Employee Stock and Incentive Plan

12 Months Ended

Dec. 31, 2019

Employee Stock and Incentive Plan [Abstract]

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, as amended and restated in 2009 (the “2009 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, 2019, 2,667,480 shares were still available for issuance under the Plan. No further grants may be made under the Company’s 2009 Equity Compensation Plan.

Performance Share Units – During 2018 and 2017, 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 Company did not grant PSUs for the year ended December 31, 2019. The performance goals of the 2018 and 2017 PSU grants consisted of the following metrics:


	Performance Grant of:
	2018	2017
Metric 1 – Company’s total shareholder return (“TSR”) compared to the TSR for a specific peer group of investor-owned water companies (a market-based condition)	25.0%	26.47%
Metric 2 – Company’s TSR compared to the TSR for the companies listed in the Standard and Poor’s Midcap Utilities Index (a market-based condition)	25.0%	26.47%
Metric 3 – Achievement of a targeted cumulative level of rate base growth as a result of acquisitions (a performance-based condition)	25.0%	23.53%
Metric 4 – Achievement of targets for maintaining consolidated operations and maintenance expenses over the three year measurement period (a performance-based condition)	25.0%	23.53%

‎

The following table provides the compensation expense and income tax benefit for PSUs:



	Years ended December 31,
		2019		2018		2017
Stock-based compensation within operations and maintenance expense	$	2,741	$	4,817	$	4,351
Income tax benefit		767		1,344		1,766

The following table summarizes nonvested PSU transactions for the year ended December 31, 2019:



	Number of Share Units		Weighted Average Fair Value
Nonvested share units at beginning of period	443,410	$	27.20
Granted	-		-
Performance criteria adjustment	(82,921)		33.56
Forfeited	(9,767)		33.21
Share units issued	(89,324)		52.39
Nonvested share units at end of period	261,398		16.35

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:



	Years ended December 31,
		2019		2018		2017
Expected term (years)		-		3.0		3.0
Risk-free interest rate		-		2.43%		1.49%
Expected volatility		-		17.2%		17.9%
Weighted average fair value of PSUs granted	$	-	$	37.42	$	30.79
Intrinsic value of vested PSUs	$	3,181	$	4,704	$	3,926
Fair value of vested PSUs	$	2,569	$	3,613	$	3,207

As of December 31, 2019, $1,840 of unrecognized compensation costs related to PSUs is expected to be recognized over a weighted average period of approximately 1.1 years. The aggregate intrinsic value of PSUs as of December 31, 2019 was $12,270. 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.

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:


	Years ended December 31,
		2019		2018		2017
Stock-based compensation within operations and maintenance expense	$	1,650	$	1,605	$	1,183
Income tax benefit		466		456		489

The following table summarizes nonvested RSU transactions for the year ended December 31, 2019:


	Number of Stock Units		Weighted Average Fair Value
Nonvested stock units at beginning of period	130,085	$	33.13
Granted	57,290		36.25
Stock units vested and issued	(40,971)		32.89
Forfeited	(4,520)		35.28
Nonvested stock units at end of period	141,884		34.39

The following table summarizes the value of RSUs:


	Years ended December 31,
		2019		2018		2017
Weighted average fair value of RSUs granted	$	36.25	$	35.15	$	30.37
Intrinsic value of vested RSUs		1,456		1,605		896
Fair value of vested RSUs		1,341		1,268		751

As of December 31, 2019, $2,187 of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of approximately 1.4 years. The aggregate intrinsic value of RSUs as of December 31, 2019 was $6,660. 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 2019, 2018, and 2017 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.

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:



	Years ended December 31,
		2019		2018		2017
Stock-based compensation within operations and maintenance expenses	$	2,280	$	546	$	245
Income tax benefit		643		184		208

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:



	Years ended December 31,
	2019		2018		2017
Expected term (years)		5.47		5.46		5.45
Risk-free interest rate		2.53%		2.72%		2.01%
Expected volatility		17.7%		17.2%		17.7%
Dividend yield		2.44%		2.37%		2.51%
Grant date fair value per option	$	5.25	$	5.10	$	4.07

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, 2019:



	Shares		Weighted Average Exercise Price	Weighted Average Remaining Life (years)		Aggregate Intrinsic Value
Outstanding, beginning of year	422,972	$	25.97
Granted	769,115		35.94
Forfeited	(36,479)		35.46
Expired / Cancelled	(2,532)		32.28
Exercised	(119,306)		15.91
Outstanding at end of year	1,033,770	$	34.20	8.4	$	13,171

Exercisable at end of year	164,117	$	26.86	5.4	$	3,296

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:



	Years ended December 31,
		2019		2018		2017
Intrinsic value of options exercised	$	2,552	$	1,806	$	2,767
Fair value of options vested		422		156		-

The following table summarizes information about the options outstanding and options exercisable as of December 31, 2019:



	Options Outstanding				Options Exercisable
	Shares	Weighted Average Remaining Life (years)		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Range of prices:
$13.00 - 14.99	47,388	0.1	$	13.72	47,388	$	13.72
$15.00 - 33.99	99,661	7.2		30.47	67,649		30.47
$34.00 - 34.99	138,113	8.2		34.51	46,214		34.51
$35.00 - 35.99	748,608	9.2		35.93	2,866		35.44
	1,033,770	8.4		34.20	164,117		26.86

As of December 31, 2019, there was $2,018 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.

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:



	Years ended December 31,
		2019		2018		2017
Stock-based compensation within operations and maintenance expense	$	698	$	600	$	563
Income tax benefit		202		173		233

The following table summarizes the value of stock awards:



	Years ended December 31,
		2019		2018		2017
Intrinsic and fair value of stock awards vested	$	698	$	600	$	563
Weighted average fair value of stock awards granted		41.75		34.95		34.42

The following table summarizes stock award transactions for year ended December 31, 2019:


	Number of Stock Awards		Weighted Average Fair Value
Nonvested stock awards at beginning of period	-	$	-
Granted	16,714		41.75
Vested	(16,714)		41.75
Nonvested stock awards at end of period	-		-