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;

the separate historical unaudited consolidated financial statements of the Company as of and for the six months ended June 30, 2020 and the related notes, included in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 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 the Form 8-K/A filed on April 13, 2020.

(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

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)

Income before income taxes

Provision for income taxes (benefit)

Net income

Net income per share:

Basic net income per share (See Note 5)

Diluted net income per share (See Note 5)

Weighted-average number of shares (in thousands):

Basic (See Note 5)

Diluted (See Note 5)

(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

Affiliated interest charges

Allowance for funds used during construction

Gain on sale of other assets

Equity earnings in joint venture

Other expense (income)

Income before income taxes

Provision for income taxes (benefit)

Net income

Net income per share:

Basic net income per share (See Note 5)

Diluted net income per share (See Note 5)

Weighted-average number of shares (in thousands):

Basic (See Note 5)

Diluted (See Note 5)

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.

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.

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 and $1,245 for the period from January 1, 2020 to March 15, 2020, 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 and $25,196, excluding approximately $1,845 and $376 of integration-related costs for which the related impact on the combined results is not factually supportable for the year ended December 31, 2019 and for the six months ended June 30, 2020, respectively. 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. Transaction-related expenses recorded by the Company also included change in control severance and retention bonus payments to its employees for a total amount of $9,000. As the cost was nonrecurring in nature, it has been eliminated for the six months ended June 30, 2020.

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 and $5,344 for the year ended December 31, 2019 and for the six months ended June 30 2020, respectively 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 and $654 related to assumed short-term borrowings of $181,000 that were incurred by Peoples in February 2020 which bear interest at LIBOR plus 0.875% for the year ended December 31, 2019 and for the six months ended June 30, 2020, respectively.

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 and for the six months ended June 30, 2020. 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.

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

Less: Elimination of settlement gain on termination of Peoples’ interest rate swaps settled in connection with the Acquisition

Total

Interest Income. Reflects the removal of the interest income earned on cash on hand for the year ended December 31, 2020 and the period January 1, 2020 to March 15, 2020.

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 and for the six months ended June 30, 2020. 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

Additional issuance of common shares in the Private Placement

Additional weighted average impact 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

Additional issuance of common shares in the Private Placement

Additional weighted average impact 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