitive advantage and ensuring our workforce
accurately represents the communities we serve. We
committed to 15 percent of our overall controllable
spend procured from diverse suppliers, and I am
thrilled to report our achievement of this target.
In addition, we are nearing achievement of our
target to reach 17 percent employees of color.
There is always more work to do, but I am encouraged
by our progress and proud to reach our first-stage
growth milestones as Essential. We are well positioned
to ensure our customer and employee experiences are
uniformly high, and we continue to grow in 2023.
On behalf of the entire Essential leadership team,
board of directors and our employees, we thank
you for your confidence and ongoing support.
Christopher H. Franklin
Chairman and CEO,
Essential Utilities Inc.
2022 Annual Report | 1
2022 FINANCIAL HIGHLIGHTS
In thousands, except per-share amounts
2022
2021
% Change
Operating Revenues
Regulated Segments:
$2,288,032
$1,878,144
21.8%
Regulated Water Segment Revenues
$1,082,972
$980,203
10.5%
Regulated Natural Gas Segment Revenues
$1,143,362
$859,902
33.0%
Operations and Maintenance Expense
$613,649
$550,580
11.5%
Net income
Capital Expenditures
$465,237
$431,612
$1,062,763
$1,020,519
Diluted net income per common share
$1.77
$1.67
7.8%
4.1%
6.0%
Annualized dividend rate per common share (12/31)
$1.1480
$1.0728
7.0%
Total Assets
$15,719,107 $14,658,278
Number of utility customers served (12/31)
1,851,586
1,820,049
7.2%
1.7%
2 | 2022 Annual Report
Diluted Adjusted Income per Common Share
Diluted Adjusted Income per Common Share
Dividends per Share (annualized)
$1.77
$1.67
$1.003
$0.937
$0.876
$1.148
$1.073
$1.41
$1.47
$1.27
7. 0 % G r o w t h
2018 (1)
2019 (2)
2020 (3)(4)
2021
2022
2018
2019
2020
2021
2022
Capital Investment (in millions of dollars)
Utility Customer Connections
751,502
753,244
756,341
$1,020.5
$1,062.8
$889.1
Water
Natural Gas
1,005,590 1,026,704
1,047,301
1,066,805
1,095,245
$550.3
$495.7
2018
2019
2020 (5)
2021
2022
2018
2019
2020
2021
2022
(1) 2018 Net income per share was $1.08 (GAAP). 2018 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(2) 2019 Net income per share was $1.04 (GAAP). 2019 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(3) 2020 Net income per share was $1.12 (GAAP). 2020 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(4) Includes Peoples’ operating results as of the closing date of the Peoples acquisition on March 16, 2020.
(5) 2020 Capital investment includes $53.5 million of capital invested by Peoples prior to closing.
Please see the investor relations page of Essential.co for a reconciliation of GAAP to non-GAAP financial measures.
2022 Annual Report | 3
As a leading infrastructure
investment company, Essential
provides easier access to capital,
enabling our regulated gas segment,
which is relatively concentrated to
the Pittsburgh, Pennsylvania area,
to accelerate critical infrastructure
projects. The investment in these
projects largely accounts for pipe
replacement, increasing the safety
and reliability of our operations
and reducing our carbon footprint
– important benchmarks in our
success and future growth.
Additionally, the strength of
our gas operations is an asset to
our long-term growth strategy,
providing a solid operational
and financial foundation that
further enables us to prudently
expand our water and wastewater
footprint through acquisition.
In late 2022, we announced our
intention to sell the small, West
Virginia portion of our natural gas
utility assets. The small size of these
assets, combined with operational
and regulatory challenges, diverted
management attention from higher
priority strategic initiatives. This
transaction will ultimately enable us
to focus on operational excellence
and organic growth of our gas
segment in states where we have the
scale to positively impact the lives of
our customers. Our gas operations
are an essential part of our company,
and we’re reaping the benefits
of integration more each day.
With its presence on top of
the Marcellus shale formation,
Pittsburgh and the Western
Pennsylvania Tri-State region is
poised to be at the forefront of
energy innovation. Thanks to the
long-standing relationships we’ve
built in Pittsburgh with our gas
segment, Essential has been able to
expand our brand to nearly 750,000
new potential water customers.
Leveraging INtegration
for Continued Growth
Our history as a mission-based company spans more than
136 years from our roots as a local Pennsylvania water
supplier to where we are today. As we approach the three-
year anniversary of Essential Utilities, we’re now one of
the country’s most significant public utility companies,
providing safe drinking water, wastewater services and
natural gas to more than 5.5 million people across 10 states.
We’ve had a foundational year, with 2022 marking important
milestones that furthered our ambitious growth strategy
and built on the excellence of our operations as protectors
and providers of the Earth’s most essential resources.
While the benefits of combining natural gas and water are not
always obvious, the integration of these businesses has positioned
us for growth as a much stronger company in a multitude of ways.
The focus for our gas operations has always been on efficient,
safe operation and emissions reduction, which we’ll achieve
through ongoing and extensive pipeline replacement,
renewable energy purchasing, accelerated methane leak
detection and repair and other planned initiatives.
4 | 2022 Annual Report
STEADY LEADERSHIP
DRIVING FUTURE SUCCESS
With a strong track record of
municipal acquisitions, financial
performance and operational
excellence, Essential Utilities is
well prepared for sustainable
and consistent growth.
A key component of that growth
to date, and why our outlook
remains so strong for the future, is
our tenured executive leadership
team. A large majority of
Essential leadership has worked
together for several years,
offering innovative and new ideas
to solve some of our nation’s
most complex infrastructure
challenges and shepherd the
company toward future success.
As we advance in our commitment
to replace infrastructure and
safeguard our communities,
we’re motivated by the
potential ahead – a fractured
infrastructure framework
with nearly 70,000 water and
wastewater systems across the
country. The opportunity for
continued environmental and
community impact is what propels
our leadership team forward.
In 2022, we expanded our
leadership to bring in new diverse
voices including executive leaders
to help shape our communications
and technology for the future.
Jeanne Russo
Vice President,
Communications
Sumit Nair
Vice President,
Chief Information Officer
SUSTAINABLE
GROWTH
HIGHLIGHTS
In 2022, Essential acquired three
water and wastewater systems
and added approximately $120
million in rate base and more
than 23,000 new customers.
In addition, we signed two
agreements to purchase
three water and wastewater
systems that collectively are
expected to add over 6,700
new customers or equivalent
dwelling units and total nearly
$27 million in purchase price.
2022 Annual Report | 5
Essential’s steady growth is a testament to the
strength and depth of our leadership team,
and our customers directly benefit as a result
of their collective experience, knowledge and
innovative thinking. I am extremely confident
in our future growth and success thanks
to this first-rate management team.”
Christopher Franklin
Chairman, Chief Executive
Officer and President
INNOVATING
TO SOLVE A
NATIONAL CRISIS
The ongoing presence of
harmful Per and Poly-fluoroalkyl
Substances (also known as PFAS,
or “forever chemicals”), requires a
unique treatment approach, and
one that we are proud to lead
among our peers. For more than
seven years, Essential has been
working to mitigate the presence
of PFAS in our water, investing
more than $40 million in treatment
solutions, working alongside
regulatory bodies to test new
approaches. We look forward to
a formal Maximum Contaminant
Level (MCL) declaration by the
U.S. Environmental Protection
Agency later this year and are
committed to implementing
treatment in alignment with it
throughout our service territory.
Essential Utilities has led the
way on PFAS remediation
through transparent
communication, a forward-
looking treatment plan
and setting a company-
wide standard as we await
regulatory guidance. To
date, we have secured more
than $10 million in grants
that will support treatment
plant improvements
while alleviating the cost
of remediation for our
customers. We remain
committed to delivering
the highest quality
water for our customers
and communities.”
Colleen Arnold
President, Aqua
Operating with
INtention
As utility infrastructure experts, we pride ourselves on
efficiency, safety, operational excellence and continuous
improvement. We are making a difference in the lives of our
customers and communities, and everyone, at every level
across Essential, understands the importance of our mission.
Our top priority remains providing safe and reliable access to water,
wastewater and natural gas service to sustain the lives of our customers
and communities. With that comes the ability to strengthen our
communities through responsible investment, improved infrastructure,
environmental stewardship and community involvement.
We don’t just provide resources for today – we strive to make
critical improvements and further innovation so our resources will
be protected for generations to come. It’s through this innovative
approach that true operational excellence can be achieved.
Each year, we replace more pipe than the distance
traveling from Philadelphia to Pittsburgh, making
critical improvements along the way.
• Safety
• Reliability
• Compliance
• Environmental
Protection
6 | 2022 Annual Report
THOUGHTFUL CAPITAL INVESTMENT
AS A SOLUTION TO AMERICA’S
INFRASTRUCTURE CRISIS
America is facing an infrastructure crisis. Across the country, aging pipelines
contribute to greenhouse gas emissions and water loss, compromise economic
growth and put our communities at risk. While federal funding is being earmarked
to tackle this growing challenge, it’s simply not enough. As a regulated utility,
Essential is poised to play a key role in modernizing our nation’s infrastructure
and safeguarding public health, our environment and economic prosperity.
In 2022, we invested more than $1 billion in critical infrastructure projects to replace
over 430 miles of aging pipeline across our service territory for both our water and gas
divisions. That’s more than the equivalent of driving from Philadelphia to Pittsburgh,
and then back again the next year. Our capital program is crucial to improving
quality, safety and reliability for our customers, and enhancing compliance.
These projects are also a key factor in our ability and commitment to reduce our greenhouse
gas emissions. In 2017, we set an ambitious goal in our natural gas segment to replace 3,000
miles of aging and leak-prone gas distribution pipes over the next 20 years. The ongoing,
long-term infrastructure improvement plan will enable us to ensure that environmental
protection remains among our highest operational objectives. As of year-end, we had
replaced more than 800 miles of pipeline, and anticipate completing this project by 2033.
AN INNOVATIVE
APPROACH
As one of the largest utilities in
the country, Essential is uniquely
positioned to play a key role in
bringing innovative solutions to
address energy challenges. The
energy economy is changing, and
we’re closely evaluating our role
in a renewable energy future,
knowing natural gas will be a
crucial fuel to help us achieve this.
With its ideal location in
Pittsburgh, home to the Marcellus
Shale formation, our gas
operations have a long history
of innovation. In April 2022, we
helped establish the inaugural
H2 Summit: Fueling the Future to
advance Pittsburgh as a regional
hydrogen energy hub. We also
announced a partnership with
the University of Pittsburgh to
evaluate the transport of hydrogen
in natural gas systems. We’re
proud to continue exploring this
innovative approach to hydrogen
as a future energy source and
the role natural gas will play.
Peoples has a long history
of innovation and we’re
excited to partner with
experts from the University
of Pittsburgh to stay on
the leading edge of energy
industry development.
Hydrogen has the potential
to transform the way we
heat our homes and power
our businesses, using
the existing natural gas
distribution system. Pitt
and the Swanson School
of Engineering have the
expertise we need to test
and study its feasibility
as a transformative
energy resource.”
Mike Huwar
President, Peoples
2022 Annual Report | 7
MAKING OUR REGION A HYDROGEN HUB, TOGETHERBackground The global energy industry is experiencing a momentous transformation driven by innovations in energy technologies and rapidly shifting social preference for sustainable, resilient and climate friendly power. This transformation depends on the continued use of clean-burning natural gas as both an ongoing foundational low-carbon transition fuel and, eventually, as a feedstock and power source for zero-carbon hydrogen-based energy systems. Hydrogen as an energy source is shifting from technology development to market activation, but among the main barriers to success is both the lack of supporting infrastructure and the current cost of hydrogen supply. Over time, both hurdles can be overcome by a series of strategic investments along the value chain from the private and public sectors. Why Pittsburgh? Pittsburgh has long been at the forefront of energy innovation. Our world-class natural gas resources, innovative university talent, forward thinking sources of capital and skilled workforce position us to lead this energy transition. The H2 Hydrogen Summit is a collaboration between Peoples Gas, the Energy Innovation Center Institute, Inc., and Bedford Funds to ensure the Pittsburgh region remains at the global forefront of energy innovation. Join us for a catalytic gathering organized to align, advance, and call to action thought-leaders, industry decision makers, regulators, and practitioners to help Pittsburgh shape the future of energy. About Us Peoples, an Essential Utilities company, provides natural gas service to approximately 750,000 homes and businesses in Western Pennsylvania, West Virginia and Kentucky. Peoples is committed to our customers, our employees, our environment, and to the regions we serve. For more information about Peoples, visit www.peoples-gas.com and follow Peoples on social media @peoplesnatgas. The Energy Innovation Center is a Pittsburgh based, not-for-profit organization with a mission to engage corporate and community leaders, align workforce development and education, develop, and demonstrate technology, and incubate businesses, to support emerging clean and sustainable energy markets. The EIC is owned and operated by the Pittsburgh Gateways Corporation. Bedford Funds is a private capital investment vehicle designed to deploy an investment strategy focused on buying, building, and operating a portfolio of low-carbon power systems, low carbon (CEA) food systems, and related technologies. peoples-gas.com/H2SummitFOR MORE INFO, VISITHYDROGEN FACT SHEETAbout Hydrogen EnergyHydrogen is the simplest, lightest and most abundant element in the universe. It can be produced from other substances such as natural gas, biomass or water electrolysis energized by nuclear power and renewable power like solar and wind. Today, about 95% of all hydrogen is produced by steam reforming of natural gas. Hydrogen in IndustryHydrogen in TransportHydrogen in BuildingsHydrogen in Power GenerationApplications of Hydrogen Hydrogen can be used in place of natural gas to heat your homes, produce hot water,transportation fuel, power generation and energize manufacturing. Other 3% Methane (pure hydrogen) 44%Methane or coal(syngas) 40%Coal (purehydrogen) 13% Hydrogen Production PathsThe difference between grey, blue, and green hydrogenSources of Hydrogen ProductionThis chart shows the share of global hydrogen production in 2020, by manufacturing process. Most hydrogen is produced with fossil fuels.H HydrogenGaseous chemical element functioning as an energy carrier. Blue hydrogen produced from fossil fuels through steam reforming with carbon capture and storage technology, reducing CO2 emissions. Green hydrogen produced through electrolysis using renewable electricity. Grey hydrogen produced from fossil fuels through steam reforming whereby CO2 is emitted. CARING FOR OUR
CUSTOMERS
We view safe, reliable and
affordable access to water,
wastewater and natural gas service
as fundamental human rights.
While the work we do as utility
infrastructure experts will help
us ensure this becomes a reality,
there is much more that we do
behind the scenes to care for
the people who matter most.
Need help with your
water or wastewater bills?
We’re here to help.
See reverse for details on Aqua’s Customer Assistance Program
The LIHEAP
Program is
OPEN
CAP Customers
Must Apply
APPLY NOW because funds are limited and the
program is scheduled to close on April 28, 2023.
1-800-400-9276 • www.compass.state.pa.us
Across our water and gas
segments, we established
educational programs to provide
our customers with practical
tools and resources focused on
pipeline and digging safety, pipe
protection, conservation tips
and more. We strive every day
to operate efficiently and invest
responsibly, but we understand
there may be customers who have
difficulty paying their utility bills.
We are proud to support these
customers through our universal
Customer Assistance Programs and
other financial aid resources for
both our water and gas segments
across our service territory.
INtegrity and the
Customer Experience
Essential is light years away from our humble beginnings as
a small operation borne of community spirit to provide safe
drinking water. But one thing has remained constant: our
deep commitment to our customers that fuels our purpose.
Our deep-rooted intention is based on the essential role
we play in everyday life – water and natural gas touch just
about everything around us – and we are guided by our core
values of integrity, respect and excellence to deliver those
resources, and a superior experience for our customers.
We can see tangible progress in our customer experience through
responsible capital investment, which ultimately yields a safer
and more reliable product. But providing a comprehensive quality
customer experience is an ongoing process, and one that we are
committed to keeping in our line of sight as we grow as a company.
8 | 2022 Annual Report
AN ESSENTIAL
EMERGENCY RESPONSE
In the early morning hours on
a bitter cold January day in
2022, Pittsburgh’s 50-year-old
Fern Hollow bridge collapsed,
bringing trees and vehicles
down with it in a devastating
spectacle. While this incident
shined an intense spotlight on
the crucial need for infrastructure
replacement in America, it
also underscored Essential’s
commitment to our customers.
Among the first responders to the
scene of the collapse were Peoples
crews, cutting the flow of natural
gas to a distribution pipe that was
severed in the accident and quickly
shifting gas from other distribution
lines to customers to mitigate
the impact of the accident.
Emergency preparedness
across both our water and gas
segments is critical to ensuring
we provide safe and reliable
access to life-sustaining utilities
even when disaster strikes. We
not only prepare our operations
to withstand emergencies, but
also share important safety and
preparedness information with
our customers. We’re committed
to constantly updating our
contingency plans to ensure
we deliver uninterrupted
service for our customers.
2022 Annual Report | 9
In 2022, we proudly continued the
important work of investing in our
communities through volunteering and
charitable donations to organizations
that support our customers. We
provided $4.5 million to deserving
organizations in line with our primary
giving pillars, $3.9 million of which to
501c3 organizations as disclosed in our
updated ESG reporting to be published
later this year. In addition, our dedicated
employees logged more than 4,000 hours
of volunteering - 3,800 during working
hours and an additional 200+ on their
own time at night and on weekends.
Through Essential’s company-wide United
Way campaign, we contributed more than
$760,000 to 500 deserving organizations,
comprised of employee donations that
were matched by Essential. We also saw
a more than 56% increase in employee
participation year over year, with more
than 1,850 employees donating in 2022.
We believe that doing the right
thing for our people, customers
and communities is integral to our
company’s success. We’re proud of our
progress to date and pleased to share
numerous merits and recognitions
from organizations that feel similarly:
• Renamed to Newsweek’s Most
Responsible Companies
• Renamed to 3BL Media’s 100
Best Corporate Citizens
• Renamed as a Champion of
Board Diversity by the Forum
of Executive Women
• Recognized as a “3+” Company
by 50/50 Women on Boards to
highlight the diversity of our board
• Named “Business of the Year”
by the Delaware County
Chamber of Commerce
• Across-the-board ratings
enhancements (MSCI, Sustainalytics,
ISS, CDP), placing Essential at or near
the top of its proxy peer group
INclusivity
and INvolvement
We’re proud to make a difference in people’s
lives, and even more proud to empower our team
members to continue this work themselves.
Long before environmental, social and governance (ESG) targets
became buzzwords, we were intentional about setting and
publicly announcing important benchmarks to ensure a diverse
and inclusive culture where everyone feels valued and where
we accurately represent the communities we serve. Because
we know when our people are empowered and motivated, we
are more likely to achieve long-term sustainable growth.
Although Essential is one of the most significant utilities in the country,
our presence is felt locally in each community where we operate. We
are your neighbors; we live and work in these communities, and we
are passionate about making a true impact where it matters most.
ESSENTIAL’S
COMMUNITY
IMPACT
IN 2022, ESSENTIAL’S
CHARITABLE DONATIONS WERE
$4,483,954
$898,037
HEALTH & HUMAN SERVICES
$113,665
EMERGENCY SERVICES
$551,407
EDUCATION
$1,723,792
COMMUNITY SUPPORT
& ECONOMIC GROWTH
10 | 2022 Annual Report
$759,849
ENVIRONMENT
$437,204
DIVERSITY & INCLUSION
BOARD
INFLUENCE
We’re not only building a diverse
board, but also one to help
expand our diversity efforts
as a company. In October, we
welcomed Bryan Lewis to our
board of directors. Bryan has
been dedicated to increasing the
financial literacy and leadership
presence in underrepresented
populations, serving on several
nonprofit boards including the
John Rex Endowment, AIF/National
Institute of Public Finance and
the Robert Toigo Foundation,
among others. We look forward
to the insight and experience
he will bring to our board.
In August, we engaged our
women board members in a
panel discussion, moderated
by CEO Chris Franklin, about
their careers, perspectives on
overcoming challenges, including
underrepresentation, and ways
they promote gender parity. This
conversation provided everyone
at Essential the tools to guide,
mentor and ensure a culture
of empowerment every day.
ENVIRONMENTAL
STEWARDSHIP
In April 2022, we kicked off
our inaugural Essential Earth
Month celebration as part of
our year-round commitment
to environmental stewardship.
Across the company, 400
volunteers supported more than
30 environmental organizations
at stream clean-ups, tree
plantings and other events in
every state where we operate.
2022 Annual Report | 11
Essential CEO Chris Franklin moderates a panel discussion with board
members L to R: Ellen Ruff, Edwina Kelly and Elizabeth Amato.
MEASURING PROGRESS TOWARD
OUR TARGETS
In 2021, Essential announced a multi-year
plan to increase diverse supplier spend to 15%
of controllable spend and added a supplier
diversity component to our short-term executive
compensation incentive plan metrics. We are
excited to announce that, as of year-end 2022,
we achieved our target sooner than anticipated.
Procuring from diverse suppliers is critical for
our communities as well as for our business; we
want to source from and partner with businesses
owned by individuals representing the diverse
communities where we live, work, and operate
each day. This also enriches and strengthens
local economies, increases sourcing options
and fosters collaboration and innovation.
At the same time, we also set an important multi-year goal to reach
17% racial diversity in our workforce, based on a zip code-level
demographic analysis of our service territory. Our fundamental
belief is that our utility should reflect the communities we serve,
and we’re proud of our progress to date. As of year-end 2022, we
have reached 16 percent employees of color. We look forward to
sharing updated progress at ESG.Essential.co later this year.
We are encouraged by this progress and will continue
engaging our customers and partners in our DEI efforts.
Diversity of backgrounds, ideas, thoughts and experiences
is critical to our culture and the way we do business.
The gains we have achieved in our Diversity, Equity & Inclusion (DEI) efforts
are not limited to our employees; we acknowledge that representation
is also critical at the board level. As of year-end, three of Essential’s nine
board of directors were women and two were people of color, improving
diversity of thought as a result. We’re proud to reflect the diversity of our
operations and communities beginning at the highest level of governance.
2022 FINANCIAL DATA
12 | 2022 Annual Report
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In thousands of dollars, except per share amounts)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report (the “Annual Report”) are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based
upon, among other things, our current assumptions, expectations, plans, and beliefs concerning future events and their
potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are
outside our control that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you
can identify forward-looking statements 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.
Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these forward-looking statements, including but not limited
to:
the success in the closing of, and the profitability of future acquisitions;
changes in general economic, business, credit and financial market conditions;
our ability to manage the expansion of our business;
our ability to integrate and otherwise realize all of the anticipated benefits of businesses, technologies or
changes in environmental conditions, including the effects of climate change;
services which we may acquire;
the decisions of governmental and regulatory bodies, including decisions on regulatory filings, including rate
increase requests and decisions regarding potential acquisitions;
our ability to file rate cases on a timely basis to minimize regulatory lag;
the impact of inflation on our business and on our customers;
abnormal weather conditions, including those that result in water use restrictions or reduced or elevated
natural gas consumption;
the seasonality of our business;
our ability to treat and supply water or collect and treat wastewater;
our ability to source sufficient natural gas to meet customer demand in a timely manner;
the continuous and reliable operation of our information technology systems, including the impact of cyber
security attacks or other cyber-related events, and risks associated with new systems implementation or
integration;
impacts from public health threats, such as the COVID-19 pandemic, including on consumption, usage,
supply chain, and collections.
changes in governmental laws, regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
the extent to which we are able to develop and market new and improved services;
the effect of the loss of major customers;
our ability to retain the services of key personnel and to hire qualified personnel as we expand;
labor disputes;
increasing difficulties in obtaining insurance and increased cost of insurance;
cost overruns relating to improvements to, or the expansion of, our operations;
inflation in the costs of goods and services;
the effect of natural gas price volatility, including the potential impact of high commodity prices on usage or
rate case outcomes;
civil disturbance or terroristic threats or acts;
1
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)
changes to the rules or our assumptions underlying our determination of what qualifies for an income tax
deduction for qualifying utility asset improvements;
changes in, or unanticipated, capital requirements;
changes in our credit rating or the market price of our common stock;
changes in valuation of strategic ventures;
changes in accounting pronouncements;
litigation and claims; and
restrictions on our subsidiaries’ ability to make dividends and other distributions.
Given these risks and uncertainties, you should not place undue reliance on any forward-looking statements. You should
read this Annual Report completely and with the understanding that our actual future results, performance and
achievements may be materially different from what we expect. These forward-looking statements represent assumptions,
expectations, plans, and beliefs only as of the date of this Annual Report. Except for our ongoing obligations to disclose
certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these
forward-looking statements, even though our situation may change in the future. For further information or other factors
which could affect our financial results and such forward-looking statements, see Item 1A – Risk Factors in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2022.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read together with our
Consolidated Financial Statements and accompanying Notes included in this Annual Report. This discussion contains
forward-looking statements that are based on management’s current expectations, estimates, and projections about our
business, operations, and financial performance. All dollar amounts are in thousands of dollars, except per share amounts.
The Company
Essential Utilities, Inc., (Essential Utilities, the Company, we, us, or our), a Pennsylvania corporation, is the holding
company for regulated utilities providing water, wastewater, or natural gas services to an estimated five million people in
Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under
the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (Aqua Pennsylvania),
provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we
serve. These customers 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 additional states. Additionally, commencing on March 16, 2020, with the completion of the Peoples Gas
Acquisition, the Company began to provide natural gas distribution services to customers in western Pennsylvania,
Kentucky, and West Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in
western Pennsylvania. In December 2022, we entered into a definitive agreement to sell our regulated natural gas utility
assets in West Virginia, which serve approximately 13,000 customers. This sale is conditioned on regulatory approval
and is expected to close in mid-2023. The completion of this transaction will conclude our regulated utility operations in
West Virginia. Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure, LLC and Aqua
Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior to our October 30, 2020 sale of our
investment in a joint venture, Aqua Infrastructure provided non-utility raw water supply services for firms in the natural
gas drilling industry. Following the October 30, 2020 closing, Aqua Infrastructure does not provide any services to the
natural gas drilling industry. Aqua Resources offers, through a third-party, water and sewer service line protection
solutions and repair services to households. Other non-regulated subsidiaries of Peoples provide utility service line
protection services to households and operate gas marketing and production businesses.
2
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)
Recent Developments
In 2022, we experienced inflationary cost increases in our materials, labor and other operating costs, higher interest rates,
as well as supply chain pressures, primarily as a result of the COVID-19 pandemic and global uncertainties associated
with the current conflict in Ukraine and sanctions imposed in response to this conflict. The price of natural gas
substantially increased and resulted in the significant increase in the revenue and expenses of our Regulated Natural Gas
business in 2022, as compared to last year. We expect these pressures to continue throughout 2023. We continue to review
the adequacy of our rates as approved by public utility commissions in relation to the increasing cost of providing services
and the inherent regulatory lag in adjusting those rates. We also continue to work with our suppliers to monitor and
address the risks present in our supply chain. While we have experienced some delays in certain materials, we have been
able to adjust our purchasing procedures to secure and stock the necessary materials without materially impacting our
operations or capital investment program. We continue to monitor the COVID-19 pandemic and take steps to mitigate the
potential risks to our business. To date, there has not been a significant impact on our ability to serve our customers or
secure necessary supplies. While the pandemic presents risks to the Company's business, as further described in Part I,
Item 1A — Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company
has not experienced any material financial or operational impacts related to the COVID-19 pandemic. Despite our efforts,
the potential for a material negative impact on the Company exists as the COVID-19 pandemic also depends on factors
beyond our knowledge, control, or ability to predict, including the duration and severity of this pandemic, the emergence
of new variants of the virus, the development and availability of effective treatments and vaccines, as well as third party
actions taken to contain its spread and mitigate its public health effects.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which among other things,
implements a 15% minimum tax on book income of certain large corporations, and a 1% excise tax on net stock
repurchases after December 31, 2022. The alternative minimum tax would not be applicable in our next fiscal year
because it is based on a three-year average annual adjusted financial statement income in excess of $1,000,000. Also
included in the IRA is a provision to implement an annual waste emissions charge beginning with calendar year 2024 (to
be paid in 2025) on applicable oil and gas facilities that exceed certain methane emission thresholds. Currently, the
Company has gathering facility assets that could exceed the minimum thresholds and potentially be subject to the waste
emissions charge. We are continuing to assess the future impact of the provisions of the IRA on our consolidated financial
statements and on the Company’s gathering assets. As a regulated utility, required capital expenditures and operating
costs, including taxes, have been traditionally recognized by state utility commissions as appropriate for inclusion in
establishing rates.
In December 2022, the Company signed an agreement to sell its regulated natural gas utility assets in West Virginia,
which are used to serve approximately 13,000 customers or less than two percent of the Company’s regulated natural gas
customers. This sale is conditioned on regulatory approval and is expected to close in mid-2023. The completion of this
transaction will conclude our regulated utility operations in West Virginia and allow the Company to focus on the growth
of its utilities in states where it has scale.
Economic Regulation
Most of our utility operations are subject to regulation by their respective state utility commissions, which have broad
administrative power and authority to regulate billing rates, determine franchise areas and conditions of service, approve
acquisitions, and authorize the issuance of securities. The utility commissions also generally establish uniform systems of
accounts and approve the terms of contracts with affiliates and customers, business combinations with other utility
systems, and loans and other financings. The policies of the utility commissions often differ from state to state and may
change over time. A small number of our operations are subject to rate regulation by county or city government. Over
time, the regulatory party in a particular state may change. The profitability of our utility operations is influenced to a
great extent by the timeliness and adequacy of rate allowances in the various states in which we operate. One
3
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)
consideration we may undertake in evaluating on which states to focus our growth and investment strategy is whether a
state provides for consolidated rates, a surcharge for replacing and rehabilitating infrastructure, fair value treatment of
acquired utility systems, and other regulatory policies that promote infrastructure investment and efficiency in processing
rate cases.
Rate Case Management Capability – The mission of the regulated utility industry is to provide quality and reliable utility
service at reasonable rates to customers, while earning a fair return for shareholders. We strive to achieve the industry’s
mission by effective planning, efficient investments, and productive use of our resources. We maintain a rate case
management capability to pursue timely and adequate returns on the capital investments that we make in improving our
distribution system, treatment plants, information technology systems, and other infrastructure. This capital investment
creates assets that are used and useful in providing utility service and is commonly referred to as rate base. Timely and
adequate rate relief is important to our continued profitability and in providing a fair return to our shareholders; thus,
providing access to capital markets to help fund these investments. In pursuing our rate case strategy, we consider the
amount of net utility plant additions and replacements made since the previous rate decision, the changes in the cost of
capital, changes in our capital structure, and changes in operating and other costs. Based on these assessments, our utility
operations periodically file rate increase requests with their respective state utility commissions or local regulatory
authorities. In general, as a regulated enterprise, our utility rates are established to provide full recovery of utility
operating costs, taxes, interest on debt used to finance capital investments, and a return on equity used to finance capital
investments. Our ability to recover our expenses in a timely manner and earn a return on equity employed in the business
helps determine the profitability of the Company.
As of December 31, 2022, the Company’s rate base is estimated to be $9,300,000, which is comprised of:
$6,400,000 in the Regulated Water segment; and
$2,900,000 in the Regulated Natural Gas segment.
As of December 31, 2022, the regulatory status of the Company’s rate base is estimated to be as follows:
$8,100,000 filed with respective state utility commissions or local regulatory authorities; and
$1,200,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 47 rate divisions, and our natural gas operations are comprised of
four rate divisions. Each of our utility rate divisions require a separate rate filing for the evaluation of the cost of service
and recovery of investments in connection with the establishment of tariff rates for that rate division. When feasible and
beneficial to our utility customers, we have sought approval from the applicable state utility commission to consolidate
rate divisions to achieve a more even distribution of costs over a larger customer base. All of the eight states in which we
operate water and wastewater utilities currently permit us to file a revenue requirement using some form of consolidated
rates for some or all of the rate divisions in that state.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $81,610 in 2022
resulting from seven base rate decisions, $3,390 in 2021 resulting from six base rate decisions, and $4,480 in 2020
resulting from five base rate decisions. Annualized revenues in aggregate from all of the rate increases realized in the
year of grant were $51,163 in 2022, $2,995 in 2021, and $1,594 in 2020.
Revenue Surcharges – Each of our states in which we operate water, wastewater, and natural gas utilities, permit us to
add an infrastructure rehabilitation surcharge to their respective bills to offset the additional depreciation and capital costs
associated with capital expenditures related to replacing and rehabilitating infrastructure systems. Prior to allowing for
such surcharges, utilities absorbed all of the depreciation and capital costs of these projects between base rate increases
without the benefit of additional revenues. The gap between the time that a capital project is completed and the recovery
of its costs in rates is known as regulatory lag. This surcharge is intended to substantially reduce regulatory lag, which
4
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)
could act as a disincentive for utilities to rehabilitate their infrastructure. In addition, some states permit our subsidiaries
to use a surcharge or credit on their bills to reflect allowable changes in costs, such as changes in state tax rates, other
taxes and purchased water costs, until such time as the new costs are fully incorporated in base rates. Additional
information regarding revenue surcharges is provided in Note 17 – Rate Activity in this Annual Report.
Inflation and Operating Costs – Most elements of operating costs are subject to the effects of inflation and changes in the
number of customers served. Several elements are subject to the effects of changes in water or gas consumption, weather
conditions, and the degree of water treatment required due to variations in the quality of the raw water. The principal
elements of operating costs are purchased gas, labor and employee benefits, electricity, chemicals, transportation,
maintenance expenses, insurance and claims costs, and costs to comply with environmental regulations. Electricity and
chemical expenses vary in relationship to water or gas consumption, raw water quality, wastewater volumes, and price
changes. Maintenance expenses are sensitive to extremely cold weather, which can cause utility mains to rupture and
natural gas service lines to freeze, resulting in additional costs to repair the affected mains.
Materials and supplies, freight, chemicals, purchased power, and labor inflation resulted in increased costs in fiscal 2022,
and we expect this trend will continue in fiscal 2023. Recovery of the effects of inflation through higher customer rates is
dependent upon receiving adequate and timely rate increases. However, rate increases are not retroactive and often lag
increases in costs caused by inflation. On occasion, our regulated utility companies may enter into rate settlement
agreements, which require us to wait for a period of time to file the next base rate increase request. These agreements
may result in regulatory lag whereby inflationary increases in expenses may not be reflected in rates, and may not yet be
requested, or a gap may exist between when a capital project is completed and the start of its recovery in rates. Even
during periods of moderate inflation, the effects of inflation can have a negative impact on our operating results.
Our natural gas distribution operations are also affected by the cost of natural gas. We are able to generally pass the cost
of gas to our customers without markup under purchase gas cost adjustment mechanisms; therefore, increases in the cost
of gas are offset by a corresponding increase in revenues. However, higher gas costs may adversely impact our accounts
receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us
to collect from our customers a portion of our bad debt expense. Additionally, higher gas costs may require us to increase
borrowings under our credit facilities, resulting in higher interest expense. A typical residential natural gas bill includes
charges for the cost of gas, delivery, and other charges. As of January 1, 2023, the annual portion of a typical Peoples
Natural Gas residential bill related to gas costs is approximately 56%. In periods when we experience market increases in
natural gas costs, such as in 2022, customer affordability and usage may be reduced. Customer conservation measures
may occur that can reduce natural gas revenues, either temporarily or over time.
Income Tax Accounting Change - In March 2020 and in June 2022, the Company changed the method of tax accounting
for certain qualifying infrastructure investments at its Peoples Natural Gas and Peoples Gas Company subsidiaries,
respectively. In December 2022, the Company made a similar change for its Aqua New Jersey subsidiary beginning with
the current tax year. These changes allow a tax deduction for qualifying utility asset improvement costs that were
formerly capitalized for tax purposes. The Company is utilizing the flow-through method to account for these timing
differences. For Peoples Natural Gas, the Company calculated the income tax benefits for qualifying capital expenditures
made prior to March 16, 2020 (catch-up adjustment) and has recorded a regulatory liability for $160,655 for these income
tax benefits. In May 2021, the Pennsylvania Public Utility Commission approved a settlement petition that allows
Peoples Natural Gas to continue to use flow-through accounting for the current tax repair benefit and allows for the catch-
up adjustment be given to its customers. These benefits are being provided back to customers over a five-year period
through a credit on customer bills which commenced in August 2021. In addition, the settlement petition required the
contribution of $500 to a customer-bill payment assistance program, completed in July 2021, and $5,000 in relief to past-
due accounts for natural gas customers impacted by the COVID-19 pandemic, completed in December 2021. For Peoples
Gas, the Company calculated the catch-up adjustment for periods prior to the 2021 tax year and recognized a regulatory
liability of $13,808 for these income tax benefits. The Company will maintain this regulatory liability on its consolidated
balance sheet until the accounting treatment is determined in its next base rate case.
5
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)
Growth-Through-Acquisition Strategy
Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations
through acquisitions of water, wastewater, and other utilities either in areas adjacent to our existing service areas or in new
service areas, and to explore acquiring market-based businesses that are complementary to our regulated utility operations.
To complement our growth strategy, we routinely evaluate the operating performance of our individual utility systems,
and in instances where limited economic growth opportunities exist or where we are unable to achieve favorable operating
results or a return on equity that we consider acceptable, we will seek to sell the utility system and reinvest the proceeds in
other utility systems. Consistent with this strategy, we are focusing our acquisitions and resources in states where we
have critical mass of operations in an effort to achieve economies of scale and increased efficiency. Our growth-through-
acquisition strategy allows us to operate more efficiently by sharing operating expenses over more utility customers and
provides new locations for future earnings growth through capital investment. Another element of our growth strategy is
the consideration of opportunities to expand by acquiring other utilities, including those that may be in a new state if they
provide promising economic growth opportunities and a return on equity that we consider acceptable. Our ability to
successfully execute this strategy historically and to meet the industry challenges has largely been due to our core
competencies, financial position, and our qualified and trained workforce, which we strive to retain by treating employees
fairly and providing our employees with development and growth opportunities.
On March 16, 2020, we completed the acquisition of Peoples Natural Gas (the Peoples Gas Acquisition), which expanded
the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas
utility customers in western Pennsylvania, West Virginia, and Kentucky.
During 2022, we completed three acquisitions of water and wastewater systems, which along with the organic growth in
our existing systems, represents 31,537 new customers. During 2021 we completed two acquisitions of water and
wastewater systems, which along with the organic growth in our existing systems, represents 21,364 new customers.
During 2020, in addition to the Peoples Gas Acquisition, we completed six acquisitions of water and wastewater systems,
which along with the organic growth in our existing systems, represents 24,169 new customers.
The Company currently has eight signed purchase agreements for additional water and wastewater systems that are
expected to serve approximately 218,600 equivalent retail customers or equivalent dwelling units and total
approximately $380,000 in purchase price in four of our existing states. This includes the Company’s agreement to
acquire the Delaware County Regional Water Quality Control Authority (DELCORA) for $276,500. DELCORA,
a Pennsylvania sewer authority, serves approximately 198,000 equivalent dwelling units in the Philadelphia suburbs.
Refer to Note 2 – Acquisitions in this Annual Report for further discussion.
As of December 31, 2022, the pipeline of potential water and wastewater municipal acquisitions the company is actively
pursuing represents approximately 400,000 total customers or equivalent dwelling units. The Company remains on track
to, on average, annually increase customers between 2% and 3% through acquisitions and organic customer growth.
Performance Measures Considered by Management
We consider the following financial measures (and the period to period changes in these financial measures) to be the
fundamental basis by which we evaluate our operating results:
earnings per share;
water and wastewater operating revenues;
gas operating revenues, net of purchased gas costs;
earnings before interest, taxes, and depreciation (EBITD);
earnings before income taxes;
6
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)
net income; and
the dividend rate on common stock.
In addition, we consider other key measures in evaluating our utility business performance within our Regulated Water
and Regulated Natural Gas segments:
our number of utility customers;
the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed
“operating expense ratio”);
return on revenues (net income divided by operating revenues);
rate base growth;
return on equity (net income divided by stockholders’ equity); and
the ratio of capital expenditures to depreciation expense.
Some of these measures, like EBITD and gas operating revenues, net of purchased gas costs, are non-GAAP financial
measures. The Company believes that the non-GAAP financial measures provide management the ability to measure the
Company’s financial operating performance across periods and are more comparable to measures reported by other
companies. We believe EBITD is a relevant and useful indicator of operating performance, as we measure it for
management purposes because it provides a better understanding of our results of operations by highlighting our
operations and the underlying profitability of our core businesses.
We review these measurements regularly and compare them to historical periods, to our operating budget as approved by
our Board of Directors, and to other publicly-traded utilities. Additionally, our Regulated Natural Gas segment is affected
by the cost of natural gas, which is passed through to customers using a purchased gas adjustment mechanism and
includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of
operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas
impact operating revenues on dollar-for-dollar basis. Management uses gas operating revenues, net of purchased gas
costs, a non-GAAP financial measure, to analyze the financial performance of our Regulated Natural Gas segment.
Management believes this measure provides a meaningful basis for evaluating our natural gas utility operations since
purchased gas expenses are included in operating revenues and passed through to customers.
Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management effectiveness
of our regulated operations. Our operating expense ratio is affected by a number of factors, including the following:
Regulatory lag – Our rate filings are designed to provide for the recovery of increases in costs of operations
(primarily labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and
claim costs, and costs to comply with environmental regulations), capital, and taxes. The revenue portion of the
operating expense ratio can be impacted by the timeliness of recovery of, and the return on capital investments.
The operating expense ratio is further influenced by regulatory lag (increases in operations and maintenance
expenses not yet recovered in rates or a gap between the time that a capital project is completed and the start of its
cost recovery in rates). The operating expense ratio is also influenced by decreases in operating revenues without a
commensurate decrease in operations and maintenance expense, such as changes in customer usage as impacted by
adverse weather conditions, or conservation trends. During periods of inflation, our operations and maintenance
expenses may increase, impacting the operating expense ratio, as a result of regulatory lag, since our rate cases may
not be filed timely and are not retroactive.
Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in some areas may initially
increase our operating expense ratio if the operating revenues generated by these operations do not reflect the true
cost of service and are accompanied by a higher ratio of operations and maintenance expenses as compared to other
operational areas of the company that are more densely populated and have integrated operations. In these cases,
7
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 acquired operations are characterized as having relatively higher operating costs to fixed capital costs, in
contrast to the majority of our operations, which generally consist of larger, interconnected systems, with higher
fixed capital costs (utility plant investment) and lower operating costs per customer. For larger acquisitions, such
as the Peoples Gas Acquisition, we have incurred significant transaction expenses, which increase operations and
maintenance expenses in periods prior to and in the period of the closing of the acquisition. In addition, we operate
market-based subsidiary companies consisting of our non-regulated natural gas operations, Aqua Resources, and
Aqua Infrastructure. The cost-structure of these market-based companies differs from our utility companies in that,
although they may generate free cash flow, these companies may at times have a higher ratio of operations and
maintenance expenses to operating revenues and a lower capital investment and, consequently, a lower ratio of
fixed capital costs versus operating revenues in contrast to our regulated operations. As a result, the operating
expense ratio is not comparable between the businesses. These market-based subsidiary companies are not a
component of our Regulated Water or Regulated Natural Gas segments.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
Other Operational Measures Considered by Management
Sendout - Sendout represents the quantity of treated water delivered to our distribution systems. We use sendout as an
indicator of customer demand. Weather conditions tend to impact water consumption, particularly during the late spring,
summer, and early fall when discretionary and recreational use of water is at its highest. Consequently, a higher
proportion of annual Regulated Water segment operating revenues are realized in the second and third quarters. In
general, during this period, an extended period of hot and dry weather increases water consumption, while above-average
rainfall and cool weather decreases water consumption. Conservation efforts, construction codes that require the use of
low-flow plumbing fixtures, as well as mandated water use restrictions in response to drought conditions can reduce water
consumption. We believe an increase in conservation awareness by our customers, including the increased use of more
efficient plumbing fixtures and appliances, may continue to result in a long-term structural trend of declining water usage
per customer. These gradual long-term changes are normally taken into account by the utility commissions in setting
rates, whereas significant short-term changes in water usage, resulting from drought warnings, water use restrictions, or
extreme weather conditions, may not be fully reflected in the rates we charge between rate proceedings. In Illinois, our
operating subsidiary has a revenue stability mechanism which allows us to recognize state PUC-authorized revenue for a
period which is not based upon the volume of water sold during that period, and effectively lessens the impact of weather
and consumption variability.
On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our
service territories in response to extended periods of dry weather conditions, regardless of our ability to meet unrestricted
customer water demands. The timing and duration of the warnings and restrictions can have an impact on our water
revenues and net income. In general, water consumption in the summer months is affected by drought warnings and
restrictions to a higher degree because discretionary and recreational use of water is highest during the summer months,
particularly in our northern service territories. At other times of the year, warnings and restrictions generally have less of
an effect on water consumption. Drought warnings and watches result in the public being asked to voluntarily reduce
water consumption.
The geographic diversity of our utility customer base reduces the effect of our exposure to extreme or unusual weather
conditions in any one area of the country. During the year ended December 31, 2022, our operating revenues for our
Regulated Water segment were derived principally from the following states: approximately 56% in Pennsylvania, 11%
in Ohio, 9% in Illinois, 8% in Texas, and 7% in North Carolina.
Heating Degree Days – The regulated natural gas utility business is subject to seasonal fluctuations with the peak usage
period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each
degree that the average of the high and the low temperatures for a day is below 65 degrees Fahrenheit in a specific
8
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)
geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas
needed for heating based on the extent to which the average temperature falls below a reference temperature for which no
heating is required (65 degrees Fahrenheit). HDDs are used in the natural gas industry to measure the relative coldness of
weather and to estimate the demand for natural gas. Normal temperatures are based on a historical twenty-year average
heating degree days, as calculated from data provided by the National Weather Service for the same geographic location.
During the year ended December 31, 2022, we experienced actual HDDs of 5,648 days, which was colder by 3.9% than
the average or normal HDDs for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service
territory.
RESULTS OF OPERATIONS
Consolidated financial and operational highlights for the years ended December 31, 2022, 2021 and 2020 are presented
below. For discussion of our results of operations and cash flows for 2021 compared with 2020, refer to Part II, Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form
10-K for our fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022.
Years ended December 31,
Operating revenues:
Regulated water segment
Regulated gas segment
Other and eliminations
2022
2021
2020
2022 vs. 2021
$ 1,082,972 $ 980,203 $ 938,540 $
859,902
38,039
1,143,362
61,698
506,564
17,594
Consolidated operating revenues
Operations and maintenance expense
Net income (1)
$ 2,288,032 $
$
$
1,462,698 $
1,878,144 $
613,649 $ 550,580 $ 528,611 $
465,237 $ 431,612 $ 284,849 $
2021 vs.
2020
41,663
353,338
20,445
415,446
21,969
146,763
102,769 $
283,460
23,659
409,888 $
63,069 $
33,625 $
Capital expenditures
Operating Statistics
Selected operating results as a percentage of operating
revenues:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes
Interest expense, net of interest income
Net income (1)
Return on Essential Utilities stockholders' equity (1)
Ratio of capital expenditures to depreciation expense
Effective tax rate
$ 1,062,763 $
1,020,519 $ 835,642 $
42,244 $
184,877
26.8%
14.0%
3.9%
10.2%
20.3%
8.7%
3.4
(3.2%)
29.3%
15.9%
4.6%
10.9%
23.0%
8.3%
3.5
(2.3%)
36.1%
17.6%
5.2%
12.5%
19.5%
6.1%
3.3
(7.5%)
-2.5%
-1.9%
-0.7%
-0.7%
-2.7%
0.4%
-0.1
(0.9%)
-6.8%
-1.7%
-0.6%
-1.6%
3.5%
2.2%
0.2
5.2%
(1) Reflects Peoples Gas Acquisition transaction-related expenses of $20,925 ($25,573 pre-tax) in 2020 and utility customer rate credits issued in
2020 of $23,004 (or $16,357 net of tax).
(2) Peoples Gas’ operating results are included since its acquisition on March 16, 2020.
Consolidated Results of Operations Comparison for 2022 and 2021
Operating revenues - Operating revenues increased by $409,888 or 21.8% for the year ended December 31, 2022
compared to the year ended December 31, 2021. Revenues from our Regulated Water segment increased by $102,769,
Regulated Natural Gas segment by $283,460 and other revenues by $23,659. A detailed discussion of the factors
contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations.
9
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 other revenues consist of market-based revenues at Aqua Resources, Aqua Infrastructure, and our non-regulated
natural gas operations amounting to $61,698 in 2022, $38,435 in 2021, and $17,776 in 2020. The increase in other
revenues is primarily due to higher revenues from our non-regulated natural gas operations driven by higher gas prices.
Operating expenses - Operations and maintenance expenses increased in 2022, as compared to 2021, by $63,069 or
11.5%, primarily due to:
increase in employee related costs of $17,129 driven by an increase in labor rates, other compensation, including a
one-time compensation payment for non-officer level employees, and benefits to employees;
increase in production costs for water and wastewater operations of $6,339, primarily due to higher chemical
prices and an increase in wholesale water costs;
additional operating costs associated with acquired and pending acquisitions of water and wastewater utility
systems and higher customer base of $6,872;
increase in customer assistance surcharge costs of $12,778 in our Regulated Natural Gas segment, which has an
equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the
increase in average gas prices during 2022 compared to last year;
increase in insurance expense of $6,911 due to higher insurance claims, which includes the impact of a favorable
insurance reserve adjustment of $2,426 during the first quarter of 2021;
increase in legal expenses of $2,779;
increase in materials and supplies of $3,417, and outside services and maintenance expenses of $22,175 largely
due to inflationary cost pressures and increased maintenance activity; offset by,
reduction of expenses in 2022 of $454 associated with remediating an advisory for some of our water utility
customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to
continue into 2023;
decrease in repairs expense of $2,820 as 2021 included costs incurred to restore and repair the property damaged
by Hurricane Ida;
lower asset impairment charge of $2,900 associated with the write down of the right of use assets of our
Regulated Natural Gas segment’s leased office space to fair value in 2022 as compared with 2021; and,
a decrease in expenses of $7,386 in our Regulated Gas segment due to higher capitalization as a result of greater
capital spend in the current year.
Purchased gas increased by $261,733 or 76.9% in 2022 compared to 2021. Purchased gas represents the cost of gas sold
by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. This expense
increased for the regulated natural gas business and non-regulated business by $237,619 and $24,114, respectively, as a
result of the increase in natural gas prices.
Depreciation and amortization expense increased by $23,225 or 7.8%, in 2022 over 2021, principally due to continued
capital expenditures to expand and improve our utility facilities, upgrade our information systems, our acquisitions of new
utility systems, and additional rate case filings. Expenses associated with filing rate cases are deferred and amortized over
periods that generally range from one to three years.
Taxes other than income taxes totaled $90,024 in 2022 and $86,641 in 2021, and has increased by $3,383 or 3.9% in
2022 as compared to 2021 principally due to increase in pumping fees of $2,120.
Other expense, net - Interest expense was $238,116 in 2022 and $207,709 in 2021. Interest expense increased in 2022
primarily due to an increase in average borrowings, and an increase in average interest rates. The weighted average cost
of fixed rate long-term debt was 3.78% at December 31, 2022 and 3.61% at December 31, 2021. The weighted average
cost of fixed and variable rate long-term debt was 3.94% at December 31, 2022 and 3.49% at December 31, 2021.
10
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)
Allowance for funds used during construction (AFUDC) was $23,665 in 2022 and $20,792 in 2021, and varies as a result
of changes in the average balance of utility plant construction work in progress, to which AFUDC is applied, changes in
the AFUDC rate which is based predominantly on short-term interest rates, changes in the balance of short term-debt, and
changes in the amount of AFUDC related to equity. The increase in 2022 is primarily due to an increase in the average
balance of utility plant construction work in progress, to which AFUDC is applied. The amount of AFUDC related to
equity was $17,618 in 2022 and $16,282 in 2021.
Gain on sale of other assets totaled $991 in 2022 and $976 in 2021, and consists of the sales of property, plant and
equipment.
Other totaled $494 in 2022, and $(2,848) in 2021, and largely consists of the non-service cost component of our net benefit
cost for pension benefits and unrealized gains and losses on investments associated with our non-qualified pension plan. In
2022, the fair values of our investments associated with our non-qualified plan declined and we recognized a loss of $895
in 2022 compared to a gain of $(607) in 2021.
Income tax benefit - Our effective income tax rate was (3.2)% in 2022, and (2.3)% in 2021. The Company’s provision
for income taxes represents an income tax benefit due to the effects of tax deductions recognized for certain qualifying
infrastructure investments. The decrease in the effective tax rate is primarily attributed to the increase in our income tax
benefit associated with the tax deduction for qualifying infrastructure investments.
Net income -
Operating income
Net income
Diluted net income per share
Years ended December 31,
2021
2020
2022
$
661,187 $
465,237
1.77
602,709 $
431,612
1.67
434,686
284,849
1.12
The changes in diluted net income per share in 2022 over the previous year were due to the aforementioned changes.
Although we have experienced increased income in the recent past, continued adequate rate increases reflecting increased
operating costs and new capital improvements are important to the future realization of improved profitability.
Segment Results of Operations Comparison for 2022 and 2021
We have identified twelve operating segments, and we have two reportable segments based on the following:
Eight segments are composed of our water and wastewater regulated utility operations in the eight states where we
provide these services. These operating segments are aggregated into one reportable segment, Regulated Water,
since each of these operating segments has the following similarities: economic characteristics, nature of services,
production processes, customers, water distribution and/or wastewater collection methods, and the nature of the
regulatory environment.
Our Regulated Natural Gas segment is composed of natural gas utility companies in three states acquired in the
Peoples Gas Acquisition. These utilities provide natural gas distribution services, and their operating results
subsequent to the March 16, 2020 acquisition date are reported in the Regulated Natural Gas segment.
Three segments are not quantitatively significant to be reportable and are composed of our non-regulated natural
gas operations, Aqua Resources, and Aqua Infrastructure. These segments are included as a component of “Other,”
11
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 addition to corporate costs that have not been allocated to the Regulated Water and Regulated Natural Gas
segments, because they would not be recoverable as a cost of utility service, and intersegment eliminations.
Corporate costs include general and administrative expenses, and interest expense.
Regulated Water Segment
The following tables present the selected operating results and customers served for our Regulated Water segment, for and
as of the year ended December 31,:
Sendout (in millions of gallons)
Pennsylvania
Ohio
Illinois
Texas
North Carolina
Other states
Subtotal
Elimination
Total sendout by state
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total water and wastewater utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Depreciation and amortization
Taxes other than income taxes
Other expense, net
Provision for income tax
Segment net income
2022
2021
2020
2022 vs. 2021 2021 vs. 2020
42,666
14,604
8,784
8,606
5,934
6,272
86,866
(141)
86,725
42,198
13,971
8,764
7,212
5,984
6,191
84,320
(154)
84,166
41,683
14,020
8,651
7,393
5,780
6,299
83,826
(65)
83,761
850,673
43,119
1,286
18,446
181,721
1,095,245
842,200
42,864
1,331
17,932
162,478
1,066,805
832,902
42,535
1,338
18,561
151,965
1,047,301
$
$
$
$
$
$
$
$
607,473 $
168,460
32,581
94,359
165,312
-
14,787
1,082,972 $
370,850 $
201,392 $
64,472 $
84,396 $
47,510 $
314,352 $
561,996 $
151,071
30,230
89,472
132,316
-
15,118
980,203 $
332,598 $
182,074 $
63,264 $
81,931 $
26,633 $
293,703 $
567,485 $
143,479
29,764
67,712
121,117
(4,080)
13,063
938,540 $
309,608 $
171,152 $
60,505 $
91,001 $
22,481 $
283,793 $
468
633
20
1,394
(50)
81
2,546
13
2,559
8,473
255
(45)
514
19,243
28,440
45,477 $
17,389
2,351
4,887
32,996
-
(331)
102,769 $
38,252 $
19,318 $
1,208 $
2,465 $
20,877 $
20,649 $
515
(49)
113
(181)
204
(108)
494
(89)
405
9,298
329
(7)
(629)
10,513
19,504
(5,489)
7,592
466
21,760
11,199
4,080
2,055
41,663
22,990
10,922
2,759
(9,070)
4,152
9,910
Operating revenues - The growth in our Regulated Water segment’s revenues over the past three years is primarily a
result of increases in our water and wastewater rates and our customer base. Water and wastewater rate increases,
including infrastructure rehabilitation surcharges, implemented during the past three years have provided additional
operating revenues of $63,367 in 2022, $27,421 in 2021, and $32,660 in 2020. The number of customers increased at an
annual compound rate of 2.2% over the past three years due to acquisitions and organic growth, adjusted to exclude
customers associated with utility system dispositions. Acquisitions in our Regulated Water segment have provided
additional water and wastewater revenues of $16,145 in 2022, $6,750 in 2021, and $10,951 in 2020.
12
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 Regulated Water segment also includes operating revenues of $11,477 in 2022 and $13,358 in 2021, and $8,781 in
2020, associated with revenues earned primarily from fees received from telecommunication operators that have put
cellular antennas on our water towers, fees earned from municipalities for our operation of their water or wastewater
treatment services or to perform billing services, and fees earned from developers for accessing our water mains.
Operating expenses - Operations and maintenance expense for the year ended December 31, 2022 was $370,850
compared to $332,598 in the prior period. The increase of 38,252 or 11.5% was primarily due to the following:
increase in employee related costs of $7,279 driven by an increase in labor rates, other compensation and benefits
to employees;
increase in production costs for water and wastewater operations of $6,339;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base
of $6,872;
increase in legal expenses of $3,059;
increase in outside services and maintenance expenses of $17,196 in our Regulated Water segment as compared
with the prior period; offset by,
reduction of expenses in 2022 of $454 associated with remediating an advisory for some of our water utility
customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to
continue into 2023; and,
offset by a decrease in repairs expense of $2,820 as 2021 included costs incurred to restore and repair the property
damaged by Hurricane Ida.
Depreciation and amortization increased by $19,318 or 10.6% primarily due to continued capital spend.
Other expense, net – Interest expense, net, increased by $3,582 or 3.3% primarily due to the increase in average borrowings
and higher interest rate on our revolving line of credit in 2022.
AFUDC increased by $1,692 or 8.8% due to the increase in the average balance of utility plant construction work in
progress, to which AFUDC is applied.
Provision for income tax – The effective income tax rate for our Regulated Water segment was 13.1% in 2022, compared
to 8.3% in 2021. The change in the effective tax rate is primarily due to a decrease in the amortization of certain
regulatory liabilities associated with deferred taxes.
13
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)
Regulated Natural Gas Segment
The following tables present the selected operating results and customers served for our Regulated Natural Gas segment
for and as of the year ended December 31,:
Gas utility customers:
Residential gas
Commercial gas
Industrial gas
Total gas utility customers
Delivered volumes (thousand cubic feet)
Residential gas
Commercial gas
Industrial gas
Total delivered volumes
Heating Degree Days (b)
Average Heating Degree Days (c)
Operating revenues:
Residential gas
Commercial gas
Industrial gas
Gas transportation
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Other expense, net
Income tax benefit
Segment net income
2022
2021
2020
2022 vs. 2021
2021 vs. 2020
695,198
59,684
1,459
756,341
692,174
59,595
1,475
753,244
690,642
59,424
1,436
751,502
3,024
89
(16)
3,097
1,532
171
39
1,742
61,093,372
37,240,382
49,017,036
147,350,790
5,648
5,438
56,542,038
33,403,899
49,726,237
139,672,174
5,139
5,466
33,675,963
20,082,555
37,936,661
91,695,179
3,013
2,973
4,551,334
3,836,483
(709,201)
7,678,616
509
(28)
22,866,075
13,321,344
11,789,576
47,976,995
2,126
2,493
2022
2021
2020
2022 vs. 2021
2021 vs. 2020
$
$
$
$
$
$
$
$
$
720,490 $
149,653
5,636
205,825
-
61,758
1,143,362 $
239,506 $
551,009 $
118,955 $
22,642 $
87,916 $
(61,942) $
185,276 $
530,338 $
99,596
3,427
198,195
(5,000)
33,346
859,902 $
226,194 $
313,390 $
113,238 $
20,801 $
78,099 $
(40,013) $
148,193 $
314,274 $
50,239
6,923
133,685
(18,924)
20,367
506,564 $
198,383 $
154,103 $
84,201 $
13,307 $
25,252 $
(25,133) $
56,451 $
190,152 $
50,057
2,209
7,630
5,000
28,412
283,460 $
13,312 $
237,619 $
5,717 $
1,841 $
9,817 $
(21,929) $
37,083 $
216,064
49,357
(3,496)
64,510
13,924
12,979
353,338
27,811
159,287
29,037
7,494
52,847
(14,880)
91,742
(a) Includes operating results since the completion of the Peoples Gas Acquisition on March 16, 2020.
(b) Unit of measure reflecting temperature-sensitive natural gas consumption, calculated by subtracting the average of a day’s high and
low temperatures from 65 degrees Fahrenheit.
(c) Based on historical twenty-year average heating degree days, as calculated from data provided by the National Weather Service for
the same geographic location.
Operating revenues – Operating revenues from the Regulated Natural Gas segment increased by $283,460 or 33.0% due
to:
impact of higher gas cost of $237,619 in 2022 as compared to 2021;
higher gas usage of $27,237;
increase of $13,682 due to higher rates and other surcharges; and,
increase in customer assistance surcharge of $12,778, which has an equivalent offsetting amount in operations and
maintenance expense. These revenues and offsetting expenses increased mainly due to the increase in average gas
prices in 2022 compared to the last year; and,
offset by the increase in tax repair surcredits to customers of $18,304.
14
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)
Operating expenses – Operations and maintenance expense for the year ended December 31, 2022 increased by $13,312
or 5.9% primarily due to the following:
increases in employee related costs of $5,413 driven by an increase in labor rates, other compensation and
benefits to employees;
increase in customer assistance surcharge costs of $12,778, which has an equivalent offsetting amount in
revenues;
increase in outside services and maintenance expenses of $4,841; offset by,
lower asset impairment charge of $2,900 associated with the write down of the right of use assets of our
Regulated Natural Gas segment’s leased office space to fair value in 2022 as compared with 2021; and,
a decrease in expenses of $7,386 in our Regulated Gas segment due to higher capitalization as a result of greater
capital spend in the current year.
Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a
purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are
reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore,
fluctuations in the cost of purchased gas impact operating revenues on dollar-for-dollar basis. Purchased gas increased by
$237,619 or 75.8% due to an increase of 78.2% in the average gas commodity prices in 2022 as compared to the prior
year.
Depreciation and amortization increased by $5,717 or 5.0% primarily due to continued capital spend.
Taxes other than income taxes increased by $1,841 or 8.9% mainly due to to an increase in sales and use taxes and
regulatory fees in 2022.
Other expense, net – Interest expense, net, increased by $11,558 or 15.3% for 2022 compared to 2021 due to additional
borrowings and a higher interest rate on our revolving line of credit in 2022.
AFUDC increased by $1,181 or 77.0% due to the increase in the average balance of utility plant construction work in
progress, to which AFUDC is applied.
Income tax benefit – The effective income tax rate was a benefit of 50.2% in 2022, compared to a benefit of 37.0% in
2021. The change in the effective tax rate is primarily attributed to an increase in the income tax benefit associated with
the tax deduction for qualifying infrastructure investment and an increase in the amortization of the tax repair catch-up
adjustment in our Regulated Natural Gas segment.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flow and Capital Expenditures
Net operating cash flows, dividends paid on common stock, capital expenditures, including allowances for funds used
during construction, and expenditures for acquiring utility systems were as follows for the years ended December 31:
Net Operating Cash
Flows
2020
2021
2022
$
$
508,024 $
644,679
600,306
1,753,009 $
Dividends
Capital Expenditures
Acquisitions
232,571 $
258,650
288,632
779,853 $
15
835,642 $
1,020,519
1,062,763
2,918,924 $
3,501,835
36,326
116,891
3,655,052
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)
Net cash flows from operating activities decreased from 2021 to 2022 largely due to the increase in accounts receivable,
unbilled revenues and inventory- gas stored. Average cost of gas stored in inventories and associated recoveries of gas
costs from customers was higher in 2022 than in 2021.
Included in capital expenditures for the three year period are: expenditures for the rehabilitation of existing utility
systems, the expansion of our utility systems, modernization and replacement of existing treatment facilities, meters,
office facilities, information technology, vehicles, and equipment. During this three year period, we received $36,563 of
customer advances and contributions in aid of construction to finance new utility mains and related facilities that are not
included in the capital expenditures presented in the above table. In addition, during this period, we have made
repayments of debt, which includes the net effect of borrowings and repayments under our long-term revolving credit
facility of $1,965,289 and have refunded $21,068 of customers’ advances for construction. Dividends increased during
the past three years as a result of annual increases in the dividends declared and paid and increases in the number of shares
outstanding.
Our planned 2023 capital program, excluding the costs of new mains financed by advances and contributions in aid of
construction is estimated to be approximately $1,123,000 in infrastructure improvements for the communities we serve.
The 2023 capital program is expected to include approximately $747,000 for infrastructure rehabilitation surcharge
qualified projects. Our planned 2023 capital program in Pennsylvania for our water and natural gas utilities is estimated
to be approximately $761,000, a portion of which is expected to be eligible as a deduction for qualifying utility asset
improvements for Federal income tax purposes. Our overall 2023 capital program along with $199,356 of debt
repayments and $365,432 of other contractual cash obligations, as reported in the section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations”, has been, or is
expected to be, financed through internally-generated funds, our revolving credit facilities, and the issuance of long-term
debt and equity.
Future utility construction in the period 2024 through 2025, including recurring programs, such as the ongoing
replacement or rehabilitation of utility meters and mains, water treatment plant upgrades, storage facility renovations,
pipes, service lines, and additional transmission mains to meet customer demands, excluding the costs of new mains
financed by advances and contributions in aid of construction, is estimated to require aggregate expenditures of
approximately $2,115,000. We anticipate that approximately one-half of these expenditures will require external
financing. We expect to refinance $221,345 of long-term debt during this period as it becomes due with funds from new
issues of long-term debt, issuances of equity, internally-generated funds, and our revolving credit facilities. The estimates
discussed above do not include any amounts for possible future acquisitions of utility systems or the financing necessary
to support them.
Our primary sources of liquidity are cash flows from operations (including the allowed deferral of Federal income tax
payments), borrowings under various short-term lines of credit and other credit facilities, and customer advances and
contributions in aid of construction. Our cash flow from operations, or internally-generated funds, is impacted by the
timing of rate relief, utility operating revenues, and changes in Federal tax laws, and accelerated tax depreciation or
deductions for utility construction projects. We fund our capital and typical acquisitions through internally-generated
funds, supplemented by short-term lines of credit. Over time, we partially repay or pay-down our short-term lines of
credit with long-term debt. The ability to finance our future construction programs, as well as our acquisition activities,
depends on our ability to attract the necessary external debt and equity financing and maintain internally-generated funds.
Timely rate orders permitting compensatory rates of return on invested capital will be required by our operating
subsidiaries to achieve an adequate level of earnings and cash flow to enable them to secure the capital they will need to
operate and to maintain satisfactory debt coverage ratios.
16
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)
Acquisitions
As part of the Company’s growth-through-acquisition strategy, as of December 31, 2022, the Company has entered into
purchase agreements to acquire the water or wastewater utility system assets of seven municipalities and a private
company for a total combined purchase price in cash of approximately $380,000. The purchase price for these pending
acquisitions is subject to certain adjustments at closing, and the pending acquisitions are subject to regulatory approvals,
including the final determination of the fair value of the rate base acquired. Closings for these acquisitions are expected to
occur in 2023 or early 2024, which is subject to the timing of the various regulatory approval processes. These
acquisitions are expected to add approximately 218,600 equivalent retail customers in four of the states in which the
Company operates.
In November 2022, the Company acquired the water system of Oak Brook, DuPage County, Illinois, which serves 2,037
customers, for a cash purchase price of $12,500. In August 2022, the Company acquired the municipal wastewater assets
of East Whiteland Township, Chester County, Pennsylvania, which serves 4,018 customers, for a cash purchase price of
$54,374. In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves
11,323 customer connections in Lower Makefield, Falls, and Middletown townships, and Yardley Borough, Bucks
County, Pennsylvania, for a cash purchase price of $53,000.
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively.
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western
Pennsylvania, West Virginia and Kentucky. The Company paid cash consideration of $3,465,344, which was subject to
adjustment based upon the terms of the purchase agreement. The Company financed this acquisition through the April
2019 issuances of $1,293,750 of common stock, $900,000 of senior notes (of which $436,000 was for this acquisition),
$690,000 of tangible equity units, and the issuance of $750,000 of common stock through a private placement, and
borrowings on our revolving credit facility. Additionally, during 2020, we completed six acquisitions of water and
wastewater utility systems for $63,279 in cash in four of the states in which we operate, adding 10,585 customers.
Excluding the Peoples Gas Acquisition, during the past three years, we have expended cash of $216,496 related to the
acquisition of both water and wastewater utility systems. We continue to pursue the acquisition of water and wastewater
utility systems and explore other utility acquisitions that may be in a new state. Our typical acquisitions are expected to
be financed with short-term debt with subsequent repayment from the proceeds of long-term debt, retained earnings, or
equity issuances.
Assets Held for Sale and Disposition
We routinely review and evaluate areas of our business and operating divisions and, over time, may sell utility systems or
portions of systems. In December 2022, the Company signed an agreement to sell its regulated natural gas utility assets in
West Virginia which serve less than two percent of the Company’s regulated natural gas customers. This sale is
conditioned on regulatory approval and is expected to close in mid-2023. The completion of this transaction will
conclude our regulated utility operations in West Virginia.
In October 2020, the Company also sold its investment in a joint venture. Its investment represented its 49% investment
in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania, and recorded a charge of $3,700 associated with the sale. Refer to Note 3
– Asset Held for Sale and Disposition in this Annual Report for additional information.
17
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)
Sources of Capital
Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient to fully fund
our cash requirements including capital expenditures and our growth through acquisitions program, which included
financings for a portion of the Peoples Gas Acquisition, we issued $5,542,246 of long-term debt, and obtained other short-
term borrowings during the past three years. At December 31, 2022, we have a $1,000,000 unsecured long-term
revolving credit facility that expires in December 2027, of which $19,041 was designated for letter of credit usage,
$490,959 was available for borrowing, and $490,000 of borrowings were outstanding at December 31, 2022. This credit
facility was established in December 2022, replacing a similar facility that was expiring in December 2023, and was used
to repay all indebtedness and fees under our prior unsecured revolving credit facility, and for other general corporate
purposes. In addition, we have short-term lines of credit of $435,500 of which $207,000 was available as of
December 31, 2022. Included in the short-term lines of credit is an Aqua Pennsylvania $100,000 364 day unsecured
revolving credit facility and a Peoples Natural Gas $300,000 364 day unsecured revolving credit facility. These short-term
lines of credit 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.
In January 2023 and October 2022, Aqua Pennsylvania issued $75,000 and $125,000 of first mortgage bonds, due in 2043
and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay
existing indebtedness and for general corporate purposes.
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents,
under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an
aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form
S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for
working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. As
of December 31, 2022, the Company has issued 1,321,994 shares for net proceeds of $63,040 under the ATM. In January
2023, the Company has issued 399,128 shares for net proceeds of $19,294 under the ATM.
On June 30, 2022, the Peoples Natural Gas Companies amended its 364-day revolving credit agreement primarily to
increase the amount of the facility from $100,000 to $300,000 and to update the termination date of the facility to June 29,
2023. Aqua Pennsylvania also amended its $100,000 364-day revolving credit agreement primarily to update the
termination date to June 29, 2023 to coincide with the term of the Peoples Natural Gas Companies’ facility.
On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815, due in
2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay
$49,700 of borrowings under Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the
Company’s existing five year unsecured revolving credit facility, and (2) for general corporate purposes.
On April 15, 2021, our operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of which $50,000
is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The proceeds from these
bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April 19, 2021, the
Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest rate of
2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua Pennsylvania
revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured
revolving credit agreement.
In August 2020, we entered into a forward equity sale agreement for 6,700,000 shares of common stock with a third party
(the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser borrowed an
equal number of shares of our common stock from stock lenders and sold the borrowed shares to the public. We did not
receive any proceeds from the sale of our common stock by the forward purchaser until settlement of the forward equity
sale agreement. On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share
18
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)
settlement. The Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74
per share. Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per
share, adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends
during the term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale
agreement to fund general corporate purposes, including for water and wastewater acquisitions, working capital and
capital expenditures. The forward equity sale agreement has now been completely settled, and there are no additional
shares subject to the forward equity sale agreement.
Our 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 and common equity will be adequate to provide sufficient
working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
Our loan and debt agreements require us to comply with certain financial covenants, which among other things, subject to
specific exceptions, limit the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and
require a minimum level of earnings coverage over interest expense. During 2022, we were in compliance with our debt
covenants under our credit facilities. Failure to comply with our debt covenants could result in an event of default, which
could result in us being required to repay or refinance our borrowings before their due date, possibly limiting our future
borrowings, and increasing our borrowing costs.
In April 2021, the Company filed a universal shelf registration statement through a filing with the 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. In April 2019, March 2020 and August 2020, we issued common stock, including common stock in connection
with a forward equity sale agreement, long-term debt and tangible equity units in several offerings under this shelf
registration statement. Refer to Note 11 – Long-term Debt and Loans Payable and Note 13 – Stockholders’ Equity in this
Annual Report for further information regarding these financings.
In addition, we have an acquisition shelf registration statement, which was filed with the SEC on February 27, 2015, to
permit the offering from time to time of an aggregate of $500,000 of our common stock and shares of preferred stock in
connection with acquisitions. The balance remaining available for use under the acquisition shelf registration as of
December 31, 2022 is $487,155.
We will determine the form and terms of any further securities issued under the universal shelf registration statement and
the acquisition shelf registration statement at the time of issuance.
We offer a Dividend Reinvestment and Direct Stock Purchase Plan (the Plan) that provides a convenient and economical
way to purchase shares of the Company. Under the direct stock purchase portion of the Plan, shares are issued throughout
the year. The dividend reinvestment portion of the Plan offers a five percent discount on the purchase of shares of
common stock with reinvested dividends. As of the December 2022 dividend payment, holders of 5.1% of the common
shares outstanding participated in the dividend reinvestment portion of the Plan. The shares issued under the Plan are
either original issue shares or shares purchased by the Company’s transfer agent in the open-market. During the past three
years, we have sold 1,132,080 original issue shares of common stock for net proceeds of $49,940 through the dividend
reinvestment portion of the Plan, and we used the proceeds to invest in our operating subsidiaries, to repay short-term
debt, and for general corporate purposes. In 2022, 2021 and 2020, we sold 368,278, 374,824 and 388,978 original issues
shares of common stock for net proceeds of $16,619, $16,799 and $16,522, respectively, through the dividend
reinvestment portion of the plan.
19
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)
Off-Balance Sheet Financing Arrangements
We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities referred to as
variable interest entities, which includes special purpose entities and other structured finance entities.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2022:
Long-term debt
Interest on fixed-rate, long-term debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Gas purchase obligations (4)
Other purchase obligations (5)
Pension plan obligations (6)
Other obligations (7)
Total
$
$
Payments Due By Period
Less than 1
year
Total
6,617,395 $ 199,356
8,149
8,923
4,716
234,950
84,632
20,343
3,719
250,143
60,348
18,216
2,813,168
84,632
20,343
11,825
9,876,070 $ 564,788 $
More than 5
1 – 3 years 3 – 5 years
years
751,512
5,445,182
39,570
192,471
13,429
20,763
3,238
1,120
485,507
1,606,927
-
-
-
-
2,076
3,293
746,194 $1,296,549 $ 7,268,539
221,345
9,953
17,233
9,142
485,784
-
-
2,737
(1) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(2) Represents minimum lease payments for long-term operating leases of land, office facilities, office equipment, and
vehicles.
(3) Represents our commitment to purchase minimum quantities of water as stipulated in agreements with other water
purveyors. We use purchased water to supplement our water supply, particularly during periods of peak customer
demand. Our actual purchases may exceed the minimum required levels.
(4) Represents our commitment to purchase minimum quantities of natural gas stipulated in agreements with various
producers of natural gas to meet regulated customers’ natural gas requirements.
(5) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of
business.
(6) Represents contributions to be made to the Company’s retirement plans.
(7) Represents expenditures estimated to be required under legal and binding contractual obligations.
20
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 addition to the contractual obligations table above, we have the following obligations:
Refunds of customer’s advances for construction – We pay refunds on customers’ advances for construction over
a specific period of time based on operating revenues related to developer-installed utility mains or as new
customers are connected to and take service from such mains. After all refunds are paid, any remaining balance is
transferred to contributions in aid of construction. The refund amounts are not included in the above table
because the refund amounts and timing are dependent upon several variables, including new customer
connections, customer consumption levels and future rate increases, which cannot be accurately estimated.
Portions of these refund amounts are payable annually through 2031 and amounts not paid by the contract
expiration dates become non-refundable.
Asset Retirement Obligations – We recognize asset retirement obligations associated with retirements of
production, storage wells and other pipeline components at fair value, as incurred, or when sufficient information
becomes available to determine a reasonable estimate of the fair value of the retirement activities to be performed.
Expected obligations are not included in the above table because the amounts and timing are dependent upon
several variables, which cannot be accurately estimated.
Uncertain tax positions – We have uncertain tax positions of $18,217. Although we believe our tax positions
comply with applicable law, we have made judgments as to the sustainability of each uncertain tax position based
on its technical merits. Due to the uncertainty of future cash outflows, if any, associated with our uncertain tax
positions, we are unable to make a reasonable estimate of the timing or amounts that may be paid. See Note 7 –
Income Taxes in this Annual Report for further information on our uncertain tax positions.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to
us.
The Company is routinely involved in legal matters, including both asserted and unasserted legal claims, during the
ordinary course of business. See Note 9 – Commitments and Contingencies in this Annual Report for a discussion of the
Company’s legal matters. It is not always possible for management to make a meaningful estimate of the potential loss or
range of loss associated with such litigation. Also, unanticipated changes in circumstances and/or revisions to the
assessed probability of the outcomes of legal matters could result in expenses being incurred in future periods as well as
an increase in actual cash required to resolve the legal matter.
Capitalization
The following table summarizes our capitalization as of December 31, 2022 and 2021:
December 31,
Long-term debt (1)
Essential Utilities stockholders' equity
2022
2021
55.2%
44.8%
100.0%
53.4%
46.6%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of
$490,000 at December 31, 2022, and $300,000 at December 31, 2021.
Over the past two years, the changes in the capitalization ratios primarily resulted from the issuance of debt to finance our
acquisitions and capital program, changes in net income, the issuance of common stock, and the declaration of dividends.
21
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)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial condition and results of operations are impacted by the methods, assumptions, and estimates used in the
application of critical accounting policies. The following accounting policies are particularly important to our financial
condition or results of operations and require estimates or other judgments of matters of uncertainty. Changes in the
estimates or other judgments included within these accounting policies could result in a significant change to the financial
statements. We believe our most critical accounting policies include the use of regulatory assets and liabilities, revenue
recognition, the valuation of our long-lived assets (which consist primarily of utility plant in service, regulatory assets,
and goodwill), our accounting for post-retirement benefits, and our accounting for income taxes. We have discussed the
selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of
Directors.
Regulatory Assets and Liabilities ─ We defer costs and credits on the balance sheet as regulatory assets and liabilities
when it is probable that these costs and credits will be recognized in the rate-making process in a period different from
when the costs and credits were incurred. These deferred amounts, both assets and liabilities, are then recognized in the
consolidated statement of operations in the same period that they are reflected in our rates charged for utility service. We
make significant judgments and estimates to record regulatory assets and liabilities, such as for amounts related to income
taxes, pension and postretirement benefits, acquisitions and capital projects. For each regulatory jurisdiction with
regulated operations, we evaluate at the end of each reporting period, whether the regulatory assets and liabilities continue
to meet the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory orders or
guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to us in the past or to
other regulated utilities. In addition, the evaluation may be impacted by changes in the regulatory environment and
pending or new legislation that could impact the ability to recover costs through regulated rates. There may be multiple
participants to rate or transactional regulatory proceedings who might offer different views on various aspects of such
proceedings, and in these instances may challenge our prudence of business policies and practices, seek cost
disallowances or request other relief.
In the event that our assessment as to the probability of the inclusion in the rate-making process is incorrect, the associated
regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
Revenue Recognition ─ Our utility revenues recognized in an accounting period include amounts billed to customers on a
cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period. The
estimated usage is based on our judgment and assumptions; our actual results could differ from these estimates, which
would result in operating revenues being adjusted in the period that the revision to our estimates is determined.
In Virginia, North Carolina, and Kentucky, we may bill our utility customers, in certain circumstances, in accordance with
a rate filing that is pending before the respective regulatory commission, which would allow interim rates before the final
commission rate order is issued. The revenue recognized reflects an estimate based on our judgment of the final outcome
of the commission’s ruling. We monitor the applicable facts and circumstances regularly and revise the estimate as
required. The revenue billed and collected prior to the final ruling is subject to refund based on the commission’s final
ruling.
Valuation of Long-Lived Assets, Goodwill and Intangible Assets ─ We review our long-lived assets for impairment,
including utility plant in service and investment in joint venture. We also review regulatory assets for the continued
application of the FASB accounting guidance for regulated operations. Our review determines whether there have been
changes in circumstances or events, such as regulatory disallowances, or abandonments, that have occurred that require
adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in
instances where their inclusion in the rate-making process is unlikely. For utility plant in service, we would recognize an
impairment loss for any amount disallowed by the respective utility commission.
22
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 long-lived assets, which consist primarily of utility plant in service, operating lease right-of-use assets and intangible
assets, are reviewed for impairment when changes in circumstances or events occur. These circumstances or events could
include a decline in the market value or physical condition of a long-lived asset, an adverse change in the manner in which
long-lived assets are used or planned to be used, a change in historical trends, operating cash flows associated with the
long-lived assets, changes in macroeconomic conditions, industry and market conditions, or overall financial performance.
When these circumstances or events occur, we determine whether it is more likely than not that the fair value of those
assets is less than their carrying amount. If we determine that it is more likely than not (that is, the likelihood of more
than 50 percent), we would recognize an impairment charge if it is determined that the carrying amount of an asset
exceeds the sum of the undiscounted estimated cash flows. In this circumstance, we would recognize an impairment
charge equal to the difference between the carrying amount and the fair value of the asset. Fair value is estimated to be
the present value of future net cash flows associated with the asset, discounted using a discount rate commensurate with
the risk and remaining life of the asset. This assessment requires significant management judgment and estimates that are
based on budgets, general strategic business plans, historical trends and other data and relevant factors. These estimates
include significant inherent uncertainties, since they involve forecasting future events. If changes in circumstances or
events occur, or estimates and assumptions that were used in this review are changed, we may be required to record an
impairment charge on our long-lived assets. Refer to Note 1 – Summary of Significant Accounting Policies – Impairment
of Long-Lived Assets in this Annual Report for additional information regarding the review of long-lived assets for
impairment.
We test the goodwill attributable for each of our reporting units for impairment at least annually, or more often, if
circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess
qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more
likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our
assessment of the qualitative factors previously noted, or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit by weighting the results from the income approach and
the market approach. These valuation approaches consider a number of factors that include, but are not limited to,
prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly
traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic
factors and future profitability of our business. If we perform a quantitative test and determine that the fair value of a
reporting unit is less than its carrying amount, we would record an impairment loss for the amount by which a reporting
unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The assessment requires
significant management judgment and estimates that are based on budgets, general strategic business plans, historical
trends and other data and relevant factors. If changes in circumstances or events occur, or estimates and assumptions that
were used in our impairment test change, we may be required to record an impairment charge for goodwill. Refer to Note
1 – Summary of Significant Accounting Policies – Goodwill in this Annual Report for further information.
In 2022, we changed our annual goodwill impairment test date from July 31 to October 1, which is a change in accounting
principle that management believes is preferable as the new test date better aligns with our long-term planning and
forecasting process. The change did not delay, accelerate or avoid an impairment charge nor did it change our
requirement to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present.
To ensure that no lapse in an assessment occurred since the prior period, we performed an impairment test as of July 31,
2022, during the third quarter of 2022 for all reporting units and noted no impairment.
During the fourth quarter of 2022, as part of the October 1, 2022 annual goodwill assessment, we elected to perform a
quantitative goodwill impairment assessment on the goodwill attributable to our Regulated Natural Gas reporting unit and
a qualitative assessment for our Regulated Water and Other reporting units. Based on our analysis, we determined that
none of the goodwill of our reporting units was impaired. The headroom, which we defined as the percentage difference
between the excess of fair value over carrying value, of our Regulated Natural Gas reporting unit was 15% as of the date
of the most recent estimated fair value determination. We generally assumed operating margins in future years would
23
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
increase as we continue to integrate and implement our rate base growth strategy. However, if overall market conditions
further deteriorate, or market interest rates increase, future non-cash impairment charges may result which could be
material. If we were to assume changes in certain of our key assumptions used to determine the fair value of our
Regulated Gas reporting unit, the following would be the effect on headroom:
Sensitivity Analysis(1)
Increase in discount rate by 100 basis points
Decrease in Market Multiples by 1x
Reduction in terminal value EBITDA(2) by 10%
Percentage points (ppts) decrease in Regulated Gas
Reporting Unit Headroom
6 ppts
7 ppts
8 ppts
(1) Each assumption used in the sensitivity analysis is independent of the other assumptions
(2) Defined as earnings before interest, taxes, depreciation and amortization
Accounting for Post-Retirement Benefits ─ We maintain a qualified and a non-qualified defined benefit pension plan and
plans that provide for post-retirement benefits other than pensions. Accounting for pension and other post-retirement
benefits requires an extensive use of assumptions including the discount rate, expected return on plan assets, the rate of
future compensation increases received by our employees, mortality, turnover and medical costs. Each assumption is
reviewed annually with assistance from our actuarial consultant, who provides guidance in establishing the assumptions.
The assumptions are selected to represent the average expected experience over time and may differ in any one year from
actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of
pension and other post-retirement benefits expense that we recognize.
Our discount rate assumption, which is used to calculate the present value of the projected benefit payments of our post-
retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to
match the projected benefit payments of the plans. The selected bond portfolio was derived from a universe of Aa-graded
corporate bonds. The discount rate was then developed as the rate that equates the market value of the bonds purchased to
the discounted value of the projected benefit payments of the plans. A decrease in the discount rate would generally
increase our post-retirement benefits expense and benefit obligation. After reviewing the hypothetical portfolio of bonds,
we selected a discount rate of 5.51% for our pension plan, and 5.45% for our other post-retirement benefit plans as of
December 31, 2022, which represent a 260 and 249 basis-point increase as compared to the discount rates selected at
December 31, 2021, respectively. Our post-retirement benefits expense under these plans is determined using the
discount rate as of the beginning of the year, which was 2.91% for our pension plan and 2.96% for our other-
postretirement benefit plan for 2022. As of September 30, 2022, settlement accounting was triggered by the amount of
lump-sum payments by our qualified pension plan to retirees and other separated employees exceeding the threshold of
service and interest cost for the period. As a result, we remeasured our qualified pension plan assets and liabilities using a
discount rate of 5.58%, and the remeasurement did not have a material impact to our consolidated financial statements.
Our expected return on plan assets is determined by evaluating the asset class return expectations with our advisors as
well as actual, long-term, historical results of our asset returns. The Company’s market-related value of plan assets is
equal to the fair value of the plans’ assets as of the last day of its fiscal year and is a determinant for the expected return
on plan assets, which is a component of post-retirement benefits expense. The allocation of our plans’ assets impacts our
expected return on plan assets. The expected return on plan assets is based on a targeted allocation of 50% to 70% return
seeking assets and 30% to 50% liability hedging assets. Our post-retirement benefits expense increases as the expected
return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our
targeted allocations. Our targeted allocations are driven by our investment strategy to earn a reasonable rate of return
while maintaining risk at acceptable levels through the diversification of investments across and within various asset
categories. For 2022, we used a 5.4% expected return on plan assets assumption, and are currently reviewing this
assumption for 2023 and expect it may remain unchanged in 2023.
24
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)
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by
accounting pronouncements. In accordance with funding rules and our funding policy, during 2023 our pension
contribution is expected to be $20,343. Future years’ contributions will be subject to economic conditions, plan
participant data and the funding rules in effect at such time as the funding calculations are performed, though we expect
future changes in the amount of contributions and expense recognized to be generally included in customer rates.
Accounting for Income Taxes ─ We estimate the amount of income tax payable or refundable for the current year and the
deferred income tax liabilities and assets that results from estimating temporary differences resulting from the treatment of
specific items, such as depreciation, for tax and financial statement reporting. Generally, these differences result in the
recognition of a deferred tax asset or liability on our consolidated balance sheet and require us to make judgments
regarding the probability of the ultimate tax impact of the various transactions we enter into. Based on these judgments,
we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected
realization of future tax benefits. Actual income taxes could vary from these estimates and changes in these estimates can
increase income tax expense in the period that these changes in estimates occur.
Our determination of what qualifies as a capital cost versus a tax deduction, for qualifying utility asset improvements, as it
relates to our income tax accounting method, is subject to subsequent adjustment as well as IRS audits, changes in income
tax laws, including regulations regarding tax-basis depreciation as it applies to our capital expenditures, or qualifying
utility asset improvements, the expiration of a statute of limitations, or other unforeseen matters could impact the tax
benefits that have already been recognized. We establish reserves for uncertain tax positions based upon management’s
judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position
reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits.
We believe our tax positions comply with applicable law and that we have adequately recorded reserves as required.
However, to the extent the final tax outcome of these matters is different than our estimates recorded, we would then need
to adjust our tax reserves which could result in additional income tax expense or benefits in the period that this
information is known.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We describe the impact of recent accounting pronouncements in Note 1 – Summary of Significant Accounting Policies in
this Annual Report.
25
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Report On Internal Control Over Financial Reporting
Management of Essential Utilities, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. The Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework (2013). As a result of management’s assessment and based on the criteria in the framework, management has
concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
herein.
a
Christopher H. Franklin
Chairman, President and Chief Executive Officer
Daniel J. Schuller
Executive Vice President and Chief Financial Officer
March 1, 2023
26
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Essential Utilities, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets, including the consolidated statements of capitalization,
of Essential Utilities, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related
consolidated statements of operations and comprehensive income, of equity, and of cash flows for each of the three years
in the period ended December 31, 2022, including the related notes and schedule of condensed parent company financial
statements as of December 31, 2022 and 2021 and for each of the three years in the period ended December 31, 2022
appearing after the signature pages (collectively referred to as the “consolidated financial statements”). We also have
audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
27
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to
accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Rate Regulation
As described in Notes 1 and 6 to the consolidated financial statements, most of the operating companies of the Company
that are regulated public utilities are subject to regulation by the utility commissions of the states in which they operate.
Some of the operating companies that are regulated public utilities are subject to rate regulation by county or city
government. As of December 31, 2022, regulatory assets were $1.4 billion and regulatory liabilities were $0.8 billion.
Regulated public utilities follow the Financial Accounting Standards Board’s accounting guidance for regulated
operations, which provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or
credits that are reflected in current rates or are considered probable of being included in future rates. The regulatory assets
represent costs that are probable to be fully recovered from customers in future rates while regulatory liabilities represent
amounts that are expected to be refunded to customers in future rates or amounts recovered from customers in advance of
incurring the costs. The regulatory assets or liabilities are then relieved as the cost or credit is reflected in the Company’s
rates charged for utility service. If, as a result of a change in circumstances, it is determined that a regulated operating
company no longer meets the criteria to apply regulatory accounting, the operating company would have to discontinue
regulatory accounting and write-off the respective regulatory assets and liabilities. Management makes significant
judgments and estimates to record regulatory assets and liabilities. For each regulatory jurisdiction with regulated
operations, management evaluates at the end of each reporting period whether the regulatory assets and liabilities continue
to meet the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory orders or
guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to the Company in the
past or to other regulated utilities. In addition, the evaluation may be impacted by changes in the regulatory environment
and pending or new legislation that could impact the ability to recover costs through regulated rates. There may be
multiple participants to rate or transactional regulatory proceedings who might offer different views on various aspects of
such proceedings and, in these instances, may challenge the prudence of business policies and practices, seek cost
disallowances or request other relief.
28
The principal considerations for our determination that performing procedures relating to management’s accounting for
rate regulation is a critical audit matter are the significant judgment by management when assessing the impact of
regulation on the accounting for regulatory assets and liabilities, which in turn led to a high degree of auditor judgment
and effort in performing procedures and in evaluating audit evidence related to whether the regulatory assets will be
recovered and liabilities will be refunded.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls
relating to management’s evaluation of regulatory matters impacting regulatory assets and liabilities, including controls
over the recovery of regulatory assets and the refund of regulatory liabilities. These procedures also included, among
others (i) obtaining the Company’s correspondence with regulators and assessing the reasonableness of management’s
judgments regarding the recovery of regulatory assets and refund of regulatory liabilities, (ii) assessing the reasonableness
of management’s accounting judgments related to new and updated regulatory orders and guidelines, and (iii) testing the
calculation of regulatory assets and liabilities based on provisions outlined in regulatory correspondence.
Philadelphia, Pennsylvania
March 1, 2023
We have served as the Company’s auditor since 2000.
29
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
Assets
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Current assets:
Cash and cash equivalents
Accounts receivable, net
Unbilled revenues
Inventory – materials and supplies
Inventory – gas stored
Current assets held for sale
Prepayments and other current assets
Regulatory assets
Total current assets
Regulatory assets
Deferred charges and other assets, net
Funds restricted for construction activity
Goodwill
Non-current assets held for sale
Operating lease right-of-use assets
Intangible assets
Total assets
See accompanying notes to consolidated financial statements.
December 31,
2022
2021
$
13,737,387
2,606,441
11,130,946
12,610,376
2,358,510
10,251,866
11,398
206,324
170,504
46,592
153,143
11,167
39,759
19,272
658,159
1,342,753
166,653
1,342
2,340,792
32,124
41,734
4,604
15,719,107
$
10,567
141,025
119,896
33,756
75,804
-
36,597
20,150
437,795
1,429,840
141,955
1,313
2,340,815
-
48,930
5,764
14,658,278
$
$
30
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
December 31,
2022
2021
Essential Utilities stockholders’ equity:
Liabilities and Equity
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 266,973,321 and 256,102,388 as of December
31, 2022 and December 31, 2021
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 3,236,237 and 3,234,765 shares as of December 31, 2022 and December 31, 2021
$
Total stockholders’ equity
133,486 $
128,050
3,793,262 3,705,814
1,534,331 1,434,201
(83,615)
5,377,386 5,184,450
(83,693)
6,418,039 5,815,211
35,707
6,371,057 5,779,504
46,982
199,356
228,500
238,843
28,694
47,063
34,393
3,263
35,276
75,808
130,673
1,021,869
132,146
65,000
192,932
81,722
40,815
37,924
-
384
-
124,140
675,063
1,345,766 1,406,537
103,619
769,617
1,256
48,230
-
50,226
43,666
2,338,541 2,423,151
114,732
778,754
843
37,666
974
31,244
28,562
610,254
596,110
$ 15,719,107 $ 14,658,278
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion, net of debt issuance costs
Commitments and contingencies (See Note 9)
Current liabilities:
Current portion of long-term debt
Loans payable
Accounts payable
Book overdraft
Accrued interest
Accrued taxes
Liabilities related to assets held for sale
Regulatory liabilities
Dividends payable
Other accrued liabilities
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers’ advances for construction
Regulatory liabilities
Asset retirement obligations
Operating lease liabilities
Non-current liabilities related to assets held for sale
Pension and other postretirement benefit liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total liabilities and equity
See accompanying notes to consolidated financial statements.
31
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Operating revenues
Operating expenses:
Operations and maintenance
Purchased gas
Depreciation
Amortization
Taxes other than income taxes
Total operating expenses
Operating income
Other expense (income):
Interest expense
Interest income
Allowance for funds used during construction
Gain on sale of other assets
Equity loss in joint venture
Other
Income before income taxes
Income tax benefit
Net income
Comprehensive income
Net income per common share:
Basic
Diluted
Average common shares outstanding during the period:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years ended December 31,
$
2022
2,288,032 $
2021
1,878,144 $
2020
1,462,698
613,649
601,995
315,811
5,366
90,024
1,626,845
550,580
340,262
292,191
5,761
86,641
1,275,435
528,611
165,745
251,443
5,616
76,597
1,028,012
661,187
602,709
434,686
238,116
(3,675)
(23,665)
(991)
-
494
450,908
(14,329)
465,237 $
207,709
(2,384)
(20,792)
(976)
-
(2,848)
422,000
(9,612)
431,612 $
188,435
(5,363)
(12,687)
(661)
3,374
(3,383)
264,971
(19,878)
284,849
465,237 $
431,612 $
284,849
1.77 $
1.77 $
1.68 $
1.67 $
1.14
1.12
262,246
262,868
257,487
258,180
249,768
254,629
$
$
$
$
32
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
Essential Utilities stockholders’ equity:
Common stock, $0.50 par value
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Total stockholders’ equity
Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
Maturity Date Range
2023 to 2033
2023 to 2039
2022 to 2058
2022 to 2056
2023 to 2059
2023 to 2052
2022 to 2036
2022 to 2027
2025
2026
December 31,
2022
2021
$
133,486 $
3,793,262
1,534,331
(83,693)
5,377,386
1,875
8,369
209,755
1,351,432
1,403,313
14,357
31,000
28,378
2,116
11,800
3,062,395
128,050
3,705,814
1,434,201
(83,615)
5,184,450
2,341
9,341
312,751
1,359,284
1,286,024
16,119
32,475
28,980
2,772
11,800
3,061,887
Notes payable to bank under revolving credit agreement, variable rate, due 2027
Unsecured notes payable:
490,000
300,000
Amortizing notes at 3.00% due 2022
Notes at 2.40% due 2031
Notes at 2.704% due 2030
Notes ranging from 3.01% to 3.57%, due 2029 through 2050
Notes at 4.28%, due 2049
Notes at 5.30%, due 2052
Notes at 5.95%, due 2023 through 2034
Total long-term debt
Current portion of long-term debt
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion, net of debt issuance costs
-
400,000
500,000
1,125,000
500,000
500,000
40,000
6,617,395
199,356
6,418,039
46,982
6,371,057
20,470
400,000
500,000
1,125,000
500,000
-
40,000
5,947,357
84,353
5,863,004
35,707
5,827,297
Total capitalization
$
11,748,443 $
11,011,747
See accompanying notes to consolidated financial statements.
33
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
Balance at December 31, 2019
Net income
Dividends declared and paid ($0.97 per share)
Issuance of common stock from private placement (21,661,095
shares)
Issuance of common stock from stock purchase contracts
(2,335,654 shares)
Issuance of common stock under dividend reinvestment plan
(388,978 shares)
Repurchase of stock (82,320 shares)
Equity compensation plan (239,512 shares)
Exercise of stock options (74,832 shares)
Stock-based compensation
Other
Balance at December 31, 2020
$
124,285 $
Net income
Dividends declared and paid ($1.0378 per share)
Issuance of common stock from stock purchase contracts
(127,749 shares)
Issuance of common stock under dividend reinvestment plan
(374,824 shares)
Issuance of common stock from forward equity sale agreement
(6,700,000 shares)
Repurchase of stock (76,732 shares)
Equity compensation plan (206,163 shares)
Exercise of stock options (122,297 shares)
Stock-based compensation
Other
-
-
64
187
3,350
-
103
61
-
-
Balance at December 31, 2021
$
128,050 $
Net income
Dividends declared and paid ($1.1104 per share)
Dividends of March 1, 2023 declared ($0.287 per share)
Issuance of common stock from stock purchase contracts
(9,029,461 shares)
Issuance of common stock under dividend reinvestment plan
(368,278 shares)
Issuance of common stock from at-the-market sale agreements
(1,321,994 shares)
Repurchase of stock (25,037 shares)
Equity compensation plan (81,516 shares)
Exercise of stock options (69,684 shares)
Stock-based compensation
Other
Balance at December 31, 2022
$
See accompanying notes to consolidated financial statements.
Common
stock
111,935 $
$
Capital in
excess of par
value
2,636,555 $
-
-
-
-
Retained
earnings
1,210,072 $
284,849
(232,571)
Treasury
stock
(77,702)
-
-
10,831
718,470
1,168
(1,168)
16,328
-
(120)
1,552
8,276
(836)
3,379,057 $
-
-
(64)
16,612
296,389
-
(103)
4,111
9,998
(186)
3,705,814 $
194
-
120
37
-
-
-
-
-
-
-
-
-
-
-
(488)
-
1,261,862 $
431,612
(258,650)
-
-
-
-
-
-
(623)
-
1,434,201 $
465,237
(288,632)
(75,808)
-
-
-
(4,365)
-
-
-
740
(81,327)
-
-
-
-
-
(3,291)
-
-
-
1,003
(83,615)
-
-
-
-
-
4,515
(4,515)
184
16,435
-
-
661
-
41
35
-
-
-
(1,192)
-
-
-
1,114
133,486 $ 3,793,262 $ 1,534,331 $ (83,693)
62,379
-
(41)
2,440
12,094
(1,344)
-
-
-
-
(667)
34
$
$
$
Total
3,880,860
284,849
(232,571)
729,301
-
16,522
(4,365)
-
1,589
7,788
(96)
4,683,877
431,612
(258,650)
-
16,799
299,739
(3,291)
-
4,172
9,375
817
5,184,450
465,237
(288,632)
(75,808)
-
16,619
63,040
(1,192)
-
2,475
11,427
(230)
$ 5,377,386
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share amounts)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Stock-based compensation
Gain on sale of utility system and other assets
Net change in receivables, deferred purchased gas costs, inventory and prepayments
Net change in payables, accrued interest, accrued taxes and other accrued liabilities
Pension and other postretirement benefits contributions
Other
Net cash flows from operating activities
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for
funds used during construction of $6,047, $4,510 and $4,434
Acquisitions of utility systems and other, net
Net proceeds from the sale of utility systems and other assets
Other
Net cash flows used in investing activities
Cash flows from financing activities:
Customers' advances and contributions in aid of construction
Repayments of customers' advances
Net proceeds (repayments) of short-term debt
Proceeds from long-term debt
Repayments of long-term debt
Change in cash overdraft position
Proceeds from issuance of common stock under dividend reinvestment plan
Proceeds from issuance of common stock from private placement
Proceeds from issuance of common stock from forward equity sale agreement
Proceeds from issuance of common stock from at-the-market sale agreement
Proceeds from exercised stock options
Repurchase of common stock
Dividends paid on common stock
Other
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes
Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid
Non-cash utility property contributions
See accompanying notes to consolidated financial statements.
Years ended December 31,
2022
2021
2020
$
465,237 $
431,612 $
284,849
321,177
(23,045)
27,631
12,206
(991)
(223,335)
53,761
(22,027)
(10,308)
600,306
297,952
(8,514)
27,336
10,078
(1,589)
(109,605)
5,190
(15,135)
7,354
644,679
(1,062,763)
(116,891)
1,081
271
(1,178,302)
(1,020,519)
(36,326)
1,819
(1,032)
(1,056,058)
11,714
(5,006)
163,500
1,646,742
(977,175)
(53,028)
16,619
-
-
63,040
2,475
(1,192)
(288,632)
(230)
578,827
831
10,567
11,398 $
15,264
(7,725)
(13,350)
1,095,171
(769,546)
37,719
16,799
-
299,739
-
4,172
(3,291)
(258,650)
817
417,119
5,740
4,827
10,567 $
257,059
(17,782)
32,325
8,160
(642)
(35,348)
(1,819)
(20,282)
1,504
508,024
(835,642)
(3,501,835)
2,115
1,696
(4,333,666)
9,585
(8,337)
(129,407)
3,366,838
(1,820,571)
33,059
16,522
729,301
-
-
1,589
(4,365)
(232,571)
(96)
1,961,547
(1,864,095)
1,868,922
4,827
225,820 $
11,269
102,129 $
35,698
201,792 $
5,692
169,048
4,853
95,945 $
36,882
98,569
36,181
$
$
$
Refer to Note 2 – Acquisitions, Note 11 – Long-term Debt and Loans Payable, and Note 15 – Employee Stock and Incentive Plan for a description of
non-cash activities.
35
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)
Note 1 – Summary of Significant Accounting Policies
Nature of Operations ─ Essential Utilities, Inc. (“Essential Utilities,” the “Company,” “we,” “our”, or “us”) is the holding
company for regulated utilities providing water, wastewater, or natural gas services concentrated in Pennsylvania, Ohio,
Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under the Aqua and Peoples
brands. One of our largest operating subsidiaries is Aqua Pennsylvania, Inc., which accounted for approximately 56% of
our Regulated Water segment’s operating revenues and approximately 73% of our Regulated Water segment’s income for
2022. As of December 31, 2022, Aqua Pennsylvania provided water or wastewater services to approximately one-half of
the total number of Regulated Water customers we serve. Aqua Pennsylvania’s service territory is located in the suburban
areas north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. The Company’s other regulated
water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, commencing on
March 16, 2020 with the completion of the Peoples Gas Acquisition, the Company began to provide natural gas
distribution services to customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total
number of natural gas utility customers we serve are in western Pennsylvania. In December 2022, the Company entered
into a definitive agreement to sell its regulated natural gas utility assets in West Virginia, which serve approximately
13,000 customers. This sale is conditioned on regulatory approval and is expected to close in mid-2023. The completion
of this transaction will conclude our regulated utility operations in West Virginia. Lastly, the Company’s market-based
activities are conducted through Aqua Infrastructure LLC, and Aqua Resources, Inc., and certain other non-regulated
subsidiaries of Peoples. Prior to our October 2020 sale of our investment in a joint venture, Aqua Infrastructure provided
non-utility raw water supply services for firms in the natural gas drilling industry. Aqua Resources offers, through a third-
party, water and sewer line protection solutions and repair services to households. Other non-regulated subsidiaries of
Peoples provide utility service line protection services to households and operate gas marketing and production
businesses.
Regulation ─ Most of the operating companies that are regulated public utilities are subject to regulation by the utility
commissions of the states in which they operate. The respective utility commissions have jurisdiction with respect to
rates, service, accounting procedures, issuance of securities, acquisitions and other matters. Some of the operating
companies that are regulated public utilities are subject to rate regulation by county or city government. Regulated public
utilities follow the Financial Accounting Standards Board’s (“FASB”) accounting guidance for regulated operations,
which provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are
reflected in current rates or are considered probable of being included in future rates. Costs, for which the Company has
received or expects to receive prospective rate recovery, are deferred as a regulatory asset and amortized over the period
of rate recovery in accordance with the FASB’s accounting guidance for regulated operations. The regulatory assets or
liabilities are then relieved as the cost or credit is reflected in Company’s rates charged for utility service. If, as a result of
a change in circumstances, it is determined that a regulated operating company no longer meets the criteria to apply
regulatory accounting, the operating company would have to discontinue regulatory accounting and write-off the
respective regulatory assets and liabilities. See Note 6 - Regulatory Assets and Liabilities for further information
regarding the Company’s regulatory assets.
The Company makes significant judgments and estimates to record regulatory assets and liabilities. For each regulatory
jurisdiction with regulated operations, the Company evaluates at the end of each reporting period, whether the regulatory
assets and liabilities continue to meet the probable criteria for future recovery or refund. The evaluation considers factors
such as regulatory orders or guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as
provided to the Company in the past or to other regulated utilities. In addition, the evaluation may be impacted by
changes in the regulatory environment and pending or new legislation that could impact the ability to recover costs
through regulated rates. There may be multiple participants to rate or transactional regulatory proceedings who might
offer different views on various aspects of such proceedings, and in these instances, may challenge the prudence of our
business policies and practices, seek cost disallowances or request other relief.
36
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Use of Estimates in Preparation of Consolidated Financial Statements ─ The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its subsidiaries.
All intercompany accounts and transactions have been eliminated.
Property, Plant and Equipment and Depreciation ─ Property, plant and equipment consist primarily of utility plant. The
cost of additions includes contracted cost, direct labor and fringe benefits, materials, overheads, and for additions meeting
certain criteria, allowance for funds used during construction. Utility systems acquired are typically recorded at estimated
original cost of utility plant when first devoted to utility service and the applicable depreciation is recorded to
accumulated depreciation. Further, utility systems acquired under fair value regulations would be recorded based on the
valuation of the utility plant as approved by the respective utility commission. The difference between the estimated
original cost, less applicable accumulated depreciation, and the purchase price may be recorded as an acquisition
adjustment within utility plant as permitted by the applicable regulatory jurisdiction. At December 31, 2022 and 2021,
utility plant includes a net credit acquisition adjustment of $6,076 and $9,055, respectively, which is generally being
amortized from 10 to 53 years. Amortization of the acquisition adjustments totaled $2,788 in 2022, $2,842 in 2021, and
$2,895 in 2020.
Utility expenditures for maintenance and repairs, including major maintenance projects and minor renewals, are charged
to operating expenses when incurred in accordance with the system of accounts prescribed by the utility commissions of
the states in which the company operates. The cost of new units of property and betterments are capitalized. Utility
expenditures for water main cleaning and relining of pipes are deferred and are presented in net property, plant and
equipment in accordance with the FASB’s accounting guidance for regulated operations. As of December 31, 2022,
$1,635 of these costs have been incurred since the last respective rate proceeding and the Company expects to recover
these costs in future rates.
The cost of software upgrades and enhancements are capitalized if they result in added functionality, which enables the
software to perform tasks it was previously incapable of performing. Information technology costs associated with major
system installations, conversions and improvements, such as software training, data conversion and business process
reengineering costs, are deferred as a regulatory asset if the Company expects to recover these costs in future rates. If
these costs are not deferred, then these costs are charged to operating expenses when incurred. As of December 31, 2022,
$41,400 of these costs have been deferred since the last respective rate proceeding as a regulatory asset, and the deferral is
reported as a component of net property, plant and equipment.
When units of utility property are replaced, retired or abandoned, the recorded value thereof is credited to the asset
account and such value, together with the net cost of removal, is charged to accumulated depreciation. To the extent the
Company anticipates recovery of the cost of removal or other retirement costs through rates after the retirement costs are
incurred, a regulatory asset is recorded as those costs are incurred. In some cases, the Company recovers retirement costs
through rates during the life of the associated asset and before the costs are incurred. These amounts, which are not yet
utilized, result in a regulatory liability being reported based on the amounts previously recovered through customer rates.
The straight-line remaining life method is used to compute depreciation on utility plant. Generally, the straight-line
method is used with respect to transportation and mechanical equipment, office equipment and laboratory equipment.
Impairment of Long-Lived Assets - Long-lived assets of the Company, which consist primarily of utility plant in service,
operating lease right-of-use assets and intangible assets, are reviewed for impairment when changes in circumstances or
events occur. These circumstances or events could include a decline in the market value or physical condition of a long-
37
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
lived asset, an adverse change in the manner in which long-lived assets are used or planned to be used, a change in
historical trends, operating cash flows associated with the long-lived assets, changes in macroeconomic conditions,
industry and market conditions, or overall financial performance. When these circumstances or events occur, the
Company determines whether it is more likely than not that the fair value of those assets is less than their carrying
amount. If the Company determines that it is more likely than not (that is, the likelihood of more than 50 percent), the
Company would recognize an impairment charge if it is determined that the carrying amount of an asset exceeds the sum
of the undiscounted estimated cash flows. In this circumstance, the Company would recognize an impairment charge
equal to the difference between the carrying amount and the fair value of the asset. Fair value is estimated to be the
present value of future net cash flows associated with the asset, discounted using a discount rate commensurate with the
risk and remaining life of the asset. During the years ended December 31, 2022 and 2021, the Company recorded an
impairment loss to write down a portion of the operating lease right-of-use asset for office space not used in operations to
fair value. Refer to Note 10 – Leases, for further details.
Regulatory assets are reviewed for the continued application of the FASB accounting guidance for regulated operations.
The Company’s review determines whether there have been changes in circumstances or events, such as regulatory
disallowances, or abandonments, that have occurred that require adjustments to the carrying value of these assets.
Adjustments to the carrying value of these assets would be made in instances where their inclusion in the rate-making
process is unlikely. For utility plant in service, we would recognize an impairment loss for any amount disallowed by the
respective utility commission.
Allowance for Funds Used During Construction ─ The allowance for funds used during construction (“AFUDC”)
represents the capitalized cost of funds used to finance the construction of utility plant. In general, AFUDC is applied to
construction projects requiring more than one month to complete. No AFUDC is applied to projects funded by customer
advances for construction, contributions in aid of construction, or applicable state-revolving fund loans. AFUDC includes
the net cost of borrowed funds and a rate of return on other funds when used and is recovered through rates as the utility
plant is depreciated. The amount of AFUDC related to equity funds in 2022 was $17,618, 2021 was $16,282, and 2020
was $8,253. No interest was capitalized by our market-based businesses.
Lease Accounting ─ The Company evaluates the contracts it enters into to determine whether such contracts contain leases.
A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for
a period of time in exchange for consideration. We enter into operating lease contracts for the right to utilize certain land,
office facilities, office equipment, and vehicles from third parties. For contracts that extend for a period greater than 12
months, we recognize a right of use asset and a corresponding lease liability on our consolidated balance sheet. The present
value of each lease is based on the future minimum lease payments in accordance with Accounting Standards Codification
(“ASC”) 842 and is determined by discounting these payments using an incremental borrowing rate.
Recognition of Revenues ─ The Company recognizes revenue as utility services are provided to our customers, which
happens over time as the services are delivered and the performance obligation is satisfied. The Company’s utility
revenues recognized in an accounting period includes amounts billed to customers on a cycle basis and unbilled amounts
based on estimated usage from the last billing to the end of the accounting period. Unbilled amounts are calculated by
deriving estimates based on average usage of the prior month. The Company’s actual results could differ from these
estimates, which would result in operating revenues being adjusted in the period that the revision to our estimates are
determined.
Generally, payment is due within 30 days once a bill is issued to a customer. Sales tax and other taxes we collect on
behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue.
38
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table presents our revenues disaggregated by major source and customer class for the years ended
December 31,:
2022
Water Revenues
Wastewater
Revenues
Natural Gas
Revenues
Other Revenues
Revenues from contracts with customers:
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
$
607,473
168,460
38,970
32,581
-
55,389
-
-
902,873
3,309
-
906,182
Revenues from contracts with customers:
2021
Water Revenues
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
$
561,996
151,071
35,984
30,230
-
53,488
-
-
-
832,769
1,760
-
834,529
Revenues from contracts with customers:
2020
Water Revenues
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
$
567,486
143,479
35,340
29,764
-
32,372
-
(3,757)
-
804,684
87
-
804,771
39
$
$
$
$
$
$
122,612
30,340
-
1,755
-
-
10,676
-
165,383
(71)
-
165,312
Wastewater
Revenues
99,931
22,060
-
1,729
-
-
8,860
-
-
132,580
(264)
-
132,316
Wastewater
Revenues
95,051
19,062
-
1,619
-
-
5,385
(323)
-
120,794
114
-
120,908
$
$
$
$
$
$
720,490
149,653
-
5,636
205,825
-
-
61,393
1,142,997
365
-
1,143,362
Natural Gas
Revenues
530,338
99,596
-
3,427
198,195
-
-
(5,000)
32,812
859,368
534
-
859,902
Natural Gas
314,274
50,239
-
6,923
133,685
-
-
(18,924)
20,243
506,440
124
-
506,564
$
$
$
$
$
$
-
-
-
-
-
-
-
11,478
11,478
-
61,698
73,176
Other
Revenues
-
-
-
-
-
-
-
-
13,358
13,358
-
38,039
51,397
Other
Revenues
-
-
-
-
-
-
-
-
12,861
12,861
-
17,594
30,455
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution. The natural gas revenues of Peoples are included for the period since
the date of the acquisition.
Revenues from Contracts with Customers – These revenues are composed of four main categories: water, wastewater,
natural gas, and other. Water revenues represent revenues earned for supplying customers with water service.
Wastewater revenues represent revenues earned for treating wastewater and releasing it into the environment. Natural gas
revenues represent revenues earned for the gas commodity and delivery of natural gas to customers. Other revenues are
associated fees that relate to our utility businesses but are not water, wastewater, or natural gas revenues. Refer to the
description below for a discussion of the performance obligation for each of these revenue streams.
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection,
industrial, gas transportation, other water, and other wastewater. The rates that generate these revenues are
approved by the respective state utility commission, and revenues are billed cyclically and accrued for when
unbilled. The regulated natural gas rates are set and adjusted for increases or decreases in our purchased gas costs
through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide us with a means
to recover purchased gas costs on an ongoing basis without filing a rate case. Other water and other wastewater
revenues consists primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation
for tariff revenues is to provide potable water, wastewater treatment service, or delivery and sale of natural gas to
customers. This performance obligation is satisfied over time as the services are rendered. The amounts that the
Company has a right to invoice for tariff revenues reflect the right to consideration from the customers in an
amount that corresponds directly with the value transferred to the customer for the performance completed to
date.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues,
which represents fees received from telecommunication operators that have put cellular antennas on our water
towers; operation and maintenance and billing contracts, which represent fees earned from municipalities for our
operation of their water or wastewater treatment services or performing billing services; and fees earned from
developers for accessing our water mains, miscellaneous service revenue from gas distribution operations, gas
processing and handling revenue, sales of natural gas at market-based rates and contracted fixed prices, sales of
gas purchased from third parties, and other gas marketing activities. The performance obligations vary for these
revenues, but all are primarily recognized over time as the service is delivered.
Alternative Revenue Program:
o Water / Wastewater Revenues – These revenues represent the difference between the actual billed utility
volumetric water and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois
rate case. In accordance with the Illinois Commerce Commission, we recognize revenues based on the
target amount established in the last rate case, and then record either a regulatory asset or liability based
on the cumulative annual difference between the target and actual amounts billed, which results in either a
payment from customers or a refund due to customers. The cumulative annual difference is either
refunded to customers or collected from customers over a nine-month period.
o Natural Gas Revenues – These revenues represent the weather-normalization adjustment (“WNA”)
mechanism in place for our natural gas customers served in Kentucky. The WNA serves to minimize the
effects of weather on the Company’s results for its residential and small commercial natural gas
customers. This regulatory mechanism adjusts 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. Customer bills are adjusted in the December through April billing months, with rates
adjusted for the difference between actual revenues and revenues calculated under this mechanism billed
to the customers.
40
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
These revenue programs represent a contract between the utility and its regulators, not customers, and therefore
are not within the scope of the FASB’s accounting guidance for recognizing revenue from contracts with
customers.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: our
non-regulated natural gas operations, Aqua Infrastructure, and Aqua Resources (described below), and
intercompany eliminations for revenue billed between our subsidiaries. Our non-regulated natural gas operations
consist of utility service line protection solutions and repair services for households and the operation of gas
marketing and production entities. Revenue is recognized and the performance obligation is satisfied over time as
the service is delivered.
Aqua Infrastructure is the holding company for our former 49% investment in a joint venture that operated a
private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north
central Pennsylvania. Prior to our October 30, 2020 sale of our investment in the joint venture, the joint venture
earned revenues through providing non-utility raw water supply services to natural gas drilling companies which
enter into water supply contracts. The performance obligation was to deliver non-potable water to the joint
venture’s customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture was reflected,
net, in equity earnings in joint venture on our consolidated statements of operations and comprehensive income.
Aqua Resources earned revenues by providing non-regulated water and wastewater services through an operating
and maintenance contract, which concluded in 2020, and continues to earn revenue through third-party water and
sewer service line protection and repair services. For the contract operations and maintenance business, the
performance obligations were performing agreed upon contract services to operate the water and wastewater
system. For the service line protection business, the performance obligations are allowing the use of our logo to a
third-party water and sewer service line repair provider. Revenues are primarily recognized over time as service
is delivered.
Cash and Cash Equivalents ─ The Company considers all highly liquid investments with an original maturity of three
months or less, which are not restricted for construction activity, to be cash equivalents.
The Company had a book overdraft, which represents transactions that have not cleared the bank accounts at the end of
the period, for specific disbursement cash accounts of $28,694 and $81,722 at December 31, 2022 and 2021, respectively.
The Company transfers cash on an as-needed basis to fund these items as they clear the bank in subsequent periods. The
balance of the book overdraft is reported as book overdraft and the change in the book overdraft balance is reported as
cash flows from financing activities, due to our ability to fund the overdraft with the Company’s credit facility.
Accounts Receivable ─ Accounts receivable are recorded at the invoiced amounts, which consists of billed and unbilled
revenues. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in
our existing accounts receivable and is determined based on lifetime expected credit losses and the aging of account
balances. The Company reviews the allowance for doubtful accounts quarterly. Account balances are written off against
the allowance when it is probable the receivable will not be recovered. When utility customers request extended payment
terms, credit is extended based on regulatory guidelines, and collateral is not required.
Inventories – Materials and Supplies – Inventories are stated at cost. Cost is determined using the first-in, first-out
method.
Inventory – Gas Stored – The Company accounts for gas in storage inventory using the weighted average cost of gas
method.
41
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Investment in Joint Venture – The Company used the equity method of accounting to account for our former 49%
investment in a joint venture with a firm in the natural gas industry for the construction and operation of a private pipeline
system to supply raw water to natural gas well drilling operations in the Marcellus Shale in north-central Pennsylvania,
which commenced operations in 2012. In 2020, the Company sold its investment in joint venture and recorded a charge
of $3,700 associated with the sale. Our share of equity loss in the joint venture was reported in the consolidated
statements of operations and comprehensive income as equity loss in joint venture. During 2020, we received
distributions of $2,137.
Assets Held for Sale ─ When the Company makes a decision to sell an asset or to stop some part of its business, the
Company assesses if such assets should be classified as an asset held for sale. Assets held for sale are measured at the
lower of their carrying amount or fair value less cost to sell. For long-lived assets or disposal groups that are classified as
held for sale but do not meet the criteria for discontinued operations, the assets and liabilities are presented separately on
the consolidated balance sheet of the initial period in which it is classified as held for sale. The major classes of assets
and liabilities classified as held for sale are disclosed in the notes to the consolidated financial statements. See “Note 3 –
Assets Held for Sale and Disposition”.
Goodwill ─ Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible assets
acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or more often, if
circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess
qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more
likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our
assessment of the qualitative factors previously noted or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit. If we perform a quantitative test and determine that the
fair value of a reporting unit is less than its carrying amount, we would record an impairment loss for the amount by
which a reporting unit’s carrying amount exceeds its fair value, not to exceed the reporting unit’s carrying amount of
goodwill.
Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level
below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the
component constitutes a business for which discrete financial information is available, and segment management regularly
reviews the operating results of that component. We assigned assets and liabilities to each reporting unit based on either
specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit.
Goodwill was assigned to the reporting units based on a combination of specific identification and relative fair values.
Determining the fair value of our reporting units involves the use of significant estimates and assumptions and
considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the
time, but such assumptions are subject to inherent uncertainty. We estimated the fair value of reporting units by
weighting results from the market approach and the income approach. These valuation approaches consider a number of
factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates,
and comparable multiples from publicly traded companies in our industry. Changes in market conditions, changes in the
regulatory environment, pending or new legislation that could impact the ability to recover costs through regulated rates
or other factors outside of our control, could cause us to change key assumptions and our judgment about a reporting
unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical
or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of
our reporting units, and a consequent future impairment charge.
In 2022, we changed the date of our annual goodwill impairment test date from July 31 to October 1, which is a change in
accounting principle, that management believes is preferable as the new test date better aligns with our long-term planning
and forecasting process. The change did not delay, accelerate or avoid an impairment charge nor did it change our
requirement to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present.
42
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
To ensure that no lapse in an assessment occurred since the prior period, during the third quarter of 2022, we performed
qualitative tests as of July 31, 2022, for all reporting units and determined that it was more likely than not that the fair
value of each of the reporting unit’s fair values exceeded their carrying values at the time of the change in impairment test
date.
During the fourth quarter of 2022, as part of the annual goodwill assessment as of October 1, 2022, we elected to perform
a quantitative goodwill impairment assessment on the goodwill attributable to our Regulated Natural Gas reporting unit
and a qualitative assessment for our Regulated Water and Other reporting units. Based on our analysis, we determined
that none of the goodwill of our reporting units was impaired.
The following table summarizes the changes in the Company’s goodwill:
Balance at December 31, 2020
Goodwill acquired
Measurement period purchase price allocation adjustments
Reclassifications to utility plant acquisition adjustment
Balance at December 31, 2021
Goodwill acquired
Reclassifications to utility plant acquisition adjustment
Balance at December 31, 2022
Regulated
Natural
Gas
Regulated
Water
58,659 $ 2,261,047 $
$
-
-
(132)
58,527
-
(23)
-
16,400
-
2,277,447
-
-
$
58,504 $ 2,277,447 $
Other
Consolidated
4,841 $ 2,324,547
-
16,400
(132)
2,340,815
-
(23)
2,340,792
-
-
-
4,841
-
-
4,841 $
The measurement period purchase price allocation adjustments resulted from the completion of the Peoples Gas
Acquisition on March 16, 2020, which resulted in goodwill of $2,277,447 which was subject to adjustment over the one
year measurement period that ended on March 15, 2021. Refer to Note 2 – Acquisitions for information about the
goodwill attributed to our Regulated Natural Gas segment.
The reclassification of goodwill to utility plant acquisition adjustment results from either a regulatory order or a
mechanism approved by the applicable utility commission. A regulatory order may provide for the one-time transfer of
certain acquired goodwill. The mechanism provides for the transfer over time, and the recovery through customer rates, of
goodwill associated with some acquisitions upon achieving specific objectives.
Intangible assets – The Company’s intangible assets consist of customer relationships for our non-regulated natural gas
operations, and non-compete agreements with certain former employees of Peoples. These intangible assets are amortized
on a straight-line basis over their estimated useful lives of fifteen years for the customer relationships and five years for
the non-compete agreements.
Derivative Instruments – The Company’s natural gas commodity price risk, driven mainly by price fluctuations of natural
gas, is mitigated by its purchased-gas cost adjustment mechanisms. The Company also uses derivative instruments to
economically hedge the cost of anticipated natural gas purchases during the winter heating months that seeks to offset the
risk to the Company’s utility customers from upward market price volatility. These strategies include requirements
contracts, spot purchase contracts and underground storage to meet regulated customers’ natural gas requirements that
may have fixed or variable pricing. The variable price contracts qualify as derivative instruments; however, because the
contract price is the prevailing price at the future transaction date the contract has no determinable fair value. The fixed
price contracts and firm commitments to purchase a fixed quantity of gas in the future qualify for the normal purchases
and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and,
as such, are accounted for under the accrual basis and are not recorded at fair value in the Company’s consolidated
financial statements.
43
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Deferred Charges and Other Assets ─ Deferred charges and other assets consist primarily of assets held to compensate
employees in the future who participate in the Company’s deferred compensation plan, prepaid pension and other post-
retirement benefit plans assets, and the non-current portion of Peoples’ financing notes receivable, which amounted to
$24,962, $43,827 and $63,204 as of December 31, 2022; and $28,576, $25,978, and $65,744 as of December 31, 2021,
respectively. The assets of the deferred compensation plan are invested in mutual funds which are carried on the
consolidated balance sheet at fair market value, and changes in fair value are included in other expense (income), refer to
Note 12 – Fair Value of Financial Instruments for further details. Refer to Note 16 – Pension Plans and Other Post-
Retirement Benefit Plans for further information on the prepaid pension and other post-retirement benefit plan assets.
Pursuant to agreements entered into by Peoples in 2019, Peoples committed to design, construct, and operate over a 20-
year period, three onsite natural gas fueled energy plants on customer-owned property in the western Pennsylvania
area. Under the provisions of ASC 842, Leases, the Company determined that indicators of control over the assets
constructed were not met, as such this failed sale-leaseback transaction was accounted for as a financing arrangement in
accordance with ASC Topic 310, Receivables. During 2021, when construction was completed and the plants became
on-line and began generation activity, the accumulated balance of the projects included in property, plant and equipment
of $71,665 was reclassified as a note receivable and included within deferred charges and other assets in the consolidated
balance sheet. Amounts becoming due for payment by the customer in the current year are included within prepayments
and other current assets in the consolidated balance sheets, which amounted to $2,517 and $2,423 as of December 31,
2022 and 2021, respectively. Interest income is recognized on these financing notes receivable using an imputed interest
rate ranging from 3.4% to 4.3% and is recorded as interest income in the consolidated statements of operations and
comprehensive income. For the year ended December 31, 2022 and 2021, interest income on financing note receivable
amounted to $2,639 and $1,971, respectively.
Income Taxes ─ The Company accounts for some income and expense items in different time periods for financial and
tax reporting purposes. Deferred income taxes are provided on specific temporary differences between the tax basis of the
assets and liabilities, and the amounts at which they are carried in the consolidated financial statements. The income tax
effect of temporary differences not currently included in rates is recorded as deferred taxes with an offsetting regulatory
asset or liability. These deferred income taxes are based on the enacted tax rates expected to be in effect when such
temporary differences are projected to reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount more likely than not to be realized. Investment tax credits are deferred and amortized over the
estimated useful lives of the related properties. Judgment is required in evaluating the Company’s Federal and state tax
positions. Despite management’s belief that the Company’s tax return positions are fully supportable, the Company
establishes reserves when it believes that its tax positions are likely to be challenged and it may not fully prevail in these
challenges. The Company’s provision for income taxes includes interest, penalties and reserves for uncertain tax
positions.
Customers’ Advances for Construction and Contributions in Aid of Construction ─ Utility mains, other utility property
or, in some instances, cash advances to reimburse the Company for its costs to construct utility mains or other utility
property, are contributed to the Company by customers, real estate developers and builders in order to extend utility
service to their properties. The value of these contributions is recorded as customers’ advances for construction. Over
time, the amount of non-cash contributed property will vary based on the timing of the contribution of the non-cash
property and the volume of non-cash contributed property received in connection with development in our service
territories. The Company makes refunds on these advances over a specific period of time based on operating revenues
related to the property, or as new customers are connected to and take service from the applicable water main. After all
refunds are made, any remaining balance is transferred to contributions in aid of construction for our regulated water
business. Contributions in aid of construction include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable. For our regulated gas business, non-refundable contributions are
netted against the cost of the related utility mains or other utility property.
44
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Based on regulatory conventions in states where the Company operates, generally our subsidiaries depreciate contributed
property and amortize contributions in aid of construction at the composite rate of the related property. Contributions in
aid of construction and customers’ advances for construction are deducted from the Company’s rate base for rate-making
purposes, and therefore, no return is earned on contributed property.
Stock-Based Compensation ─ The Company records compensation expense in the financial statements for stock-based
awards based on the grant date fair value of those awards. Stock-based compensation expense includes an estimate for
pre-vesting forfeitures and is recognized over the requisite service periods of the awards on either a straight-line basis, or
the graded vesting method, which is generally commensurate with the vesting term.
Fair Value Measurements – 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.
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. Additionally, assets that are measured at fair value using the net
asset value (“NAV”) per share practical expedient are not classified in the fair value hierarchy. 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 years ended December 31, 2022 and 2021.
Recent Accounting Pronouncements ─
Pronouncements to be adopted upon the effective date:
In October 2021, the FASB issued accounting guidance on accounting for acquired revenue contracts with customers in a
business combination. The guidance specifies for all acquired revenue contracts, regardless of their timing of payment,
the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a
business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting
guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The Company
adopted this guidance effective January 1, 2023, and will apply it prospectively to business combinations occurring on or
after that date.
45
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Pronouncements adopted during the fiscal year:
In August 2020, the FASB issued updated accounting guidance on accounting for convertible instruments and contracts in
an entity’s own equity. The updated guidance reduces the number of accounting models for convertible debt and
convertible preferred stock instruments and makes certain disclosure amendments intended to improve the information
provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception,
which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Further, the
standard changes the way certain convertible instruments are treated when calculating earnings per share. As permitted,
we adopted this updated guidance on January 1, 2022, which did not have a material impact on our consolidated financial
statements.
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant
to the Company.
Note 2 – Acquisitions
Peoples Gas Acquisition
On March 16, 2020 (the “Closing Date”), the Company completed the acquisition of Peoples Natural Gas (the “Peoples
Gas Acquisition”), which expanded the Company’s regulated utility business to include natural gas distribution, serving
approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia, and Kentucky. The
Company paid cash consideration of $3,465,344, which was subject to adjustment based upon the terms of the purchase
agreement. Purchase price adjustments included the completion of a closing balance sheet, which was provided to the
seller, and an adjustment for utility capital expenditures made by the seller during the period between November 1, 2018
and the Closing Date. There was a dispute between the parties regarding this adjustment for utility capital expenditures.
In November 2021, the dispute between the parties regarding the adjustment for utility capital expenditures was resolved
in accordance with the provisions of the purchase agreement and an inconsequential payment was made between the
parties. The purchase price paid by the Company was determined as follows:
Base purchase price
Adjustments:
Estimated change in working capital
Certain estimated capital expenditures
Assumption of indebtedness
Cash consideration
$
$
4,275,000
43,935
247,500
(1,101,091)
3,465,344
The assumption of $1,101,091 of indebtedness as of the Closing Date, consisted of $920,091 of senior notes and $181,000
of short-term debt. The acquisition was financed through a series of financing transactions which included the issuance of
common stock from a public offering and a private placement, a tangible equity unit offering, and short and long-term
debt. Refer to Note 11 – Long-term Debt and Loans Payable, and Note 13 – Stockholder’s Equity for further information
on these financings.
46
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company accounted for the Peoples Gas Acquisition as a business combination using the acquisition method of
accounting. The purchase price was allocated to the net tangible and intangible assets based upon their estimated fair
values at the date of the acquisition. The purchase price allocation was preliminary and was subject to revision through
the end of the measurement period on March 15, 2021. During the first quarter of 2021, the Company recorded an
adjustment to increase goodwill by $16,400 primarily reflecting an adjustment to deferred income taxes and the valuation
of accounts receivable. Goodwill recorded for the Peoples Gas Acquisition is not expected to be deductible for tax
purposes. The following table summarizes the purchase price allocation as of the acquisition date and measurement period
adjustments as of March 15, 2021:
Property, plant and equipment, net
Current assets
Regulatory assets
Goodwill
Other long-term assets
Total assets acquired
Current portion of long-term debt
Loans payable
Other current liabilities
Long-term debt
Deferred income taxes
Regulatory liabilities
Other long-term liabilities
Total liabilities assumed
Net assets acquired
Amounts
Previously
Recognized as of
Acquisition Date (a)
2,476,551
242,531
286,751
2,261,047
75,071
5,341,951
5,136
181,000
186,120
999,460
213,647
123,029
168,215
1,876,607
3,465,344
$
$
Measurement
Period
Adjustments
$
-
$
(9,197)
(22,293)
16,400
-
(15,090)
-
-
(200)
-
(20,522)
6,389
(757)
(15,090)
$
-
$
Amounts
Recognized as of
Acquisition Date
(as Adjusted)
2,476,551
233,334
264,458
2,277,447
75,071
5,326,861
5,136
181,000
185,920
999,460
193,125
129,418
167,458
1,861,517
3,465,344
(a) As reported in the Essential Utilities, Inc. Form 10-K for the period ended December 31, 2020.
The fair value of long-term debt was determined based on prevailing market prices for similar debt issuances as of March
16, 2020, which resulted in an adjustment to increase the carrying amount by $84,569. The fair value adjustment is being
amortized over the remaining life of the debt.
Goodwill is attributable to the assembled workforce of Peoples, planned growth in new markets, and planned growth in
rate base through continued investment in utility infrastructure. Goodwill recorded for the Peoples Gas Acquisition is not
expected to be deductible for tax purposes.
The Company incurred transaction-related expenses for the Peoples Gas Acquisition, which consisted of costs recorded as
operations and maintenance expenses in the first quarter of 2020 of $25,397, primarily representing expenses associated
with investment banking fees, including bridge financing, employee related costs, obtaining regulatory approvals, legal
expenses, and integration planning. There were no further transaction-related expenses for the Peoples Gas Acquisition
after the first quarter of 2020.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. The Company committed to provide $23,004 of one-time
customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers served by
47
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Aqua Pennsylvania. The Company granted $4,080 of customer rate credits to its water and wastewater customers during
the third quarter of 2020, and $18,924 to its natural gas utility customers in the fourth quarter of 2020 to satisfy the
$23,004 commitment.
Water and Wastewater Utility Acquisitions – Pending Completion
In January 2023, the Company entered into a purchase agreement to acquire the water utility assets of La Rue, an Ohio
municipality, which serves approximately 300 customers for $2,250.
In December 2022, the Company entered into a purchase agreement to acquire the wastewater utility assets of Union
Rome Sewer, which serves approximately 5,300 customers in the southeast corner of Lawrence County, Ohio, for
$25,500.
In August 2022, the Company entered into a purchase agreement to acquire a portion of the water and wastewater utility
assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,400 customers for $1,400.
In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern
Oaks Water System, which serves approximately 740 customers in Texas for $3,300. In October 2021, the Company
entered into a purchase agreement to acquire the wastewater utility assets of the City of Beaver Falls, Pennsylvania which
consists of approximately 7,600 customers for $41,250. In July 2021, the Company entered into a purchase agreement to
acquire the water utility assets of Shenandoah Borough, Pennsylvania, which consists of approximately 2,930 customers
for $12,000. In January 2021, the Company entered into purchase agreement to acquire the wastewater utility system
assets of Willistown Township, Pennsylvania, which consist of approximately 2,300 customers for $17,500.
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 based acquired. We plan to finance the
purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are
secured. These pending acquisitions are expected to close in 2023 and in early 2024. Closing for our utility acquisitions
are subject to the timing of the regulatory approval process.
48
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
DELCORA Purchase Agreement
In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the
Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000
customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In
May 2020, Delaware County, Pennsylvania filed a lawsuit alleging that DELCORA does not have the legal authority to
establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware
County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between
DELCORA and the Company, (2) the County cannot terminate DELCORA prior to the closing of the transaction, and (3)
the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of
Pennsylvania. On March 3, 2022, the Commonwealth Court issued a decision finding that Delaware County can dissolve
the Authority if it so chooses, but the purchase agreement must be upheld regardless of who is operating the system. The
case was remanded back to the trial court for the entry of an order consistent with the Commonwealth Court’s opinion.
This order was issued on September 8, 2022 (“Remand Order). Since then, the County has challenged the Remand Order
through two separate actions:
First, Delaware County filed an Application for Determination of Finality (“Application”) on October 13, 2022.
The Company filed its opposition to the Application on October 27, 2022, and on November 2, 2022, the
Delaware County Court of Common Pleas denied Delaware County’s Application for Determination of Finality
indicating that its previous order already constituted a final order that addressed the claims of all parties. On
December 2, 2022, following the denial of its Application, Delaware County filed a Petition for Permission to
Appeal (“Petition”) the Remand Order in the Commonwealth Court of Pennsylvania. On December 16, 2022, the
Company filed an Answer in opposition to the Petition, and the matter is currently pending before Commonwealth
Court.
Second, on November 2, 2022, Delaware County filed a Notice of Appeal (“Notice of Appeal”) from the Remand
Order. On December 2, 2022, the Delaware County of Common Pleas issued an Opinion concluding that the
County Court did not err in issuing the Remand Order. On January 13, 2023, Delaware County filed an
Application in Commonwealth Court seeking confirmation of briefing deadlines with respect to the Notice of
Appeal. In response, by Order dated January 24, 2023, the Commonwealth Court stated that “the record received
from the Court of Common Pleas of Delaware County is currently under review for finality. A briefing schedule
will be issued upon completion of this review.”
On January 25, 2023, DELCORA filed in the Delaware Court of Common Pleas a complaint for Declaratory Judgment
seeking resolution of whether the County Ordinance dissolving DELCORA is a final action prohibiting DELCORA from
carrying out the material transaction of the Asset Purchase Agreement and, in the event that DELCORA retains the ability
to close the transaction, whether DELCORA is permitted to exist as a trust.
The administrative law judges in the regulatory approval process recommended that the Company’s application be denied,
and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania
Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge
(“ALJ”) and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was
also appealed to the Commonwealth Court by Delaware County. The County appealed the 2021 Order on April 29, 2022.
A decision was issued by the Commonwealth Court on September 12, 2022 which dismissed the appeal of the County.
After the PUC issued the 2021 Order, on April 16, 2021, the administrative law judge issued an order staying the
proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a
letter notifying the PUC of the March 3, 2022 Commonwealth Court decision (that originated in Delaware County Court
of Common Pleas) and requested that the PUC move forward with processing the application. On July 14, 2022, the
Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the
proceeding. The published procedural schedule has the proceeding concluding in June 2023.
49
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On January 26, 2023, several parties involved in the PUC case filed a joint motion for stay based on DELCORA’s filing
of the January 25, 2023 complaint for Declaratory Judgment filed by DELCORA, and referenced the City of Chester’s
bankruptcy filing in which the City of Chester has asserted reversionary contract interests regarding to DELCORA’s
wastewater assets. On February 6, 2023, the ALJ stayed the PUC DELCORA application proceedings again. The
Company will be filing a Petition for Interlocutory Review to the PUC asking to review the ALJ’s February 6, 2023
decision to stay the current proceedings.
The purchase price for this pending acquisition is subject to certain adjustments at closing, and is subject to regulatory
approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase
price of this acquisition by the issuance of common stock and by utilizing our revolving credit facility until permanent
debt is secured. Closing of our acquisition of DELCORA is expected to occur in 2023, subject to the timing of the
regulatory approval process and Delaware County’s on-going litigation.
Water and Wastewater Utility Acquisitions - Completed
In November 2022, the Company acquired certain water utility assets of Oak Brook, Illinois, which serves 2,037
customers for a cash purchase price of $12,500. In August 2022, the Company acquired the municipal wastewater assets
of East Whiteland Township, Chester County, Pennsylvania, which serves 4,018 customers, for a cash purchase price of
$54,374. Additionally, in March 2022, the Company acquired the wastewater system of Lower Makefield Township,
which serves 11,323 customer connections in Lower Makefield, Falls, and Middletown townships, and Yardley Borough,
Bucks County, Pennsylvania, for a cash purchase price of $53,000. The purchase price allocation for these acquisitions
consisted primarily of property, plant and equipment. The operating revenues included in the consolidated financial
statements of the Company during the period owned by the Company for these utility systems acquired in 2022 are
$11,393.
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively. The purchase price allocation for these acquisitions consisted primarily
of property, plant and equipment. The operating revenues included in the consolidated financial statements of the
Company during the period owned by the Company for the utility systems acquired in 2021 were $7,421 in 2022 and
$2,462 in 2021.
In December 2020, the Company acquired the wastewater utility system asset of New Garden Township, Pennsylvania,
which serves 1,965 customers. The total cash purchase price for the utility system was $29,944. Further, in June 2020,
the Company acquired the wastewater utility system assets of East Norriton Township, Pennsylvania, which serves 4,947
customers. The total cash purchase price for the utility system was $21,000. The purchase price allocation for these
acquisitions consisted primarily of property, plant and equipment. Additionally, during 2020, we completed four
acquisitions of water and wastewater utility systems for $12,335 in cash in three of the states in which we operate, adding
3,673 customers. The operating revenues included in the consolidated financial statements of the Company during the
period owned by the Company for the utility systems acquired in 2020 were $10,717 in 2022, $8,365 in 2021 and $3,569
in 2020.
The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results
of operations.
50
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 3 –Assets Held for Sale and Disposition
In the fourth quarter of 2022, the Company decided to market for sale the assets of its regulated natural gas system in
West Virginia that serves approximately 13,000 customers and is part of the Company’s Regulated Natural Gas segment.
On December 31, 2022, the Company entered into a definitive agreement with Hope Gas, Inc. for the sale of its
membership interests in its West Virginia assets for cash at closing of $37,000. The purchase price is subject to certain
adjustments at closing and is subject to applicable regulatory approvals. Closing on the sale is expected in mid-2023, and
completion of this transaction will conclude the Company’s operations in West Virginia. Based on an assessment of the
sale price and the carrying value of the planned disposition, there is no anticipated impairment expected to be recognized
because of this sale agreement. These assets and liabilities do not qualify as discontinued operations, are reported as held
for sale in the Company’s consolidated balance sheet, and consist of the following as of December 31, 2022:
Inventory - gas stored
Other current assets
Regulatory assets
Current assets held for sale
Property, plant and equipment, net
Regulatory assets and other
Non-current assets held for sale
Current liabilities related to assets held for sale
Regulatory liabilities
Other long-term liabilities
Non-current liabilities related to assets held for sale
$
$
$
$
$
2,807
3,284
5,076
11,167
30,267
1,857
32,124
3,263
649
325
974
In October 2020 the Company sold its investment in a joint venture. Its investment represented its 49% investment in a
joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania. This investment was an unconsolidated affiliate and was accounted for
under the equity method of accounting within our Aqua Infrastructure subsidiary. In 2020, the Company recorded a
charge of $3,700 for the write-down of the Company’s investment associated with the sale and is reported in equity loss in
joint venture. This disposition has not been presented as discontinued operations in the Company’s consolidated financial
statements as it does not qualify as discontinued operations, since the disposal does not represent a strategic shift that has
a major effect on our operations or financial results.
51
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 4 – Property, Plant and Equipment
December 31,
2022
2021
Approximate
Range of
Useful Lives
Weighted
Average
Useful Life
Regulated Water segment:
Utility plant and equipment
$
Mains and accessories
Services, hydrants, treatment plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and purification equipment
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility plant and equipment - regulated water segment
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Property, Plant and Equipment - Regulated Water segment
4,213,197 $ 4,014,507 26-90 years
2,672,186 5-89 years
2,910,496
376,880 15-80 years
388,596
1,011,487 7-76 years
1,131,975
980,208 5-84 years
1,045,053
116,888
133,618
9,172,156
9,822,935
366,777
304,373
(6,076)
20,561
10,204,197
(9,055) 10-53 years
21,098 17-64 years
9,488,572
-
-
-
Regulated Natural Gas segment:
Natural gas transmission
Natural gas storage
Natural gas gathering and processing
Natural gas distribution
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility plant and equipment - Regulated Natural Gas
segment
Utility construction work-in-progress
Property, plant and equipment - Regulated Natural Gas
segment
Total property, plant and equipment
Note 5 – Accounts Receivable
Billed utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
72 years
56 years
47 years
41 years
28 years
-
-
-
22 years
58 years
68 years
45 years
59 years
63 years
24 years
-
-
398,658
61,639
144,337
2,206,434
568,305
4,187
365,051 24-93 years
60,985 5-85 years
131,237 5-77 years
1,874,040 25-78 years
588,716 5-65 years
3,872
-
-
3,383,560
149,630
3,023,901
97,903
3,533,190
3,121,804
$ 13,737,387 $ 12,610,376
December 31,
2022
2021
$
265,504
4,801
270,305
63,981
206,324 $
197,815
1,283
199,098
58,073
141,025
$
$
52
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
As of December 31, 2022, the Company’s utility customers are located principally in the following states: 66% in
Pennsylvania, 9% in Ohio, 6% in North Carolina, 5% in Texas, and 5% in Illinois. No single customer accounted for
more than one percent of the Company's utility operating revenues during the years ended December 31, 2022, 2021, and
2020. The following table summarizes the changes in the Company’s allowance for doubtful accounts:
Balance at January 1,
Amounts charged to expense
Accounts written off
Recoveries of accounts written off and other
Balance at December 31,
2022
2021
2020
$
$
58,073 $
27,631
(22,507)
784
63,981 $
40,099 $
27,336
(19,731)
10,369
58,073 $
7,353
32,325
(12,613)
13,034
40,099
For Recoveries of accounts written off and other, “other” represents the opening balance from the Peoples Gas
Acquisition of $10,962 in 2020 and additional measurement period adjustments in 2021 of $12,851 before the
measurement period ended.
Note 6 – Regulatory Assets and Liabilities
The regulatory assets represent costs that are probable to be fully recovered from customers in future rates while
regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts recovered
from customers in advance of incurring the costs. Except for income taxes and utility plant retirement costs, regulatory
assets and regulatory liabilities are excluded from the Company’s rate base and do not earn a return. The components of
regulatory assets and regulatory liabilities are as follows:
December 31, 2022
December 31, 2021
Income taxes
Purchased gas costs
Utility plant retirement costs
Post-retirement benefits
Accrued vacation
Water tank painting
Fair value adjustment of long-term debt assumed in acquisition
Debt refinancing
Rate case filing expenses and other
Regulatory
Assets
1,164,294 $
15,435
36,440
51,810
3,231
10,385
49,954
13,906
16,570
1,362,025 $
$
$
Regulatory
Liabilities
Regulatory
Assets
571,110
28,955
64,212
142,390
-
-
-
-
7,363
814,030
$
$
1,219,924 $
13,798
47,683
60,640
3,760
7,553
62,722
19,083
14,827
1,449,990 $
Regulatory
Liabilities
595,185
-
56,479
115,283
-
-
-
-
3,054
770,001
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related to specific
differences between tax and book depreciation expense, are recognized in the rate setting process on a cash basis or as a
reduction in current income tax expense and will be recovered as they reverse. Amounts include differences that arise
between specific utility asset improvement costs capitalized for book and deducted as an expense for tax purposes.
Additionally, the recording of AFUDC for equity funds results in the recognition of a regulatory asset for income taxes,
which represents amounts due related to the revenue requirement. Regulatory liabilities are refundable in future rate
filings based on the difference between the amount of the income tax benefits that were incorporated into the Company’s
cost of service in its latest rate case as compared to the actual income tax benefits recognized.
A portion of the regulatory liability for income taxes is related to Aqua Pennsylvania’s income tax accounting change for
the tax benefits realized on the Company’s 2012 tax return, which have not yet reduced current income tax expense due to
a rate order requiring a ten year amortization period which began in 2013. Beginning in 2013, the Company amortized
$38,000, annually, of its deferred income tax benefits, which reduced current income tax expense. A portion of the
income taxes regulatory liability is also related to Peoples Natural Gas’ income tax accounting change for the tax benefits
53
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
expected to be realized for the periods prior to adoption on March 16, 2020. The Company recorded a regulatory liability
for this catch-up adjustment in the amount of $160,655 in 2020, and it remained on the consolidated balance sheet as of
December 31, 2020. In May 2021, the Company received a regulatory order directing the Company to refund the catch-
up adjustment to its utility customers over a five-year period, which was initiated by the Company in August 2021. In
2022, the Company made a similar change for its Peoples Gas and Aqua New Jersey subsidiaries, resulting in the
recognition of a regulatory liability for each of these subsidiaries for the tax benefits prior to the year of adoption.
On July 8, 2022, Pennsylvania enacted House Bill 1342 into law, which among other things, reduces Pennsylvania’s
corporate income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through
2031, when it reaches to 4.99%. The Company evaluated the impacts of the tax rate change and recorded, in the third
quarter of 2022, a reduction to our deferred tax liabilities of $244,537 with a corresponding reduction primarily to our
regulatory assets.
The regulatory asset or liability for purchased gas costs reflects the differences between actual purchased gas costs and the
levels of recovery for these costs in current rates. The unrecovered costs are recovered and the over-recovered costs are
refunded in future periods, typically within a year, through quarterly and annual filings with the applicable state regulatory
agency.
The regulatory asset for utility plant retirement costs, including cost of removal, represents costs already incurred that are
expected to be recovered in future rates over a five year recovery period. The regulatory liability for utility plant
retirement costs represents amounts recovered through rates during the life of the associated asset and before the costs are
incurred.
The regulatory asset for accrued vacation represents costs that would otherwise be charged to operations and maintenance
expense for vacation that is earned by employees, which is recovered as a cost of service.
The regulatory asset for post-retirement benefits, which includes pension and other post-retirement benefits, primarily
reflects a regulatory asset that has been recorded for the costs that would otherwise be charged to stockholders’ equity for
the underfunded status of the Company’s pension and other post-retirement benefit plans. The Company also has a
regulatory asset related to post-retirement benefits costs that represent costs already incurred which are now being or
anticipated to be recovered in rates over a period ranging from approximately 10 to 37 years. The regulatory liability for
post-retirement benefits represents costs recovered in rates in excess of post-retirement benefits expense.
Expenses associated with water tank painting are deferred and amortized over a period of time as approved in the
regulatory process. Water tank painting costs are generally being amortized over a period ranging from 10 to 20 years.
The regulatory liability for water tank painting costs represents amounts recovered through rates and before the costs are
incurred.
The Company recorded a fair value adjustment for fixed rate, long-term debt assumed in acquisitions that matures in
various years ranging from 2023 to 2032. The regulatory asset or liability results from the rate setting process continuing
to recognize the historical interest cost of the assumed debt.
The regulatory asset for debt refinancing represents a portion of a make whole payment of $25,237 incurred in 2019 for
the Company’s redemption of $313,500 of the Company’s outstanding notes that had maturities ranging from 2019-2037
and interest rates ranging from 3.57-5.83%. The Company deferred a portion of the make whole payment as it represents
an amount by which we expect to receive prospective rate recovery.
The regulatory asset related to rate case filing expenses and other represents the costs associated with filing for rate
increases that are deferred and amortized over periods that generally range from one year to five years, and costs incurred
by the Company for which it has received or expects to receive rate recovery.
54
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The regulatory asset related to the costs incurred for information technology software projects and water main cleaning
and relining projects are described in Note 1 – Summary of Significant Accounting Policies – Property, Plant and
Equipment and Depreciation.
Note 7 – Income Taxes
Income tax benefit for the years ended December 31, is comprised of the following:
Current:
Federal
State
Deferred:
Federal
State
Total income tax benefit
Years Ended December 31,
2022
2021
2020
$
$
- $
(5,132) $
8,716
8,716
4,034
(1,098)
(8,258)
(14,787)
(23,045)
(14,329) $
3,036
(11,550)
(8,514)
(9,612) $
(1,831)
(265)
(2,096)
(11,527)
(6,255)
(17,782)
(19,878)
The statutory Federal tax rate is 21% for 2022, 2021, and 2020. For states with a corporate net income tax, the state
corporate net income tax rates range from 2.5% to 9.99% for all years presented. The Company’s effective income tax
rate for 2022, 2021, and 2020 was (3.2)%, (2.3)%, and (7.5)%, respectively. The Company remains subject to
examination by federal and state tax authorities for the 2019 through 2022 tax years.
The reasons for the differences between amounts computed by applying the statutory Federal corporate income tax rate to
income before income tax expense are as follows:
Computed Federal tax expense at statutory rate
Decrease in Federal tax expense related to the flow through of plant related timing
differences
State income taxes, net of Federal tax benefit
Increase in tax expense for depreciation expense to be recovered in future rates
Stock-based compensation
Deduction for Essential Utilities common dividends paid under employee benefit
plan
Amortization of deferred investment tax credits
Amortization of excess deferred income taxes
Impact of acquisitions and reorganizations
Other, net
Actual income tax benefit
Years Ended December 31,
2021
2022
88,620 $
94,691 $
2020
55,644
$
(99,741)
2,456
159
(242)
(76,534)
(1,681)
925
(611)
(53,532)
(6,896)
140
(1,484)
(333)
(290)
(8,425)
-
(2,604)
(315)
(330)
(319)
(314)
(15,352)
(11,715)
-
(4,632)
2,236
(3,340)
(14,329) $ (9,612) $ (19,878)
$
55
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In 2012, in response to a rate order, Aqua Pennsylvania changed its tax method of accounting for qualifying utility system
repairs, which provides for a tax deduction for qualifying utility asset improvement costs that were previously being
capitalized and depreciated for book and tax purposes. The rate order requires a flow-through method of income tax
benefits, which results in a reduction in current income tax expense through the recognition of income tax benefits due to
the income tax accounting method change. The Company recognized a tax deduction on its 2012 Federal tax return of
$380,000 for prior year qualifying costs and based on a 2012 rate order, Aqua Pennsylvania began to amortize this benefit
over ten years beginning in 2013. As a result of the May 2022 rate order, this amortization period was extended for an
additional three years and the Company’s utility rates now include these tax benefits.
In 2019, the Pennsylvania Public Utility Commission issued a rate order to Aqua Pennsylvania and commencing in 2020
the base rates were designed to include annual tax benefits for qualifying utility system improvement costs equal to a
deduction of $158,865, subject to a $3,000 collar either above or below this target amount. In May 2022, Aqua
Pennsylvania received a rate order that adjusted this target to $159,060 and revised the collar amount to $4,000, beginning
with the 2022 fiscal year. To the extent actual tax benefits are outside this range, tax benefits will either be deferred or
accrued, and settled in the next rate filing.
In March 2020 and in June 2022, the Company changed the method of tax accounting for certain qualifying infrastructure
investments at its Peoples Natural Gas and Peoples Gas Company subsidiaries, respectively. This change allows a tax
deduction for qualifying utility asset improvement costs that were formerly capitalized for tax purposes. Consistent with
the Company’s accounting for differences between book and tax expenditures in Pennsylvania in its other regulated
subsidiaries, the Company uses the flow-through method to account for these timing differences.
For Peoples Natural Gas, the Company calculated the income tax benefits for qualifying capital expenditures made prior
to the date of its acquisition on March 16, 2020 (“catch-up adjustment”) and recognized a regulatory liability of $160,655
for these income tax benefits. On May 6, 2021, the Pennsylvania Public Utility Commission approved a settlement order
which stipulates, among other points, that the catch-up adjustment be provided by a surcredit to utility customers over a
five-year period beginning August 2021, and the Company can continue to use flow-through accounting for the current
tax repair benefit until its next base rate case. During 2022 and 2021, $29,431 and $11,127, respectively, of income tax
benefits were amortized as refunds to Peoples Natural Gas customers. For Peoples Gas Company, the Company calculated
the catch-up adjustment from periods prior to the 2021 tax year and recognized a regulatory liability of $13,808 for these
income tax benefits. The Company will maintain this regulatory liability on its consolidated balance sheet until accounting
treatment is determined in its next base rate case.
The following table provides the changes in the Company’s unrecognized tax benefits:
Balance at January 1,
Impact of current year activity
Effect of Pennsylvania tax rate change
Balance at December 31,
2022
2021
2020
20,201 $
(900)
(1,084)
18,217 $
19,194 $
1,007
-
20,201 $
18,671
523
-
19,194
$
$
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate resolution. From time to time, the Company may be assessed
interest and penalties by taxing authorities, which would be recorded as income tax expense. During the years ended
December 31, 2022, 2021 and 2020, there were expenses of $118, $409, and $24 for interest and penalties related to
uncertain tax positions. As of December 31, 2022 and 2021, the Company has accrued liabilities of $620 and $502 for
interest and penalties related to its uncertain tax position.
56
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On its 2012 Federal tax return, filed in September 2013, Aqua Pennsylvania filed a change in accounting method to adopt
the IRS temporary tangible property regulations. This method change allowed the Company to take a current year
deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS
has issued final regulations. While the Company maintains the belief that the deduction taken on its tax return is
appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. Provisions
for uncertain tax positions were recorded to reflect the possible challenge of the Company’s methodology for determining
its repair deduction as required by the FASB’s accounting guidance for income taxes. Should the taxing authority
challenge the Company’s tax treatment, and ultimately disallow a portion of the repair deduction, the Company expects
Federal net operating loss carryforwards to offset any resulting liability, and state net operating loss carryforwards will
offset a portion of any resulting liability.
The unrecognized tax benefits relate to the income tax accounting change, and the tax position is attributable to a
temporary difference. The Company does not anticipate material changes to its unrecognized tax benefits within the next
year. As a result of the regulatory treatment afforded by the income tax accounting change in Pennsylvania and despite
this position being a temporary difference, as of December 31, 2022 and 2021, $35,267 and $34,980, respectively, of
these tax benefits would have an impact on the Company’s effective income tax rate in the event the Company does
sustain all, or a portion, of its tax position.
The following table provides the components of net deferred tax liability:
Deferred tax assets:
Customers' advances for construction
Costs expensed for book not deducted for tax, principally accrued expenses
Post-retirement benefits
Tax effect of regulatory liabilities for post-retirement benefits
Tax attribute and credit carryforwards
Operating lease liabilities
Unrecovered purchased gas costs
Other
Less valuation allowance
Deferred tax liabilities:
Utility plant, principally due to depreciation and differences in the basis of fixed assets
due to variation in tax and book accounting
Deferred taxes associated with the gross-up of revenues necessary to recover, in rates,
the effect of temporary differences
Post-retirement benefits
Utility plant acquisition adjustment basis differences
Deferred investment tax credit
Operating lease right-of-use assets
Over-recovered purchased gas costs
$
December 31,
2022
2021
27,009
23,585
-
26,453
235,838
13,558
4,654
10,248
341,345
(38,940)
302,405
28,845
28,211
5,186
16,080
243,131
16,064
-
7,586
345,103
(36,662)
308,441
1,495,526
1,510,752
128,975
6,130
198
5,092
12,250
-
1,648,171
179,825
-
222
5,406
14,034
4,739
1,714,978
Net deferred tax liability
$
1,345,766 $
1,406,537
57
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
At December 31, 2022, the Company has a cumulative Federal NOL of $625,988. The Company believes the Federal
NOLs are more likely than not to be recovered and require no valuation allowance. The Company’s Federal NOLs do not
begin to expire until 2032.
At December 31, 2022, the Company has a cumulative state NOL of $1,832,795 a portion of which is offset by a
valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state
NOLs do not begin to expire until 2023.
At December 31, 2022, the Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position,
on a gross basis, of $79,368 and $85,759, respectively, which results from the Company’s adoption in 2013 of the FASB’s
accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists. The amounts of the Company’s Federal and state NOL carryforwards prior to
being reduced by the unrecognized tax positions are $705,356 and $1,918,555, respectively. The Company records its
unrecognized tax benefit as a component of its net deferred income tax liability.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which among other things,
implements a 15% minimum tax on book income of certain large corporations, and a 1% excise tax on net stock
repurchases after December 31, 2022. The alternative minimum tax would not be applicable in our next fiscal year
because it is based on a three-year average annual adjusted financial statement income in excess of $1,000,000. Also
included in the IRA is a provision to implement an annual waste emissions charge beginning with calendar year 2024 (to
be paid in 2025) on applicable oil and gas facilities that exceed certain methane emission thresholds. Currently, the
Company has gathering facility assets that could exceed the minimum thresholds and potentially be subject to the waste
emissions charge. We are continuing to assess the future impact of the provisions of the IRA on our consolidated financial
statements and on the Company’s gathering assets. As a regulated utility, required capital expenditures and operating
costs, including taxes, have been traditionally recognized by state utility commissions as appropriate for inclusion in
establishing rates.
On July 8, 2022, Pennsylvania enacted House Bill 1342 into law, which among other things, reduces Pennsylvania’s
corporate income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through
2031, when it reaches to 4.99%. The Company evaluated the impacts of the tax rate change and recorded a reduction to
our deferred tax liabilities of $244,537 with a corresponding reduction primarily to our regulatory assets.
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs (“IIJ”) Act. The IIJ
contained several tax provisions, including the modification of the tax code to exclude from taxable income any
contribution in aid of construction. This provision effectively restored the exclusion that existed prior to the enactment of
TCJA and would generally apply to contributions made after December 31, 2020. The Company evaluated the tax
provisions included in the IIJ, and their impact was incorporated in the calculation of the income tax provision.
58
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 8 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes, including the expenses of Peoples for the
period since the completion of the acquisition on March 16, 2020:
Property
Gross receipts, excise and franchise
Payroll
Regulatory assessments
Pumping fees
Other
Total taxes other than income taxes
Note 9 – Commitments and Contingencies
Commitments –
Years Ended December 31,
2022
2021
2020
33,703
16,828
21,343
6,771
7,881
3,498
90,024 $
33,946
15,777
21,789
6,968
5,761
2,400
86,641
$
$
32,054
14,462
19,053
3,130
6,028
1,870
76,597
$
$
The Company maintains agreements with other water purveyors for the purchase of water to supplement its water supply,
particularly during periods of peak demand. The agreements stipulate purchases of minimum quantities of water to the
year 2029. The estimated annual commitments related to such purchases through 2027 are expected to average $3,419,
and the aggregate of the years remaining approximates $1,120.
The Company has entered into purchase obligations, in the ordinary course of business, that include agreements for water
treatment processes at some of its wells in a small number of its divisions. The 20 year term agreement provides for the
use of treatment equipment and media used in the treatment process and are subject to adjustment based on changes in the
Consumer Price Index. The future contractual cash obligations related to these agreements are as follows:
2023
2024
2025
$
1,111
$
1,131
$
1,156
$
2026
1,182 $
2027
1,208
$
Thereafter
1,708
The Company’s natural gas supply is provided by sources on the interstate pipeline system and from local western
Pennsylvania gas well production. The Company has various interstate pipeline service agreements that provide for firm
transportation capacity, firm storage capacity, and other services and include capacity reservation charges based upon the
maximum daily and annual contract quantities set forth in the agreements. Some of these agreements have minimum
volume obligations and are transacted at applicable tariff and negotiated rates to the year 2034. The estimated annual
commitments related to such purchases through 2027 are expected to average $241,248, and the aggregate of the years
remaining beyond 2027 approximates $1,606,927.
The purchased water, water treatment, and purchased gas expenses under these agreements were as follows:
Purchased water under long-term agreements
Water treatment expense under contractual agreement
Purchased natural gas under long-term agreements
Years Ended December 31,
2021
2020
2022
$
5,559 $
1,061
601,995
5,867 $
1,017
340,262
5,931
1,006
165,745
59
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Contingencies – The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal
matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such
matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules
regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of
December 31, 2022, the aggregate amount of $19,658 is accrued for loss contingencies and is reported in the Company’s
consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best
estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses
if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount
of the probable loss or range of probable losses. Further, Essential Utilities has insurance coverage for certain of these
loss contingencies, and as of December 31, 2022, estimates that approximately $1,530 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, net.
During a portion of 2019, the Company initiated a do not consume advisory for some of its customers in one division
served by the Company’s Illinois subsidiary. The do not consume advisory was lifted in 2019, and, in 2022, the water
system was determined to be in compliance with the federal Lead and Copper Rule. During the second quarter of 2021, an
amount was accrued for the portion of the fine or penalty that we determined to be probable and estimable of being
incurred. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated,
commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this
do not consume advisory. The complaint seeks class action certification, attorney's fees, and "damages, including, but not
limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the
Company’s subsidiary to a discrete service area in University Park Illinois. The complaint contains allegations of
damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The
complaint is in the discovery phase and class certification has not been granted. During the third quarter of 2022, the
Company established an accrual for the amount of loss asserted in the complaint that we determined to be probable and
estimable of being incurred. The Company is vigorously defending against this claim. The Company submitted a claim
for the expenses incurred to its insurance carrier for potential recovery of a portion of these costs and is currently in
litigation with one of its carriers seeking to enforce its claims. The Company continues to assess the potential loss
contingency on this matter. While the final outcome of this claim cannot be predicted with certainty, and unfavorable
outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of this
matter is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash
flows.
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no
pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is
the subject that are material or are expected to have a material effect on the Company’s financial position, results of
operations or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit
program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for
these claims totaled $2,327 and $2,470 at December 31, 2022 and 2021, respectively, and represents a reserve for unpaid
claim costs, including an estimate for the cost of incurred but not reported claims.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004
of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers
served by Aqua Pennsylvania, Inc. In 2020, the Company granted $4,080 of customer rate credits to its Pennsylvania
water and wastewater customers and $18,924 to its Pennsylvania natural gas utility customers.
60
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 10 – Leases
The Company leases land, office facilities, office equipment, and vehicles for use in its operations, which are accounted
for as operating leases. Leases with a term of 12 months or less are not recorded on the balance sheet; rather, lease
expense is recognized over the lease term. Our leases have remaining lives of 1 to 72 years.
Some of the Company’s leases can be extended on a month-to-month basis, which allow us to terminate the lease at any
given month without penalty while others include options to extend the leases for up to 50 years. The renewal of a month-
to-month lease is at our sole discretion.
The Company accounts for lease and non-lease components of lease arrangements separately. For calculating lease
liabilities, we may deem lease terms to include options to extend or terminate the lease when it’s reasonably certain that
we will exercise that option. The Company’s lease agreements do not contain significant residual value guarantees,
restrictions or covenants.
Lease liabilities and corresponding right-of-use assets are recorded based on the present value of the lease payments over
the expected lease term, including leases with variable payments that are based on a market rate or an index and net of any
impairment. All other variable payments are expensed as incurred. Since the Company’s lease agreements do not provide
an implicit interest rate, we utilize our incremental borrowing rate to determine the discount rate used to present value the
lease payments.
On January 6, 2022, the Company entered into an amendment to an office lease that provided for the partial termination of
the Company’s obligations with respect to a portion of the leased premises of approximately 37,000 rentable square feet.
The Company paid a termination fee of $2,812, reduced its remaining lease payments by $1,753 and recognized a loss on
the partial termination of the lease of $1,801.
During the fourth quarter of 2021, the Company determined that there were impairment indicators that required the
Company to review a portion of office space that was no longer used by the Company in its operations for
impairment. Accordingly, the Company performed undiscounted cash flow analyses on the related right-of-use asset
group and determined that such right-of-use asset was impaired. This resulted in a non-cash impairment charge of $4,695,
representing the excess of the right-of-use asset over its fair value, and is included within operations and maintenance
expense in the consolidated statements of operations and comprehensive income.
Components of lease expense were as follows:
Operating lease cost
Years Ended December 31,
2021
2020
2022
$
9,359 $
9,716 $
8,496
61
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Supplemental balance sheet information related to leases was as follows:
Operating leases:
Operating lease right-of-use assets
Other accrued liabilities
Operating lease liabilities
Total operating lease liabilities
Weighted average remaining lease term:
Operating leases
Weighted average discount rate:
Operating leases
$
$
$
$
Years Ended December 31,
2021
2022
9,270 $
9,612
December 31,
2022
2021
41,734 $
48,930
9,316
37,666
46,982 $
7,841
48,230
56,071
December 31,
2022
2021
9.7 years
10.6 years
3.42%
3.62%
Maturities of operating lease liabilities and a reconciliation of the operating lease liabilities reported on our consolidated
balance sheets as of December 31, 2022 are as follows:
2023
2024
2025
2026
2027
Thereafter
Total operating lease payments
Total operating lease payments
Less operating lease liabilities
Present value adjustment
Operating Leases
8,923
8,643
8,591
6,671
6,757
20,763
60,348
60,348
46,982
13,366
$
$
$
$
62
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 11 – Long-term Debt and Loans Payable
Long-term Debt – The consolidated statements of capitalization provide a summary of long-term debt as of December 31,
2022 and 2021. The supplemental indentures with respect to specific issues of the first mortgage bonds restrict the ability
of Aqua Pennsylvania and other operating subsidiaries of the Company to declare dividends, in cash or property, or
repurchase or otherwise acquire the stock of these companies. Loan agreements for Aqua Pennsylvania and other
operating subsidiaries of the Company have restrictions on minimum net assets. As of December 31, 2022, restrictions on
the net assets of the Company were $4,284,813 of the total $5,377,386 in net assets. Included in this amount were
restrictions on Aqua Pennsylvania’s net assets of $1,678,703 of their total net assets of $2,462,533. As of December 31,
2022, $2,158,502 of Aqua Pennsylvania’s retained earnings of $2,178,502 and $277,036 of the retained earnings of
$445,076 of other subsidiaries were free of these restrictions. Some supplemental indentures also prohibit Aqua
Pennsylvania and some other subsidiaries of the Company from making loans to, or purchasing the stock of, the
Company.
Sinking fund payments are required by the terms of specific issues of long-term debt. Excluding amounts due under the
Company’s revolving credit agreement, the future sinking fund payments and debt maturities of the Company’s long-term
debt are as follows:
$
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
Total
$
2023
464 $
872
2,182
32,025
151,649
11,472
-
-
692
-
199,356 $
2024
256
712
1,268
53,318
4,527
10,728
-
-
976
-
71,785
$
2025
197 $
766
1,427
782
122,310
630
-
23,000
448
-
$ 149,560 $
2026
179 $
776
1,305
746
1,562
237
5,000
-
-
11,800
21,605 $
2027
Thereafter
146 $
787
1,113
210,889
1,567
27
20,000
5,378
-
-
239,907 $
633
4,456
1,102,460
2,178,672
1,621,698
531,263
6,000
-
-
-
5,445,182
In January 2023 and October 2022, Aqua Pennsylvania issued $75,000 and $125,000 of first mortgage bonds, due in 2043
and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay
existing indebtedness and for general corporate purposes.
On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815, due in
2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay
$49,700 of borrowings under Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the
Company’s existing five year unsecured revolving credit facility, and (2) for general corporate purposes.
On April 15, 2021, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of
which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The
proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April
19, 2021, the Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest
rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua
Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing five year
unsecured revolving credit agreement.
63
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The weighted average cost of long-term debt at December 31, 2022 and 2021 was 3.94% and 3.49%, respectively. The
weighted average cost of fixed rate long-term debt at December 31, 2022 and 2021 was 3.78% and 3.61%, respectively.
On December 14, 2022, the Company entered into a five year $1,000,000 unsecured revolving credit facility, which
replaced the Company’s prior five year $1,000,000 unsecured revolving credit facility. The Company’s new unsecured
revolving credit facility was used to repay all indebtedness and fees under our prior unsecured revolving credit facility,
and for other general corporate purposes. The facility includes a $100,000 sublimit for daily demand loan. Funds
borrowed under this facility are classified as long-term debt and are used to provide working capital as well as support for
letters of credit for insurance policies and other financing arrangements. As of December 31, 2022, the Company has the
following sublimits and available capacity under the credit facility: $100,000 letter of credit sublimit, $80,959 of letters
of credit available capacity, $0 borrowed under the swing-line commitment, $490,959 was available for borrowing and
$490,000 of funds borrowed under the agreement. Interest under the facility is equal to either (i) Term simple secured
overnight financing rate (SOFR), plus applicable margin; or (ii) an Alternate Base Rate (which is based at the highest of
the (a) New York Federal Reserve Bank rate, plus 0.5%, (b) the prime rate, and, (c) the daily SOFR, plus 1.0%,) plus
applicable margin. The applicable margin for an Alternate Base Rate loan will be up to 0.5% and for a SOFR loan will be
up to 1.5%, in each case depending on the debt ratings in effect as of such date. The Company may elect either the Term
SOFR or the Alternate Base Rate at the time of the drawdown, and loans may be converted from one rate to another at any
time, subject or certain conditions. A facility fee is charged on the total commitment amount of the
agreement. Under these facilities the average cost of borrowings was 3.11% and 1.31%, and the average borrowing
was $297,021 and $174,026, during 2022 and 2021, respectively.
The Company is obligated to comply with covenants under some of its loan and debt agreements. These covenants
contain a number of restrictive financial covenants, which among other things limit, subject to specific exceptions, the
Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require a minimum level of
earnings coverage over interest expense. During 2022, the Company was in compliance with its debt covenants under its
loan and debt agreements. Failure to comply with the Company’s debt covenants could result in an event of default,
which could result in the Company being required to repay or finance its borrowings before their due date, possibly
limiting the Company’s future borrowings, and increasing its borrowing costs.
Loans Payable – In June 2022, Aqua Pennsylvania amended its $100,000 364-day revolving credit agreement primarily
to update the termination date of the facility to June 29, 2023. The funds borrowed under this agreement are classified as
loans payable and used to provide working capital. As of December 31, 2022 and 2021, funds borrowed under the
agreement were $20,000 and $35,000, respectively. Interest under this facility is based, at the borrower’s option, on the
prime rate, an adjusted overnight bank funding rate, or an adjusted Bloomberg Short-Term Bank Yield Index (BSBY)
floating rate. This agreement restricts short-term borrowings of Aqua Pennsylvania. A commitment fee of 0.05% is
charged on the total commitment amount of Aqua Pennsylvania’s revolving credit agreement. The average cost of
borrowing under the facility was 2.40% and 0.78%, and the average borrowing was $31,555 and $40,312, during 2022
and 2021, respectively. The maximum amount outstanding at the end of any one month was $55,000 and $70,000 in 2022
and 2021, respectively.
In June 2022, Peoples Natural Gas Companies amended its 364-day revolving credit agreement primarily to increase the
amount of the facility from $100,000 to $300,000 and to update the termination date of the facility to June 29, 2023. The
funds borrowed under this agreement are classified as loans payable and used to provide working capital. Interest under
this facility is based, at the borrower’ option, at the prime rate, an adjusted overnight bank funding rate, or an adjusted
BSBY floating rate. A commitment fee of 0.05% is charged on the total commitment amount of Peoples’ revolving credit
agreement. As of December 31, 2022 and 2021, funds borrowed under the agreement were $208,500 and $30,000,
respectively. The average cost of borrowing under the facility was 2.30% and 1.02%, and the average borrowing was
$97,458 and $23,750, during 2022 and 2021, respectively. The maximum amount outstanding at the end of any one
month was $234,000 and $30,000 in 2022 and 2021, respectively.
64
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
At December 31, 2022 and 2021, the Company had other combined short-term lines of credit of $35,000. Funds
borrowed under these lines are classified as loans payable and are used to provide working capital. As of December 31,
2022 and 2021, funds borrowed under the short-term lines of credit were $0. The average borrowing under the lines was
$0 and $0 during 2022 and 2021, respectively. The maximum amount outstanding at the end of any one month was $0
and $0 in 2022 and 2021, respectively. Interest under the lines is based at the Company’s option, depending on the line,
on the prime rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The average cost
of borrowings under all lines during 2022 and 2021 was 0% and 0%, respectively.
Interest Income and Expense– Interest income of $3,675, $2,384, and $5,363 was recognized for the years ended
December 31, 2022, 2021, and 2020, respectively. Interest expense was $238,116, $207,709, and $188,435 in 2022,
2021, and 2020, including amounts capitalized for borrowed funds of $6,047, $4,510, and $4,434, respectively.
Note 12 – Fair Value of Financial Instruments
Financial instruments are recorded at carrying value in the financial statements and approximate fair value, with the
exception of long-term debt, as of the dates presented. The fair value of these instruments is disclosed below in
accordance with current accounting guidance related to financial instruments.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and
assumptions. As of December 31, 2022 and 2021, the carrying amount of the Company’s loans payable was $228,500
and $65,000, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents is
determined based on Level 1 methods and assumptions. As of December 31, 2022 and 2021, the carrying amounts of the
Company's cash and cash equivalents were $11,398 and $10,567, respectively, which equates to their fair value. The
Company’s assets underlying the deferred compensation 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 December 31, 2022 and 2021, the carrying amount of these securities was $24,962 and $28,576, respectively, which
equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.
Unrealized gains and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
Years ended December 31,
2020
2021
2022
Net gain (loss) recognized during the period on equity securities
Less: net gain (loss) recognized during the period on equity securities sold during the
period
Unrealized gain (loss) recognized during the reporting period on equity securities still held
at the reporting date
$ (895) $
607 $ 492
-
-
-
$ (895) $
607 $
492
The net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and
comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
Carrying amount
Estimated fair value
December 31,
2022
6,617,395 $
5,528,131
2021
5,947,357
6,482,499
$
65
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 $114,732 and $103,619 at December 31, 2022 and 2021,
respectively. 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 rates. Portions of these non-
interest bearing instruments are payable annually through 2031 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 feature.
Note 13 – Stockholders’ Equity
At December 31, 2022, the Company had 600,000,000 shares of common stock authorized; par value $0.50. Shares
outstanding and treasury shares held were as follows:
Shares outstanding
Treasury shares
At-the-Market Offering
2022
263,737,084
3,236,237
December 31,
2021
252,867,623
3,234,765
2020
245,390,468
3,180,887
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents,
under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an
aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form
S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for
working capital, capital expenditures, water and wastewater utility acquisitions, and repaying outstanding indebtedness.
During the fourth quarter of 2022, the Company issued 1,321,994 shares of common stock under the ATM for proceeds of
$63,040, net of expenses. In January 2023, the Company issued 399,128 shares of common stock under the ATM for
proceeds of $19,294, net of expenses.
Forward Equity Sale
In August 2020, the Company entered into a forward equity sale agreement for 6,700,000 shares of common stock with a
third party (the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser
borrowed an equal number of shares of the Company’s common stock from stock lenders and sold the borrowed shares to
the public. The Company did not receive any proceeds from the sale of its common stock by the forward purchaser until
settlement of the shares underlying the forward equity sale agreement. The actual proceeds to be received by the
Company would have varied depending upon the settlement date, the number of shares designated for settlement on that
settlement date and the method of settlement. The forward equity sale agreement was accounted for as an equity
instrument and was recorded at a fair value of $0 at inception. The fair value was not adjusted as the Company continued
to meet the accounting requirements for equity instruments.
On August 9, 2021, the Company completely settled forward equity sale agreements by physical share settlement. The
Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74 per share.
Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per share,
adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends during the
term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale agreement to
fund general corporate purposes, including for water and wastewater utility acquisitions, working capital and capital
expenditures. There are no remaining shares subject to the forward equity sale agreement.
66
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Private Placement
On March 29, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with
Canada Pension Plan Investment Board (the “Investor”), pursuant to which the Company agreed to issue and sell to the
Investor in a private placement (the “Private Placement”) 21,661,095 newly issued shares of common stock, par value
$0.50 per share (the “Common Stock”). On March 16, 2020, in connection with the closing of the Peoples Gas
Acquisition, the Company closed on the Private Placement and received gross proceeds of $749,907, less expenses of
$20,606. In June 2021, the Company filed a registration statement on Form S-3 ASR registering the Private Placement
shares for resale.
The shares issued and sold to the Investor pursuant to the Private Placement were to be priced at the lower of (1) $34.62,
which represents a 4.5% discount to the trailing 20 consecutive trading day volume weighted average price of the
Common Stock ending on, and including, March 28, 2019, and (2) the volume weighted average price per share in the
Company’ subsequent public offering of Common Stock to fund a portion of the Peoples Gas Acquisition. Based on the
common stock offering noted below, the Private Placement was priced at $34.62 per share.
The Stock Purchase Agreement contains customary representations, warranties and covenants of the Company and the
Investor, and the parties have agreed to indemnify each other for losses related to breaches of their respective
representations and warranties. At the closing of the Private Placement, the Company reimbursed the Investor for
reasonable out-of-pocket diligence expenses of $4,000.
Common Stock / Tangible Equity Unit Issuances
On April 23, 2019, the Company issued $1,293,750, less expenses of $30,651, of its common stock and $690,000, less
expenses of $16,358, of its tangible equity units (the “Units”), with a stated amount of $50 per unit. These issuances were
part of the financing of the Peoples Gas Acquisition. The common stock was issued at $34.62 per share and thus the
Private Placement noted above was priced at $34.62 per share. The Company recorded the issuance of the purchase
contract portion of the Units as additional paid-in-capital of $570,919, less allocable issuance costs of $13,530, in our
financial statements. The Company recorded the amortizing notes portion of the Units of $119,081 as long-term debt and
recorded allocable issuance costs of $2,828 as debt issuance costs.
Each Unit consisted of a prepaid stock purchase contract and an amortizing note, each issued by the Company. The
amortizing notes had an initial principal amount of $8.62909, or $119,081 in aggregate, and yielded interest at a rate of
3.00% per year, and paid equal quarterly cash installments of $0.75000 per amortizing note (except for the July 30, 2019
installment payment, which was $0.80833 per amortizing note), that constituted a payment of interest and a partial
repayment of principal. This cash payment in the aggregate was equivalent to 6.00% per year with respect to each $50
stated amount of the Units. The amortizing notes represented unsecured senior obligations of the Company.
Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date,
and, in exchange, the Company issued shares of its common stock. During 2022, 981,919 stock purchase contracts were
early settled by the holders of the contracts prior to the mandatory settlement date, resulting in the issuance of 1,166,107
shares of the Company’s common stock. On May 2, 2022, the remaining 6,621,315 stock purchase contracts were each
mandatorily settled for 1.18758 shares of the Company’s common stock, and in the aggregate the Company issued
7,863,354 shares of its common stock. Additionally, the final quarterly installment payment was made, which resulted in
the complete pay-off of the amortizing notes.
At December 31, 2022, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock, $1.00 par
value.
In April 2021, the Company filed a 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
67
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities
specified therein at indeterminate prices.
The Company has an acquisition shelf registration statement on file with the SEC which permits the offering, from time to
time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with
acquisitions. The balance remaining available for use under the acquisition shelf registration as of December 31, 2022 is
$487,155.
The form and terms of any securities issued under the universal shelf registration statement and the acquisition shelf
registration statement will be determined at the time of issuance.
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) that allows reinvested dividends to
be used to purchase shares of common stock at a five percent discount from the current market value. Under the direct
stock purchase program, shares are issued throughout the year. The shares issued under the Plan are either shares
purchased by the Company’s transfer agent in the open-market or original issue shares. In 2022, 2021 and 2020, the
Company sold 368,278, 374,824 and 388,978 original issue shares of common stock through the dividend reinvestment
portion of the Plan, for net proceeds of $16,619, $16,799 and $16,522, respectively.
The Company recorded a regulatory asset for its underfunded status of its pension and other post-retirement benefit plans
that would otherwise be charged to other comprehensive income, as it anticipates recovery of its costs through customer
rates.
Note 14 – Net Income per Common Share and Equity per Common Share
Basic net income per share is based on the weighted average number of common shares 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 share is based on the weighted average number of common shares outstanding and
potentially dilutive shares. The dilutive effect of employee stock-based compensation and shares issuable under the
forward equity sale agreement (from the date the Company entered into the forward equity sale agreement to the
settlement date) are included in the computation of diluted net income per common share. The dilutive effect of stock-
based compensation and shares issuable under the forward equity sale agreement are calculated by using the treasury
stock method and expected proceeds upon exercise or issuance of the stock-based compensation and settlement of the
forward equity sale agreement. The treasury stock method assumes that the proceeds from stock-based compensation and
settlement of the forward equity sale agreement are used to purchase the Company’s common stock at the average market
price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net
income per share:
Average common shares outstanding during the period for basic computation
Effect of dilutive securities:
Forward equity sale agreement
Issuance of common stock from private placement
Tangible equity units
Employee stock-based compensation
Average common shares outstanding during the period for diluted computation
Years ended December 31,
2021
2022
262,246
-
-
-
622
262,868
257,487
189
-
-
504
258,180
2020
249,768
-
4,438
-
423
254,629
For the year ended December 31, 2020, the average common shares outstanding during the period for diluted computation
reflects the impact of the issuance of common stock from the March 16, 2020 private placement as if the shares were
issued on January 1, 2020.
68
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The number of outstanding employee stock options that were not included in the diluted earnings per share calculation
because the effect would have been anti-dilutive was 77,506 for the year ended December 31, 2022. For the years ended
December 31, 2021 and 2020, all of the Company’s employee stock options were included in the calculation of diluted net
income 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. 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.
On May 2, 2022, all of the remaining stock purchase contracts under the tangible equity units were mandatorily settled.
For the year ended December 31, 2022, the weighted average impact of 2,932,010 shares were included in the basic
computation of the average common shares outstanding based on the number of shares that were issued upon settlement
of the stock purchase contracts under the tangible equity units. For the years ended December 31, 2021 and 2020, the
minimum settlement amount of the stock purchase contracts under the tangible equity units of 9,041,687 and 9,370,646
shares, respectively, were considered outstanding for the basic computation of the average common shares outstanding.
Equity per common share was $20.39 and $20.50 at December 31, 2022 and 2021, respectively. These amounts were
computed by dividing Essential Utilities stockholders’ equity by the number of shares of common stock outstanding at the
end of each year.
Note 15 – Employee Stock and Incentive Plan
Under the Company’s Amended and Restated Equity Compensation Plan, (the “Plan”) approved by the Company’s
shareholders on May 2, 2019, to replace the 2004 Equity Compensation 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 Plan authorizes 6,250,000 shares for issuance under the plan. A
maximum of 3,125,000 shares under the Plan may be issued pursuant to stock award, stock units and other stock-based
awards, subject to adjustment as provided in the Plan. During any calendar year, no individual may be granted (i) stock
options and stock appreciation rights under the Plan for more than 500,000 shares of common stock in the aggregate or (ii)
stock awards, stock units or other stock-based awards under the Plan for more than 500,000 shares of Company stock in
the aggregate, subject to adjustment as provided in the Plan. Awards to employees and consultants under the Plan are
made by a committee of the Board of Directors, 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 December 31, 2022, 1,754,295 shares
were still available for issuance under the Plan. No further grants may be made under the Company’s 2004 Equity
Compensation Plan.
Performance Share Units – During 2022, 2021 and 2020, the Company granted 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 performance period specified in the grant, subject to exceptions through the respective vesting
periods, 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 performance goals of the 2022, 2021 and 2020 PSU grants consisted of the following metrics:
Metric 1 – Company’s total shareholder return (“TSR”) compared to the TSR for a specific
peer group of investor-owned utilities (a market-based condition)
Metric 2 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 3 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
38.46%
30.77%
30.77%
69
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the compensation expense and income tax benefit for PSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
Years ended December 31,
2021
2022
2020
$
7,950 $
1,997
7,150 $
2,038
3,630
957
The following table summarizes nonvested PSU transactions for the year ended December 31, 2022:
Nonvested share units at beginning of period
Granted
Performance criteria adjustment
Forfeited
Nonvested share units at end of period
Number of
Share Units
Weighted
Average Fair
Value
355,384 $
161,968
100,227
(61,117)
556,462
42.19
42.33
46.21
43.89
42.77
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based
conditions associated with the PSUs using the Monte Carlo valuation method, which assesses the probabilities of various
outcomes of market conditions. The other portion of the fair value of the PSUs associated with performance-based
conditions was 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 fair value of each PSU grant is amortized into compensation expense on a straight-line
basis over their respective vesting periods, generally 36 months. The accrual of compensation costs is based on an
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. The following table provides the assumptions used in the pricing model for the
grant, the resulting grant date fair value of PSUs, and the intrinsic value and fair value of PSUs that vested during the
year:
Expected term (years)
Risk-free interest rate
Expected volatility
Weighted average fair value of PSUs granted
Intrinsic value of vested PSUs
Fair value of vested PSUs
Years ended December 31,
2022
2021
3.0
1.75%
31.9%
42.33 $
- $
- $
3.0
0.24%
32.1%
43.18 $
6,050 $
5,321 $
2020
3.0
0.66%
24.2%
55.25
9,030
5,215
$
$
$
As of December 31, 2022, $9,752 of unrecognized compensation costs related to PSUs is expected to be recognized over
a weighted average period of approximately 1.79 years. The aggregate intrinsic value of PSUs as of December 31, 2022
was $17,594. The aggregate intrinsic value of PSUs is based on the number of nonvested share units and the market value
of the Company’s common stock as of the period end date.
70
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common
stock and is valued based on the fair market value of the Company’s stock on the date of grant. RSUs are eligible to be
earned at the end of a specified restricted period, generally three years, beginning on the date of grant. In some cases, the
right to receive the shares is subject to specific performance goals established at the time the grant is made. 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 expense and income
tax benefit for RSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
Years ended December 31,
2022
2,927 $
736
2021
3,360 $
953
2020
2,180
585
The following table summarizes nonvested RSU transactions for the year ended December 31, 2022:
Nonvested stock units at beginning of period
Granted
Stock units vested and issued
Forfeited
Nonvested stock units at end of period
The following table summarizes the value of RSUs:
Weighted average fair value of RSUs granted
Intrinsic value of vested RSUs
Fair value of vested RSUs
$
Number of
Stock Units
Weighted
Average Fair
Value
193,687 $
72,092
(65,839)
(19,634)
180,306
43.76
44.74
38.42
45.30
45.94
Years ended December 31,
2021
2022
44.74 $
3,090
2,483
44.44 $
2,108
1,726
2020
49.19
2,130
1,203
As of December 31, 2022, $3,246 of unrecognized compensation costs related to RSUs is expected to be recognized over
a weighted average period of approximately 1.7 years. The aggregate intrinsic value of RSUs as of December 31, 2022
was $8,606. The aggregate intrinsic value of RSUs is based on the number of nonvested stock units and the market value
of the Company’s common stock as of the period end date.
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 ten years from the grant date. The vesting of stock options granted in 2022 and 2019 are
subject to the achievement of the following performance goal: the Company achieves at least an adjusted return on equity
equal to 150 basis points below the return on equity granted by the Pennsylvania Public Utility Commission during the
Company’s Pennsylvania subsidiary’s last rate proceeding. The adjusted return on equity equals net income, excluding
net income or loss from acquisitions which have not yet been incorporated into a rate application as of the last year end,
divided by equity which excludes equity applicable to acquisitions which are not yet incorporated in a rate application
during the award period.
71
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company did not grant stock options for the years ended December 31, 2021 and 2020. 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 compensation expense and
income tax benefit for stock options:
Stock-based compensation within operations and maintenance expenses
Income tax benefit
$
451 $
140
480 $
136
Years ended December 31,
2022
2021
2020
1,322
374
Options under the plans were issued at the closing market price of the stock on the day of the grant. The fair value of
options was estimated at the grant date using the Black-Scholes option-pricing model, which relies on assumptions that
require management’s judgment. The following table provides the assumptions used in the pricing model for grants and
the resulting grant date fair value of stock options granted in the period reported:
Expected term (years)
Risk-free interest rate
Expected volatility
Dividend yield
Grant date fair value per option
2022
5.48
1.92%
26.5%
2.37%
9.34
$
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected
volatility is based on a weighted-average combination of historical and implied volatilities over a time period that
approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield
curve in effect at the time of grant for the expected term of the option. The Company assumes that forfeitures will be
minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.
The following table summarizes stock option transactions for the year ended December 31, 2022:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic Value
6.2 $
5.9 $
9,383
9,191
Outstanding, beginning of year
Granted
Forfeited
Expired / Cancelled
Exercised
Outstanding at end of year
Shares
813,492
85,527
(9,149)
(125)
(69,684)
820,061 $
35.37
45.19
44.32
35.94
35.52
36.29
Exercisable at end of year
745,000 $
35.39
72
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at the
end of the period or on the day of exercise, exceeded the closing market price of stock on the date of grant. The following
table summarizes the intrinsic value of stock options exercised and the fair value of stock options which vested:
Intrinsic value of options exercised
Fair value of options vested
Years ended December 31,
$
2022
2021
2020
960 $
1,203
$
1,709
1,485
1,849
1,673
The following table summarizes information about the options outstanding and options exercisable as of December 31,
2022:
Options Outstanding
Options Exercisable
Range of prices:
$30.00 - 33.99
$34.00 - 34.99
$35.00 - 35.99
$36.00 and above
Shares
54,467
90,194
597,894
77,506
820,061
Weighted
Average
Remaining
Life (years)
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
4.1 $
5.2
6.2
9.1
6.2 $
30.47
34.51
35.93
45.17
36.29
54,467 $
90,194
597,894
2,445
745,000 $
30.47
34.51
35.93
45.19
35.39
As of December 31, 2022, there was $322 of total unrecognized compensation costs related to nonvested stock options
granted under the plans. The cost is expected to be recognized over a weighted average period of approximately 1.5
years.
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to
receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction
period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the
date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock
to be de minimis.
The following table provides the compensation cost and income tax benefit for stock-based compensation related to
restricted stock:
Years ended December 31,
2021
2022
2020
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
50 $
15
130 $
37
333
96
73
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes restricted stock transactions for the year ended December 31, 2022:
Nonvested shares at beginning of period
Granted
Vested
Nonvested shares at end of period
Number of Shares
1,068
1,170
(1,068)
1,170
$
$
Weighted Average
Fair Value
46.83
42.75
(46.83)
42.75
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. Stock awards
are granted to the Company’s non-employee directors. The issuance of stock awards results in compensation expense
which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant. The
following table provides compensation cost and income tax benefit for stock-based compensation related to stock awards:
Stock-based compensation within operations and maintenance expense
Income tax benefit
The following table summarizes the value of stock awards:
Years ended December 31,
2021
2022
2020
715 $
207
700 $
202
695
201
$
Years ended December 31,
2022
2021
2020
Intrinsic and fair value of stock awards vested
Weighted average fair value of stock awards granted
$
715 $
46.44
700 $
47.46
695
41.97
The following table summarizes stock award transactions for year ended December 31, 2022:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock awards at end of period
Number of
Stock Awards
Weighted
Average Fair
Value
- $
15,397
(15,397)
-
-
46.44
46.44
-
74
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 16 – Pension Plans and Other Post-retirement Benefits
The Company maintains a qualified, defined benefit pension plan that covers its full-time employees who were hired prior
to the date their respective pension plan was closed to new participants. Retirement benefits under the plan are generally
based on the employee’s total years of service and compensation during the last five years of employment. The
Company’s policy is to fund the plan annually at a level which is deductible for income tax purposes and which provides
assets sufficient to meet its pension obligations over time. To offset some limitations imposed by the Internal Revenue
Code with respect to payments under qualified plans, the Company has a non-qualified Supplemental Pension Benefit
Plan for Salaried Employees in order to prevent some employees from being penalized by these limitations, and to provide
certain retirement benefits based on employee’s years of service and compensation. The net pension costs and obligations
of the qualified and non-qualified plans are included in the tables which follow. Employees hired after their respective
pension plan was closed, may participate in a defined contribution plan that provides a Company matching contribution
on amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of the eligible
participants’ compensation.
The Company’s qualified defined benefit pension plan has a permanent lump sum option to the form of benefit payments
offered to participants upon retirement or termination. The plan paid $17,757 and $11,069 to participants who elected this
option during 2022 and 2021, respectively. During 2022, we made lump-sum pension benefit distributions exceeding the
cumulative amount of service and interest cost components of the net periodic pension cost for the year, which is the
settlement accounting threshold. The settlement loss of $3,300 was recorded as a regulatory asset, as it is probable of
recovery in future rates, and will be amortized into pension benefit costs. A settlement loss is the recognition of
unrecognized pension benefit costs that would have been incurred in subsequent periods.
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to employees
retiring with a minimum level of service and hired before their respective plan closed to new participants. These benefits
include continuation of medical and prescription drug benefits, or a cash contribution toward such benefits, for eligible
retirees and life insurance benefits for eligible retirees. The Company funds these benefits through various trust accounts.
The benefits of retired officers and other eligible retirees are paid by the Company and not from plan assets due to
limitations imposed by the Internal Revenue Code.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years
indicated:
Years:
2023
2024
2025
2026
2027
2028-2032
Pension Benefits
Other Post-retirement Benefits
$
27,351 $
27,154
27,723
27,497
29,007
129,413
5,498
5,464
5,636
5,965
6,252
32,750
75
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the assumptions used
in the measurement of the company’s benefit obligation are as follows:
Pension Benefits
2022
2021
Other Post-retirement Benefits
2022
2021
Change in benefit obligation:
$
Benefit obligation at January 1,
Service cost
Interest cost
Actuarial loss/(gain)
Plan participants' contributions
Benefits paid
Plan amendments
Participants' directed transfer of benefit to other plans
Settlements
Benefit obligation at December 31,
452,947 $
2,587
13,806
(105,107)
-
(19,339)
2,121
(4,568)
(17,757)
324,690
486,219 $
3,503
13,018
(17,378)
-
(32,415)
-
-
-
452,947
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Participants' contributions
Benefits paid
Settlements
Fair value of plan assets at December 31,
433,121
(83,297)
20,390
-
(19,281)
(17,757)
333,176
426,801
23,901
14,834
-
(32,415)
-
433,121
114,651
1,911
3,369
(31,995)
145
(4,580)
-
-
-
83,501
107,308
(19,589)
1,636
145
(3,506)
-
85,994
$ 125,375
2,793
3,358
(12,001)
36
(4,910)
-
-
-
114,651
98,995
12,484
598
36
(4,805)
-
107,308
Funded status of plan:
Net asset / (liability) recognized at December 31,
$
8,486 $
(19,826) $
2,493
$
(7,343)
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
Non-current asset
Current liability
Noncurrent liability
Net asset / (liability) recognized
Pension Benefits
2022
2021
Other Post-retirement Benefits
2022
2021
$
$
24,389 $
(761)
(15,142)
8,486 $
2,474 $
(1,144)
(21,156)
(19,826) $
19,438 $
(843)
(16,102)
2,493 $
23,504
(1,777)
(29,070)
(7,343)
76
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides selected information about plans with accumulated benefit obligation and projected benefit
obligation in excess of plan assets:
December 31,
2022
December 31,
2021
Pension
Benefits
Other
Post-retirement
Benefits
Pension
Benefits
Other
Post-retirement
Benefits
Selected information for plans with projected benefit
obligation in excess of plan assets:
Projected benefit obligation
Fair value of plan assets
Selected information for plans with accumulated benefit
obligation in excess of plan assets:
Accumulated benefit obligation
Fair value of plan assets
$
16,041 $
-
N/A $
N/A
23,601 $
-
N/A
N/A
$
12,126 $
-
29,009 $
12,064
17,129 $
-
42,463
11,616
The following table provides the components of net periodic benefit costs for the years ended December 31,:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of actuarial loss (gain)
Net periodic benefit cost (credit)
Pension Benefits
2022
2021
2020
$
2,587 $
3,503 $
3,775 $
13,806
(22,004)
536
2,043
(3,032) $
13,018
(23,165)
559
2,907
(3,178) $
13,710
(21,249)
591
7,967
4,794 $
$
Other Post-retirement Benefits
2020
2,276
3,687
(4,079)
(464)
622
2,042
2021
2,793 $
3,358
(4,155)
(432)
219
1,783 $
2022
1,911 $
3,369
(4,502)
-
(1,336)
(558) $
The Company records the underfunded/overfunded status of its pension and other post-retirement benefit plans on its
consolidated balance sheets and records a regulatory asset/liability for these costs that would otherwise be charged to
stockholders’ equity, as the Company anticipates recoverability of the costs through customer rates to be probable.
Changes in the plans’ funded status will affect the assets and liabilities recorded on the balance sheet. Due to the
Company’s regulatory treatment, the recognition of the funded status is recorded as a regulatory asset pursuant to the
FASB’s accounting guidance for regulated operations.
The following table provides the amounts recognized in regulatory assets and regulatory liabilities that have not been
recognized as components of net periodic benefit cost as of December 31:
Net actuarial loss (gain)
Prior service cost
Total recognized in regulatory assets
$
$
56,737 $
2,550
59,287 $
64,247
965
65,212
$
$
Pension Benefits
2022
2021
Other Post-retirement Benefits
2022
(19,894)
-
(19,894)
2021
(16,323)
-
(16,323)
$
$
77
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Accounting for pensions and other post-retirement benefits requires 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. Each assumption is reviewed annually with assistance from the Company’s
actuarial consultant who provides guidance in establishing the assumptions. The assumptions are selected to represent the
average expected experience over time and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of pension and other post-retirement benefit
expense that the Company recognizes.
The significant assumptions related to the Company’s benefit obligations are as follows:
Weighted Average Assumptions Used to Determine Benefit Obligations as of
December 31,
Discount rate
Rate of compensation increase
Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as of
December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Pension Benefits
2022
2021
Other Post-
retirement Benefits
2022
2021
5.51%
2.91%
3.0-4.0% 3.0-4.0%
5.45%
n/a
2.96%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.50%
5.0%
2029
6.25%
5.0%
2027
n/a – Assumption is not applicable.
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
Pension Benefits
2022
2021
2020
Other Post-retirement Benefits
2020
2021
2022
Weighted Average Assumptions Used to Determine
Net Periodic Benefit Costs for Years Ended December
31,
Discount rate
Expected return on plan assets
Rate of compensation increase
Assumed Health Care Cost Trend Rates Used to
Determine Net Periodic Benefit Costs for Years Ended
December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
n/a – Assumption is not applicable.
2.91%
5.40%
2.57%
5.60%
3.0-4.0% 3.0-4.0% 3.0-4.0%
3.35%
2.96%
6.00% 3.4%-5.4%
n/a
2.68%
5.60%
n/a
3.42%
6.00%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.25%
6.3%
6.3%
5.0%
2027
5.0%
2025
5.0%
2025
* In September 2022, the Company remeasured its qualified pension plan assets and liabilities in accordance with settlement accounting rules. The
discount rate used for the remeasurement and for the calculation of the net periodic benefit cost for the remainder of the year was 5.58%.
78
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s discount rate assumption, which is utilized to calculate the present value of the projected benefit
payments of our post-retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate
bonds appropriate to match the projected benefit payments of the plans. The selected bond portfolio was derived from a
universe of Aa-graded corporate bonds. The discount rate was then developed as the rate that equates the market value of
the bonds purchased to the discounted value of the plan’s benefit payments. The Company’s pension expense and liability
(benefit obligations) increases as the discount rate is reduced.
The Company’s expected return on plan assets is determined by evaluating the asset class return expectations with its
advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related value of plan
assets is equal to the fair value of the plan’s assets as of the last day of its fiscal year, and is a determinant for the expected
return on plan assets which is a component of post-retirement benefits expense. The Company’s pension expense
increases as the expected return on plan assets decreases. For 2022, the Company used a 5.4% expected return on plan
assets assumption. The Company believes its actual long-term asset allocation on average will approximate the targeted
allocation. The Company’s investment strategy is to earn a reasonable rate of return while maintaining risk at acceptable
levels. Risk is managed through fixed income investments to manage interest rate exposures that impact the valuation of
liabilities and through the diversification of investments across and within various asset categories. Investment returns are
compared to a total plan benchmark constructed by applying the plan’s asset allocation target weightings to passive index
returns representative of the respective asset classes in which the plan invests. The Retirement and Employee Benefits
Committee meets quarterly to review plan investments and management monitors investment performance quarterly
through a performance report prepared by an external consulting firm.
The Company’s pension plan asset allocation and the target allocation by asset class are as follows:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
2022
56%
44%
100%
2021
53%
47%
100%
Percentage of Plan Assets at December 31,
The fair value of the Company’s pension plans’ assets at December 31, 2022 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
$
18,037 $
- $
- $
-
-
-
-
31,670
49,707 $
-
-
-
-
-
- $
-
-
-
-
-
- $
$
Assets measured at
NAV (a)
-
$
15,163
102,038
52,048
114,220
-
283,469
$
Total
18,037
15,163
102,038
52,048
114,220
31,670
333,176
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
79
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s pension plans’ assets at December 31, 2021 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
Assets
measured at
NAV (a)
$
20,290 $
-
-
-
-
5,509
25,799 $
$
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
-
$
134,394
39,163
56,191
177,574
-
407,322
$
Total
20,290
134,394
39,163
56,191
177,574
5,509
433,121
Equity securities include our common stock in the amounts of $18,037 or 5.4% and $20,290 or 4.7% of total pension
plans’ assets as of December 31, 2022 and 2021, respectively.
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as
follows:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
2022
62%
38%
100%
2021
68%
32%
100%
Percentage of Plan Assets at December 31,
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2022 by asset class are as
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
Total other post-retirement assets
Level 1
Level 2
Level 3
Assets measured at
NAV (a)
$
$
27,258 $
6,386
15,131
8,725
57,500 $
- $
-
-
-
- $
- $
-
-
-
- $
16,024
3,311
9,159
-
28,494
$
$
Total
43,282
9,697
24,290
8,725
85,994
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
80
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2021 by asset class are as
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
Total other post-retirement assets
Level 1
Level 2
Level 3
Assets
measured at
NAV (a)
$
$
36,753 $
9,609
17,241
4,406
68,009 $
- $
-
-
-
- $
- $
-
-
-
- $
22,544
4,391
12,364
-
39,299
$
$
Total
59,297
14,000
29,605
4,406
107,308
Valuation Techniques Used to Determine Fair Value
Common Stocks - Investments in common stocks are valued using unadjusted quoted prices obtained from active
markets.
Return Seeking Assets – Investments in return seeking assets consists of the following:
o Global equities, which consist of common and preferred shares of stock, traded on U.S. or foreign
exchanges that are valued using unadjusted quoted prices obtained from active markets, or commingled
fund vehicles, consisting of such securities valued using NAV, which are not classified within the fair
value hierarchy.
o Real estate securities, which consist of securities, traded on U.S. or foreign exchanges that are valued
using unadjusted quoted prices obtained from active markets, or for real estate commingle fund vehicles
that are not publicly quoted, the fund administrators value the funds using the NAV per fund share,
derived from the quoted prices in active markets of the underlying securities and are not classified within
the fair value hierarchy.
o Hedge / diversifying strategies, which consist of a multi-manager fund vehicle having underlying
exposures that collectively seek to provide low correlation of return to equity and fixed income markets,
thereby offering diversification. As a multi-manager fund investment, NAV is derived from underlying
manager NAVs, which are derived from the quoted prices in active markets of the underlying securities
and are not classified within the fair value hierarchy.
o Credit, which consist of certain opportunistic, return-oriented credits which primarily include below
investment grade bonds (i.e. high yield bonds), bank loans, and securitized debt. Credits are valued using
the NAV per fund share, derived from either quoted prices in active markets of the underlying securities,
or less active markets, or quotes of similar assets, and are not classified within the fair value hierarchy.
Liability Hedging Assets – Investments in liability hedging assets consist of funds investing in high-quality fixed
income securities (i.e. U.S. Treasury securities and government bonds), and for funds for which market quotations
are readily available, are valued at the last reported closing price on the primary market or exchange on which
they are traded. Funds for which market quotations are not readily available, are valued using the NAV per fund
share, derived from the quoted prices in active markets of the underlying securities and are not classified within
the fair value hierarchy.
Cash and Cash Equivalents – Investments in cash and cash equivalents are comprised of both uninvested cash and
money market funds. The uninvested cash is valued based on its carrying value, and the money market funds are
valued utilizing the net asset value per unit obtained from published market prices.
81
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by
accounting pronouncements. In accordance with funding rules and the Company’s funding policy, during 2023 our
pension contribution is expected to be $20,343.
The Company has a 401(k) savings plan, which is a defined contribution plan and covers substantially all employees. The
Company makes matching contributions that are based on a percentage of an employee’s contribution, subject to specific
limitations, as well as, non-discretionary contributions based on eligible hourly wages for certain union employees,
discretionary year-end contributions based on an employee’s eligible compensation, and employer profit sharing
contributions. Participants may diversify their Company matching account balances into other investments offered under
the 401(k) savings plan. The Company’s contributions, which are recorded as compensation expense, were $21,758,
$19,569, and $15,445, for the years ended December 31, 2022, 2021, and 2020, respectively.
Note 17 –Rate Activity
On December 30, 2022, our water and wastewater utility operating divisions in Ohio filed an application with the Public
Utilities Commission of Ohio designed to increase rates by $9,816 annually.
On September 21, 2022, our regulated water and wastewater utility operating divisions in Ohio received an order from the
Public Utilities Commission of Ohio which will increase operating revenues by $5,483 annually. New rates for water and
sewer service went into effect on September 21, 2022.
On June 30, 2022, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North
Carolina, filed an application with the North Carolina Utilities Commission designed to increase rates by $18,064 in the
first year of new rates being implemented, then an additional $4,303 and $4,577 in the second and third years,
respectively.
On May 16, 2022, the Company’s regulated water and wastewater operating subsidiary in Pennsylvania, Aqua
Pennsylvania, received an order from the Pennsylvania Public Utility Commission that allowed base rate increases that
would increase total annual operating revenues by $69,251. New rates went into effect on May 19, 2022. At the time the
rate order was received, the rates in effect also included $35,470 in Distribution System Improvement Charges (“DSIC”),
which was 7.2% above prior base rates. Consequently, the aggregate annual base rates increased by $104,721 since the
last base rate increase and DSIC was reset to zero.
On January 3, 2022, the Company’s natural gas operating division in Kentucky received an order from the Kentucky
Public Service Commission resulting in an increase of $5,238 in annual revenues, and new rates went into effect on
January 4, 2022. On June 7, 2022, an additional $260 was approved and made effective by the Commission, resulting
from a rehearing requested by the operating division.
In addition to the Ohio, Pennsylvania, and Kentucky rate awards noted above, the Company’s operating subsidiaries were
allowed annualized rate increases of $1,378 in 2022, $3,390 in 2021, and $4,480 in 2020, represented by two, six, and five
rate decisions, respectively. Annualized revenues in aggregate from all of the rate increases realized in the year of grant
were approximately $51,163, $2,995, and $1,594 in 2022, 2021, and 2020, respectively.
Eight states in which the Company operates permit water and wastewater utilities to add a surcharge to their water or
wastewater bills to offset the additional depreciation and capital costs related to infrastructure system replacement and
rehabilitation projects completed and placed into service between base rate filings. Additionally, Pennsylvania and
Kentucky allow for the use of an infrastructure rehabilitation surcharge for natural gas utility systems. The surcharge for
infrastructure system replacements and rehabilitations is typically adjusted periodically based on additional qualified
capital expenditures completed or anticipated in a future period, is capped as a percentage of base rates, generally at 5% to
12.75%, and is reset to zero when new base rates that reflect the costs of those additions become effective or when a
utility’s earnings exceed a regulatory benchmark. During 2022, the Company received approval to bill infrastructure
82
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
rehabilitation surcharges designed to increase total operating revenues on an annual basis by $7,571 in its water and
wastewater utility operating divisions in Pennsylvania, North Carolina, Illinois and Virginia. The surcharge for
infrastructure system replacements and rehabilitations provided revenues in 2022, 2021, and 2020 of $26,902, $33,771,
and $13,039, respectively.
Note 18 – Segment Information
The Company has identified twelve operating segments and has two reportable segments, the Regulated Water segment
and the Regulated Natural Gas segment. The 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 eight water and wastewater utility operating segments are aggregated into
one reportable segment, because each of these operating segments has the following similarities: economic characteristics,
nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of
the regulatory environment. The Regulated Natural Gas segment is comprised of one operating segment representing
natural gas utility companies, acquired in the Peoples Gas Acquisition, for which the Company provides natural gas
distribution services. The operating results of Peoples are included in the consolidated financial statements for the period
since the completion of its acquisition on March 16, 2020.
In addition to the Company’s two reportable segments, we include three of our operating segments within the Other
category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas
operations, Aqua Infrastructure, and Aqua Resources. Our non-regulated natural gas operations consist of utility service
line protection solutions and repair services to households and the operation of gas marketing and production entities.
Prior to our October 30, 2020 sale of our investment in joint venture, Aqua Infrastructure provided non-utility raw water
supply services for firms in the natural gas drilling industry. Aqua Resources offers, through a third party, water and
sewer service line protection solutions and repair services to households. In addition to these segments, Other is
comprised of business activities not included in the reportable segments, corporate costs that have not been allocated to
the Regulated Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include
general and administrative expenses, and interest expense. The Company reports these corporate costs within Other as
they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment
operating performance used by the Company to measure the underlying performance of the operating segments.
The following table presents information about the Company’s reportable segments:
Regulated
Natural Gas
Other and
Eliminations
Consolidated
2022
Operating revenues
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Interest expense, net (b)
Allowance for funds used during construction
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
$
$
$
$
$
$
$
$
$
$
Regulated
Water
1,082,972 $
370,850 $
- $
201,392 $
111,938 $
(20,950) $
47,510 $
314,352 $
61,698 $
3,293 $
50,986 $
830 $
35,317 $
- $
103 $
(34,391) $
576,314 $ 479,335 $ 7,114 $
397,820 $
1,143,362 $
239,506 $
551,009 $
118,955 $
87,186 $
(2,715) $
(61,942) $
185,276 $
8,792,633 $
6,528,654 $
2,288,032
613,649
601,995
321,177
234,441
(23,665)
(14,329)
465,237
1,062,763
15,719,107
83
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
2021
Operating revenues
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Interest expense, net (b)
Allowance for funds used during construction
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
2020 (a)
Operating revenues
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Interest expense, net (b)
Allowance for funds used during construction
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
980,203 $
332,598 $
- $
182,074 $
108,356 $
(19,258) $
26,633 $
293,703 $
621,595 $
8,403,586 $
859,902 $
226,194 $
313,390 $
113,238 $
75,628 $
(1,534) $
(40,013) $
148,193 $
397,419 $
5,960,602 $
38,039 $
(8,212) $
26,872 $
2,640 $
21,341 $
- $
3,768 $
(10,284) $
1,505 $
294,090 $
Consolidated
1,878,144
550,580
340,262
297,952
205,325
(20,792)
(9,612)
431,612
1,020,519
14,658,278
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
Consolidated
938,540 $
309,608 $
- $
171,152 $
101,810 $
(11,231) $
22,481 $
283,793 $
542,199 $
7,838,034 $
506,564 $
198,383 $
154,103 $
84,201 $
29,016 $
(1,456) $
(25,133) $
56,451 $
292,121 $
5,303,507 $
17,594 $
20,620 $
11,642 $
1,706 $
52,246 $
- $
(17,226) $
(55,395) $
1,322 $
563,736 $
1,462,698
528,611
165,745
257,059
183,072
(12,687)
(19,878)
284,849
835,642
13,705,277
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(a) Includes the operating results and capital expenditures of the Regulated Natural Gas segment for the period since the completion of the Peoples
Gas Acquisition on March 16, 2020.
(b) The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated
operating subsidiaries from Essential Utilities, Inc.
84
The graph below matches the cumulative 5-Year total return of holders of Essential Utilities, Inc.'s
common stock with the cumulative total returns of the S&P 500 Index and the S&P Midcap 400 Utilities
Index. The graph assumes that the value of the investment in our common stock, in each index, and in
the peer group (including reinvestment of dividends) was $100 on 12/31/2017 and tracks it through
12/31/2022.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
Among Essential Utilities, Inc., the S&P 500 Index,
and the S&P Midcap 400 Utilities Index
$250
$200
$150
$100
$50
$0
2017
2018
2019
2020
2021
2022
Essential Utilities, Inc.
S&P 500 Index
S&P Midcap 400 Utilities Index
*$100 invested on 12/31/17 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2023 Standard & Poor's, a division of S&P Global. All rights reserved.
Years as of December 31
2017
2018
2019
2020
2021
2022
Essential Utilities, Inc.
S&P 500 Index
S&P Midcap 400 Utilities Index
100.00
100.00
100.00
89.32
95.62
106.81
125.41
125.72
122.12
129.08
148.85
105.18
149.78
191.58
125.96
136.42
156.89
125.76
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
85
Financial Reports and Investor Relations
Independent Registered Public Accounting Firm
Copies of the company’s public financial reports,
PricewaterhouseCoopers LLP
including annual reports and Forms 10–K and 10–Q, are
Two Commerce Square
available online and can be downloaded from the
Suite 1800
investor relations section of our website at Essential.co.
2001 Market Street
You may also obtain these reports by writing to us at:
Philadelphia, PA 19103-7042
Investor Relations Department
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Corporate Governance
Stock Exchange
The Common Stock of the company is listed on the New
York Stock Exchange (NYSE) and under the ticker
symbol WTRG.
We are committed to maintaining high standards of
Dividend Reinvestment and Direct Stock
corporate governance and are in compliance with the
Purchase Plan
corporate governance rules of the Securities and
The company’s Dividend Reinvestment and Direct Stock
Exchange Commission (SEC) and the New York Stock
Purchase Plan (“Plan”) enables shareholders to
Exchange. Copies of our key corporate governance
reinvest all, or a designated portion of, dividends paid
documents, including our Corporate Governance
on up to 100,000 shares of Common Stock in
Guidelines, Code of Ethical Business Conduct, and the
additional shares of Common Stock at a discretionary
charters of each committee of our Board of Directors
discount from a price based on the market value of the
can be obtained from the corporate governance portion
stock. The discount between 0 and 5.0 percent on the
of the investor relations section of our website,
shares purchased or issued to meet the dividend
Essential.co. Amendments to the Code of Ethical
reinvestment requirement will be designated by us in
Business, and in the event of any grant of waiver from
our sole discretion prior to the purchase or issuance of
a provision of the Code of Conduct requiring disclosure
such shares. We reserve the right to change, reduce or
under applicable SEC rules will be disclosed on our
discontinue any discount at any time without notice. In
website.
Annual Meeting
The 2023 Annual Meeting of Shareholders of Essential
Utilities, Inc. will be held virtually via live webcast on
Wednesday, May 3, 2023, at 8 a.m. Eastern Time, at
www.virtualshareholdermeeting.com/WTRG2023.
Transfer Agent and Registrar
Computershare
P.O. Box 43006
Providence, RI 02940-3006
800.205.8314 or
www.computershare.com/investor
addition, shareholders may purchase additional shares
of Essential Utilities Common Stock at any time with a
minimum investment of $50, up to a maximum of
$250,000 annually. Individuals may become
shareholders by making an initial investment of at
least $500. A Plan prospectus may be obtained by
calling Computershare at 800.205.8314 or by visiting
www.computershare.com/investor. Please read the
prospectus carefully before you invest.
8 6
86
Direct Deposit
With direct deposit, Essential Utilities cash dividends
How to obtain a separate set of voting materials If
you are a registered shareholder who shares an address
are deposited automatically on the dividend payment
with another registered shareholder and have received
date of each quarter. Shareholders will receive
only one Notice of Internet Availability of Proxy
confirmation of their deposit in the mail.
Materials or set of proxy material and wish to receive a
Shareholders interested in direct deposit should call
separate copy for each shareholder in your household
the company’s transfer agent at 800.205.8314.
Delivery of voting materials to shareholders
sharing an address
The SEC’s rules permit the Company to deliver a
Notice of Internet Availability of Proxy Materials or a
single set of proxy materials to one address shared
for the 2023 annual meeting, you may write or call us
to request a separate copy of this material at no cost to
you at 610.645.1021 or write us at:
Attn: Investor Relations
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA, 19010
by two or more of the Company’s shareholders. This
Email: investorrelations@essential.co
is intended to reduce the printing and postage
expense of delivering duplicate voting materials to
our shareholders who have more than one Essential
Utilities stock account. A separate Notice of Internet
Availability or proxy card is included for each of these
shareholders. If you received a Notice of Internet
Availability you will not receive a printed copy of the
proxy materials unless you request it by following the
instructions in the notice for requesting printed proxy
material.
For future annual meetings, you may request separate
voting material by calling Broadridge at 866.540.9095,
or by writing to Broadridge Financial Solutions, Inc.,
Householding Department, 51 Mercedes Way,
Edgewood, New York 11717.
Account Access
Essential Utilities shareholders may access their
account by visiting www.computershare.com/investor.
Shareholders may view their account, purchase
additional shares, and make changes to their account.
To learn more, visit www.computershare.com/investor or
call 800.205.8314.
8 7
87
Dividends
Essential Utilities has paid dividends for 78 consecutive years. The normal Common Stock dividend dates for 2023
and the first six months of 2024 are:
Declaration Date
December 7, 2022
February 22, 2023
July 31, 2023
October 30, 2023
January 29, 2024
April 29, 2024
Ex-Dividend Date
Record Date
Payment Date
February 9, 2023
February 10, 2023
March 1, 2023
May 11, 2023
May 12, 2023
June 1, 2023
August 10, 2023
August 11, 2023
September 1,2023
November 8, 2023
November 10, 2023
December 1, 2023
February 8, 2024
February 9, 2024
March 1, 2024
May 9, 2024
May 10, 2024
June 1, 2024
To be an owner of record, and therefore eligible to
Escheatment is the act of reporting and transferring
receive the quarterly dividend, shares must have
property to a state when the rightful owner has an
been purchased before the ex-dividend date. Owners
invalid address or has not made contact or initiated a
of any share(s) on or after the ex-dividend date will
transaction during the state’s designated dormancy
not receive the dividend for that quarter. The
period. Escheated assets are transferred to the state for
previous owner – the owner of record – will receive
safekeeping (and often liquidated) until the rightful
the dividend.
Only the Board of Directors may declare dividends
and set record dates. Therefore, the payment of
dividends and these dates may change at the
discretion of the Board.
Dividends paid on the company’s Common Stock are
subject to Federal and State income tax.
Lost Dividend Checks, Stock Certificates
and Escheatment
Dividend checks lost by shareholders, or those that
might be lost in the mail, will be replaced upon
notification of the lost or missing check. All inquiries
concerning lost or missing dividend checks should be
made to the company’s transfer agent at
800.205.8314. Shareholders should call or write the
company’s transfer agent to report a lost certificate.
Appropriate documentation will be prepared and
sent to the shareholder with instructions.
owner makes a claim on the asset. To keep your shares
of stock and uncashed dividends from being escheated,
you must maintain contact (recommended at least once
a year) with the company’s transfer agent, especially if
you recently changed your address, changed your
marital status or are managing an estate following a
death. Unclaimed property laws vary widely from state
to state.
Safekeeping of Stock Certificates
Under the Direct Stock Purchase Plan, shareholders may
have their stock certificates deposited with the transfer
agent for safekeeping free of charge. Stock certificates
and written instructions should be forwarded to:
Computershare, N.A.
P.O. BOX 43006
Providence, RI 02940-3006
88
OUR MISSION:
To sustain life and improve economic prosperity by
safely and reliably delivering Earth’s most essential
resources to our customers and communities.
OUR VALUES: INTEGRITY RESPECT EXCELLENCE
BOARD OF DIRECTORS
As of December 31, 2022
Christopher H. Franklin
Chairman, Chief Executive
Officer and President
Essential Utilities, Inc.
Director since 2015
Elizabeth B. Amato
Former Executive Vice President
and Chief Human Resources Officer
United Technologies Corporation
Director since 2018
David A. Ciesinski
President, Chief Executive
Officer and Director
Lancaster Colony Corporation
President, T. Marzetti Company
Director since 2021
Daniel J. Hilferty
Chairman and Chief
Executive Officer
Dune View Strategies
Director since 2017
Edwina Kelly
Senior Principal
Canada Pension Plan
Investment Board
Director since 2021
Ellen T. Ruff
Former President
Duke Energy Corporation
Director since 2006
Lee C. Stewart
Private Financial Consultant
Director since 2018
W. Bryan Lewis
Vice President and Chief
Investment Officer
United States Steel Corporation
Director since 2022
Christopher C. Womack
Chairman, President and
Chief Executive Officer
Georgia Power
Director since 2019
Christopher H. Franklin
Chairman, Chief Executive
Officer and President
Colleen M. Arnold
President
Aqua
OFFICERS
Michael A. Huwar
President
Peoples
Christopher P. Luning
Executive Vice President
General Counsel
Daniel J. Schuller
Executive Vice President
Chief Financial Officer
Matthew R. Rhodes
Executive Vice President Strategy
and Corporate Development
Robert A. Rubin
Senior Vice President
Chief Accounting Officer
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which generally
include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. The Company can give no assurance
that any actual or future results or events discussed in these statements will be achieved. Any forward-looking statements represent its views only
as of today and should not be relied upon as representing its views as of any subsequent date. Readers are cautioned that such forward-looking
statements are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ materially from the statements
contained in this release. There are important factors that could cause actual results to differ materially from those expressed or implied by such
forward-looking statements including the factors discussed in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, which
are filed with the Securities and Exchange Commission. For more information regarding risks and uncertainties associated with the Company’s
business, please refer to the Company’s annual, quarterly and other SEC filings. The Company is not under any obligation - and expressly disclaims
any such obligation — to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
Essential Utilities, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010
NYSE: WTRG
877.987.2782
www.Essential.co
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