the separate historical audited consolidated financial statements of the Company as of and for the year ended December 31, 2019 and the related notes, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2020; and

the separate historical audited consolidated financial statements of Peoples as of December 31, 2019 and 2018, and for the three years ended December 31, 2019 and related notes included as Exhibit 99.1 to this Form 8-K/A.

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

Gas stored—current portion

Prepayments and other current assets

Assets held for sale

Regulatory assets, current portion

Other

Total current assets

Regulatory assets, excluding current portion

Deferred charges and other assets, net

3

3

(g), 

(h) 

Investment in joint venture

Goodwill

Operating lease right-of-use assets

Intangible assets, net

3

(b) 

Other

Total Assets

Liabilities and Equity

Stockholders’ equity:

Common stock

Member’s equity

Capital in excess of par value

Retained earnings

Treasury stock

Accumulated other comprehensive income

Total Equity

Long-term debt, excluding current portion

Less: debt issuance costs

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

Current liabilities:

Current portion of long-term debt

Loans payable

Accounts payable

Book overdraft

Accrued interest

Accrued taxes

Other accrued liabilities

3

(i) 

Interest rate swap agreements

Regulatory liabilities, current portion

Total current liabilities

Deferred credits and other liabilities:

Deferred income taxes and investment tax credits

Customers’ advances for construction

Regulatory liabilities, excluding current portion

Asset retirement obligations

Pension and other postretirement benefits liabilities

Operating lease liabilities

Other accrued liabilities, excluding current portion

3

3

(i), 

(e) 

Total deferred credits and other liabilities

Contributions in aid of construction

Total Liabilities and Equity

(in thousands, except per share amounts)

Operating revenues

Operating expenses:

Operations and maintenance

5

(n) 

Purchased gas

Depreciation

Amortization

Taxes other than income taxes

Total operating expenses

Operating income

Other expense (income):

Interest expense

Interest income

Affiliated interest charges

Allowance for funds used during construction

Change in fair value of interest rate swap agreements

Loss on debt extinguishment

Gain on sale of other assets

Equity earnings in joint venture

Other expense (income)

3

(n) 

Income before income taxes

Provision for income taxes (benefit)

Net income

Net income per share:

Basic net income per share (See Note 7)

Diluted net income per share (See Note 7)

Weighted-average number of shares (in thousands):

Basic (See Note 7)

Diluted (See Note 7)

Issuance of $749,907 of the Company’s common stock, par value $0.50 per share (“Common Stock”), pursuant to a Stock Purchase Agreement with Canada Pension Plan Investment Board (“CPPIB”) (the “Private Placement”) at a per share price of $34.62. The Private Placement was completed on March 16, 2020;

Borrowings of $150,000 under a credit agreement the Company entered into with PNC Bank, National Association on March 13, 2020 (the “PNC Credit Agreement”);

Borrowings of approximately $800,000, including approximately $22,000 designated for letter of credit usage, aggregate principal amount of long-term debt under the Company’s five-year unsecured revolving credit agreement (the “Revolving Credit Agreement”);

Issuance of $ 1,293,750 of Common Stock and $690,000 of the Company’s 6.00% tangible equity units (“TEUs”) in public offerings, which were completed on April 23, 2019; and

Issuance of $900,000 aggregate principal amount of senior notes in a public offering that was completed on April 26, 2019. A portion of the proceeds from the senior notes were used to redeem $313,500 of the Company’s outstanding debt (the “Company Debt Refinancing”), and remaining proceeds were used prior to December 31, 2019 to temporarily repay borrowings under the Revolving Credit Agreement. On the Acquisition closing date, the Company borrowed under the Revolving Credit Agreement to complete the Acquisition as described above.

Internal-use Software. Represents the reclassification of Peoples’ capitalized internal-use software costs and related amortization within “Intangible assets, net” into the Company’s “Property, plant and equipment, at cost, net” line item in order to conform to the Company’s balance sheet presentation.

Intangibles, net. Represents the reclassification of Peoples’ other intangible assets within Peoples’ “Intangible assets, net” into the Company’s “Deferred charges and other assets, net” line item in order to conform to the Company’s balance sheet presentation.

Accrued Taxes and Payroll. Represents the reclassification of Peoples’ current accrued payroll and accrued taxes within “Accrued interest, payroll and taxes” into the Company’s “Other accrued liabilities” and “Accrued taxes” line items, respectively in order to conform to the Company’s balance sheet presentation.

Debt Issuance Costs. Represents the reclassification of Peoples’ unamortized debt issuance costs within “Long-term debt, excluding current portion” into the Company’s “Less: debt issuance costs” line item in order to conform to the Company’s balance sheet presentation.

Asset Retirement Obligation. Represents the reclassification of Peoples’ “Asset retirement obligation” into the Company’s “Other” line item of non-current liabilities in order to conform to the Company’s balance sheet presentation.

Pension and Other Postretirement Benefits, Non-current. Represents the reclassification of Peoples’ “Pension and other postretirement benefits liabilities” to the Company’s “Other” line item of non-current liabilities in order to conform to the Company’s balance sheet presentation.

Other Current Assets and Other Assets. Represents the reclassification of Peoples’ prepaid gas costs and restricted cash within Peoples’ “Other” to the Company’s “Prepayments and other current assets” line item in order to conform to the Company’s balance sheet presentation. In addition, the amounts presented within Peoples’ “Other” are reclassified to “Deferred charges and other assets, net.”

Investments. Represents the reclassification of Peoples’ investments to the Company’s “Deferred charges and other assets, net” line item in order to conform to the Company’s balance sheet presentation.

Customer Advances. Represents the reclassification of Peoples’ customer advances for construction reclassified within both other current and other noncurrent liabilities into the Company’s “Customers’ advances for construction” line item in order to conform to the Company’s balance sheet presentation.

Unbilled Revenue. Represents the reclassification of Peoples’ unbilled revenue within “Accounting receivable, net” into the Company’s “Unbilled revenue” line item in order to conform to the Company’s balance sheet presentation.

Donations, Penalties and Other Expenses. Represents the reclassification of Peoples’ donations, penalties and other miscellaneous expenses to the Company’s “Operations and maintenance” line item in order to conform to the Company’s statement of net income presentation.

Amortization. Represents the reclassification of certain expenses from Peoples’ “Depreciation and amortization” into the Company’s “Amortization” line item in order to conform to the Company’s statement of net income presentation.

Allowance for Funds Used in Construction. Represents the reclassification of allowance for funds used in construction within Peoples’ “Interest expense” to the Company’s “Allowance for funds used during construction” line item in order to conform to the Company’s statement of net income presentation.

Interest and Other Income. Represents the reclassification of certain interest income recorded by Peoples within “Other” to the Company’s “Interest income” line item in order to conform to the Company’s statement of net income presentation.

In thousands

Base cash purchase price pursuant to the Peoples purchase agreement

Add: working capital adjustment

Add: capital expenditure adjustment

Less: adjustment for Peoples’ debt outstanding as of the Acquisition closing date

Total cash purchase price

In thousands

Cash and cash equivalents

Accounts receivable and unbilled revenues, net

Inventory, materials and supplies

Prepayments and other current assets

Regulatory assets, current portion

Other current assets

Property, plant and equipment, net

Regulatory assets, excluding current portion

Intangible assets, net

Other non-current assets

Operating lease right-of-use assets

Goodwill

Total assets acquired

Accounts payable

Current portion of long-term debt

Loans Payable

Other accrued liabilities, current portion

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

Deferred income taxes and investment tax credits

Regulatory liabilities, excluding current portion

Operating lease liabilities

Other accrued liabilities, excluding current portion

Total liabilities assumed

Net assets acquired / purchase price

Property, Plant and Equipment. Reflects the elimination of accumulated depreciation. The net carrying amount of property, plant and equipment of Peoples’ regulatory operations is expected to approximate fair value. The Company is currently finalizing its fair value analysis of the property, plant and equipment related to non-regulated activities, but the fair value adjustments are not expected to be material.

Cash. The pro forma adjustment reflects the payment of cash purchase price and estimated acquisition-related costs, as follows:

In thousands

Total cash purchase price

Acquisition-related costs

Payment of change in control severance and retention bonus

Issuance of one-time rate credits to customers(1)

Total adjustment to cash and cash equivalents

In connection with the Acquisition, the Company has agreed to issue one-time rate credits of $23,000 in aggregate based on a regulatory order from the Pennsylvania Public Utility Commission. Such arrangement will be accounted for separate from the business combination and therefore will be expensed following the Acquisition. However, as the arrangement was contemplated and directly attributable to the Acquisition, an adjustment to the pro forma balance sheet is reflected.

Goodwill. Reflects the elimination of Peoples’ historical goodwill of $431,839 and the preliminary estimate of the purchase price paid over the fair value of Peoples’ preliminary calculation of identifiable assets acquired and liabilities assumed related to the Acquisition.

Member’s Equity and Accumulated Other Comprehensive Income. Reflects the elimination of Peoples’ historical members’ equity and accumulated other comprehensive income.

Retained Earnings. Reflects the payment of additional Acquisition-related expenses, net of tax, that were incurred to complete the Acquisition. These Acquisition-related expenses are directly attributable to the Acquisition and consist principally of legal, and advisory fees in connection with the Acquisition. Retained earnings also reflects the payment of a change in control severance to two of Peoples’ executives in connection with the Acquisition, net of tax, and the issuance of one-time rate credits, net of tax, as described in Note (b). These costs are not reflected in the pro forma statement of net income because they are nonrecurring in nature.

Long-Term Debt and Loan Payable. Reflects (i) the elimination of the portion of the Peoples’ debt that was outstanding as of December 31, 2019 and was not assumed by Essential upon consummation of the Acquisition (including Peoples’ senior notes that matured in February 2020, as described below), (ii) the fair value adjustments related to the portion of the Peoples’ debt that was outstanding as of December 31, 2019 and was assumed by Essential upon consummation of the Acquisition, (iii) the elimination of the unamortized debt issuance costs of $6,495 upon the fair value re-measurement and (iv) the assumption by the Company of Peoples’ short-term borrowings of $181,000 that were incurred by Peoples in February 2020. The fair value of long-term debt was determined based on prevailing market prices for similar debt issuances as of March 16, 2020, the Acquisition completion date. The fair value adjustment to Peoples’ debt will be amortized as an adjustment to interest expense over the remaining life of the debt. As the debt is related to regulated operations, this adjustment to interest expense will be offset equally by an amortization of a corresponding regulatory asset. The proceeds from the $181,000 of short-term borrowing were used to repay Peoples’ senior notes of $181,000 that matured in February 2020. The following table summarizes the pro forma adjustments:

Current portion of long-term debt:

Current portion of long-term debt assumed from Peoples

Less: Historical current portion of long-term debt of Peoples

Total pro forma adjustment to current portion of long-term debt

Long-term debt, excluding current portion:

Long-term debt, excluding current portion, assumed from Peoples

The fair value adjustment to the debt assumed from Peoples (not including the $181,000 loan payable)

Less: Historical debt issuance costs

Less: Historical long-term debt of Peoples, excluding current portion and net of debt issuance costs

Total pro forma adjustment to long-term debt, excluding current portion

Loan payable assumed from Peoples

Accrued Taxes. Reflects the income tax-effect related to the Acquisition-related costs, change in control severance and retention bonus, and customer rate credits of $13,058, using an estimated statutory income tax rate of 28%. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company.

Deferred Income Taxes. Reflects the income tax differences and related impact on deferred income tax liabilities of the fair value adjustments, exclusive of goodwill, applying an estimated statutory income tax rate of 28%. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company.

Regulatory Assets. Reflects an increase of the combined company’s non-current regulatory assets related to the fair value adjustment to long-term debt, including the write-off of certain debt issuance costs, related to regulated companies. As the debt is expected to be related entirely to regulatory activities, the fair value adjustments to debt are adjusted to the regulatory asset as they are expected to be recovered as part of the rate making.

In thousands

Debt issuance costs related to regulatory operations

Estimated fair value adjustment to debt, excluding debt issuance costs related to regulatory operations

Total

Lease-related Balances. As described in Note 2, pro forma adjustments were recorded to align the accounting policies of Peoples to reflect the adoption of ASC 842, including adjustments to the operating lease right-of-use assets and corresponding operating lease liabilities, including the current portion reflected in other accrued liabilities, current portion.

Accounts receivable, net. Represents an adjustment to a note receivable balance that was deemed uncollectible prior to the Acquisition. As a result, no fair value was allocated to the acquired receivable on the Acquisition date.

Deferred charges and other assets, net. Represents the recognition of intangible assets identified related to the non-regulated businesses of Peoples. The identified intangible assets are expected as the following:

Customer List

Trade Name

Total

Historical Net Book Value

Pro forma adjustment

Management Fee. Reflects the elimination of Peoples’ management fee charged by its parent, SteelRiver Infrastructure Partners, of approximately $4,979 during the year ended December 31, 2019, respectively. The management fee has been eliminated in the unaudited pro forma financial statements as the management fee agreements will be terminated in connection with the Acquisition.

Transaction Costs. Reflects the elimination of Acquisition-related expenses recorded by both the Company and Peoples of $21,585, excluding approximately $1,845 of integration-related costs for which the related impact on the combined results is not factually supportable for the year ended December 31, 2019. The Acquisition-related expenses consisted principally of legal and advisory fees, including underwriter structuring and opinion letter fees, and have been eliminated as they were directly related to the Acquisition and were nonrecurring in nature.

Amortization expense. All amortization adjustments relate to identified intangible assets as a result of the acquisition for non-regulated businesses and are recorded to Amortization. The estimated amortization expense was computed using the straight-line method based on an estimated useful life of the identifiable definite-lived intangible assets.

Customer List

Trade Name

Total

Historical amortization expense

Pro forma adjustment

Interest Expense. Reflects the elimination of interest expense of $26,081 for the year ended December 31, 2019 related to Peoples’ debt outstanding as of December 31, 2019 that was not assumed by Essential upon the consummation of the Acquisition, including interest expenses related to certain loans with the parent company of Peoples, offset by additional estimated interest expense of $3,194 related to assumed short-term borrowings of $181,000 that were incurred by Peoples in February 2020 and bear interest at LIBOR plus 0.875%.

Change in Fair Value of Interest Rate Swap Agreements. Reflects the elimination of the change in fair value of the interest rate swap agreements for the year ended December 31, 2019. This amount will not have a continuing impact on the ongoing results of the combined company as the interest rate swap agreements were executed in October 2018 and were settled in connection with Essential’s senior notes offering in April 2019.

Loss on Debt Extinguishment. Reflects the elimination of the loss recorded by the Company for the year ended December 31, 2019, due to the redemption of $313,500 principal amount of the Company’s outstanding notes in the Company Debt Refinancing and corresponding make whole payments. These notes would have been callable in connection with the Acquisition if they had remained outstanding and therefore their repayment is considered directly attributable to the Acquisition.

Income Tax Expense. Reflects the income tax effects of the pro forma adjustments calculated using an estimated statutory income tax rate of 28% for the year ended December 31, 2019. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company.

Private Placement. On March 29, 2019, the Company entered into a Stock Purchase Agreement with CPPIB pursuant to which CPPIB purchased 21,661 newly issued shares of Common Stock from the Company on March 16, 2020 at $34.62 per share. The total net proceeds for the Private Placement was $730,239, which is net of issuance costs of $19,668.

PNC Credit Agreement. On March 13, 2020, the Company borrowed $150,000 under the PNC Credit Agreement, which the Company entered into on March 13, 2020. The PNC Credit Agreement will mature on March 12, 2021 and the loan bears interest at LIBOR plus 0.875%, in respect of LIBOR borrowings, and the alternate base rate plus 0.775%, in respect of alternate base rate borrowings. The debt issuance costs were not material and therefore are not reflected in the pro forma financial statements.

Revolving Credit Agreement Borrowings. The Company drew approximately $800,000, including approximately $22,000 designated for letter of credit usage, aggregate principal amount of long-term debt under the Revolving Credit Agreement. The Revolving Credit Agreement was amended on March 13, 2020 and provided the Company with an additional $450,000 of borrowing capacity upon closing of the Acquisition on March 16, 2020. The total net proceeds of $799,325 are net of issuance costs of $675.

Common Stock Offering. On April 23, 2019, the Company issued 37,370 shares of Common Stock in a public offering (the “Common Stock Offering”). The total net proceeds for the Common Stock public offering was $1,262,857, which is net of expenses of $30,893.

TEUs Offering. On April 23, 2019, the Company issued 13,800 TEUs in a public offering (the “TEU Offering”). The total net proceeds of the TEUs offering was $674,400, which is net of expenses of $15,600. Each TEU consists of a prepaid stock purchase contract (the “stock purchase contracts”) and a senior amortizing note due April 30, 2022 (the “amortizing notes”), each issued by the Company. Unless earlier settled or redeemed, each stock purchase contract will automatically settle on April 30, 2022 (subject to postponement in limited circumstances) for between 1.1790 and 1.4442 shares of Common Stock, subject to adjustment, based upon the applicable market value of the Common Stock, in accordance with the terms of the Purchase Contract Agreement, dated as of April 23, 2019, relating to the TEUs. The amortizing notes were issued with an initial principal amount of $8.62909 per amortizing note, or $119,081 in aggregate, and bear interest at a rate of 3.00% per year, and pay 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), which constitute a payment of interest and a partial repayment of principal, and which cash payment in the aggregate is equivalent to 6.00% per year with respect to the $50.00 stated amount per TEU. The amortizing notes represent unsecured senior obligations of the Company. The Company recorded the issuance of the stock purchase contract portion of the TEUs as additional paid-in-capital of $570,919, less allocable issuance costs of $12,845, in its historical audited consolidated financial statements. The Company recorded the amortizing notes portion of the TEUs of $119,081 as long-term debt and recorded allocable issuance costs of $2,679 as debt issuance costs.

Senior Notes Offering. On April 26, 2019, the Company issued $400,000 aggregate principal amount of senior notes due 2029(the “2029 Notes”) and $500,000 aggregate principal amount of senior notes due 2049 (the “2049 Notes” and, together with the 2029 Notes, the “Senior Notes”) in a public offering. The total net proceeds of the Senior Notes offering was $892,069, which is net of expenses of $7,931. The 2029 Notes and the 2049 Notes have interest rates of 3.566% and 4.276%, respectively. Of these proceeds, approximately $313,500 was used to redeem certain of the Company’s privately placed notes in the Company Debt Refinancing. These notes would have been callable in connection with the Acquisition if they had remained outstanding and therefore their repayment is considered directly attributable to the Acquisition. Prior to December 31, 2019, the remaining proceeds were temporarily used to repay borrowings under the Revolving Credit Agreement. On the Acquisition closing date, the Company borrowed under the Revolving Credit Agreement to complete the Acquisition as noted above.

Cash and Cash Equivalents. Reflects the anticipated impacts to cash from the financing transactions, as described above.

In thousands

Proceeds from the Private Placement, net of equity issuance costs and reimbursed costs incurred by CPPIB

Proceeds from the PNC Credit Agreement

Proceeds from the Revolving Credit Agreement net of debt issuance costs

Total

Common Stock and Capital in Excess of Par Value. Reflects the adjustment to Common Stock based on the sale of 21,661 shares of Common Stock at $34.62 per share in the Private Placement.

Revolving Credit Agreement Borrowings. Reflects the issuance of an additional $800,000 aggregate principal amount under the Revolving Credit Agreement. The pro forma adjustment also reflects an estimated debt issuance costs of $675 which will be capitalized as a long-term other asset and amortized over the remaining term of the five-year revolver term.

PNC Credit Agreement Borrowings. Reflects the issuance of an additional $150,000 aggregate principal amount of a short-term loan under the PNC Credit Agreement.

Interest Expense. Reflects the following:

In thousands

Incremental interest expense related to the amortization of the Senior Notes ($36,143), less actual interest paid ($24,257)

Incremental interest expense related to the amortization of the amortizing notes ($3,198), less actual interest paid ($2,276)

Incremental interest expense related to the amortization of borrowings under the PNC Credit Agreement

Incremental interest expense related to the amortization of borrowings under the Revolving Credit Agreement

Subtotal

Less: Elimination of privately placed senior notes pursuant to the Company Debt Refinancing that occurred on May 5, 2019

Total

Interest Income. Reflects the removal of the interest income earned on cash on hand.

Income Tax Expense. Reflects the income tax effects of the pro forma adjustments calculated using an estimated statutory income tax rate of 28% for the year ended December 31, 2019. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company.

In thousands

Pro forma net income

Basic weighted average common shares outstanding

Basic average common shares outstanding during historic period 2019

Additional issuance of common shares in the Private Placement

Additional weighted average impact of minimum shares issuable under the stock purchase contracts portion of the TEUs

Additional weighted average impact of common shares in the Common Stock Offering

Basic weighted average common shares outstanding used in pro forma net earnings per share

Pro forma net earnings per common share, basic

Diluted weighted average common shares outstanding

Diluted average common shares outstanding during historic period 2019

Additional issuance of common shares in the Private Placement

Additional weighted average impact of minimum shares issuable under the stock purchase contracts portion of the TEUs

Additional weighted average impact of common shares in the Common Stock Offering

Diluted weighted average common shares outstanding used in pro forma net earnings per share

Pro forma net earnings per common share, diluted