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 Regulated Natural Gas segment 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 low temperatures for a day is below 65 degrees Fahrenheit in a specific 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 above which no heating is required (65 degrees Fahrenheit). During the year ended December 31, 2025, we experienced actual HDDs of 5,380 days, which was colder by 25.5% than the actual HDDs of 4,288 days in 2024 for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service territory. A weather normalization adjustment (“WNA”) mechanism is in place for our natural gas customers served in Kentucky, and, beginning in October 2024, for our natural gas customers in Pennsylvania. The WNA serves to minimize the effects of weather on the Company’s ability to collect revenues to cover operating expenses for its residential and small commercial natural gas customers. The Regulated Natural Gas segment provides universal service programs that help low-income, payment-troubled customers with energy efficiency and bill assistances. The Company recovers program-related costs as pass- through universal service rider charge (also referred to as customer assistance surcharge) on the customer bill based on actual costs of the programs. For the years ended December 31, 2025 and 2024, the Company billed $26,055 and $8,685 of universal service rider charges, respectively. The increase in 2025 is mainly due to an increase in rates, usage, and cost of gas, as well as program enrollments.
Operating expenses – Operations and maintenance expense for the year ended December 31, 2025 increased by $20,480 or 9.9% primarily due to the following:
an increase in customer assistance surcharges of $17,457, which generally has offsetting amounts in revenues; an increase in labor and employee benefits of $11,859 resulting from merit increases, higher incentive compensation, and higher healthcare costs; an increase in bad debt expense of $2,974; and an increase in legal fees of $1,399; offset by an increase in capitalization in our Regulated Natural Gas segment of $9,812 in the current period as compared to the prior period due to higher capital spend and increasing pool of eligible capitalizable costs; and a decrease in materials and supplies of $1,979. 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 $117,585 or 44.0% in 2025 compared to 2024. The increase is the result of higher average cost of gas of $75,449, and higher gas usage of $42,522 due to colder weather conditions offset by a decrease of $386 due to the sale of our three non-utility local microgrid and distributed energy projects in January 2024.
Depreciation and amortization increased by $22,534 or 16.6% primarily due to continued capital investment and the implementation of new depreciation rates following a recently completed rate case.
Taxes other than income taxes decreased by $3,007 or 13.1% mainly due to a favorable adjustment on sales and use tax accruals as a result of the closure of a sales and use tax audit during the second quarter of 2025.
Other expense, net – Interest expense, net of interest income, increased by $14,085 or 15.1% due to higher push down debt borrowings of the Regulated Natural Gas segment from Essential Utilities, Inc, which is primarily used to fund capital projects. 15
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