DEF 14A 1 e20166_wtrg-def14a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. )

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o Soliciting Material Pursuant to §240.14a-12

 

ESSENTIAL UTILITIES, INC.

(Name of Registrant as Specified In Its Charter)

 

N/A

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(Photo)

Christopher H. Franklin

 

“We are steadfast in our commitments – investing in infrastructure, operational excellence, environmental stewardship and rigorous safety standards – which improve reliability and service for our customers, provide consistent return for shareholders and contribute to the economic prosperity of communities we serve.”

 
 

 

 

To Our Shareholders

 

On behalf of your Board of Directors, I am pleased to invite you to attend the 2020 Annual Meeting of the Shareholders of Essential Utilities, Inc. to be held on Wednesday, May 6, 2020 in Pittsburgh, Pennsylvania. This will be our first Annual Meeting of Shareholders following the closing of the acquisition of Peoples Natural Gas, and the changing of our name from Aqua America, Inc. to Essential Utilities, Inc.

 

The combination of these two companies, each of which have been in existence for more than 130 years, will provide an opportunity to make a substantial contribution to the improvement in our nation’s infrastructure while simultaneously adding shareholder value. Peoples Natural Gas, the nation’s fifth largest natural gas local distribution company, adds 745,000 new utility customers to our existing platform, as the second largest publicly traded water utility with one million water and wastewater customer connections. Together, these two utilities, under Essential Utilities, Inc., are expected to invest nearly $1 billion a year to improve our nation’s infrastructure.

 

Importantly, in the context of the transaction, the Company’s board and management remain optimistic in growing the water business; the addition of a natural gas utility platform is supplemental to the expected continued growth in our water business. As an example of the Company’s commitment to expanding the water and wastewater business, in October 2019, we announced an agreement to purchase the wastewater assets of the Delaware County Regional Water Control Authority (DELCORA), the largest municipal transaction in the Company’s history. Both the board and management remain confident in the continued growth in the water and wastewater business.

 

For the beginning part of 2019, the Company’s stock price lagged industry stock multiples. We attribute the temporary lag to the market’s anticipation of the large equity and debt offerings that needed to be undertaken to finance the acquisition of Peoples Natural Gas. After the successful completion of the debt and equity offerings, the market and stock price reacted positively, and we finished the year with a total return to shareholders of 40%.

 

Our transaction with Peoples Natural Gas has given us an opportunity to revisit our compensation plans and our ESG (Environmental, Social and Governance) initiatives. Reflected in this proxy statement, you will recognize a marked difference in our approach. After listening carefully during more than 500 meetings with investors in 2019, we have incorporated much of that feedback into our approach to compensation and corporate strategy. The 2020 proxy statement includes information regarding matters important to our shareholders about these efforts.

 

You will notice one change immediately - we have enhanced our disclosures and made our proxy statement easier to read and understand. We are pleased with the results and hope that you are as well.

 

Thank you for your confidence in Essential!

 

Sincerely,

-s- Christopher H. Franklin

Christopher H. Franklin

Chairman, President and Chief Executive Officer

 

March 27, 2020

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   1

 
 

Notice of Annual Meeting of Shareholders

         

 

Essential Utilities, Inc.
762 W. Lancaster Avenue

Bryn Mawr, Pennsylvania 19010

 

The annual meeting will be held:

 

Wednesday, May 6, 2020
8:00 A.M. Local Time

 

Location

Peoples Natural Gas Headquarters
375 North Shore Drive

Pittsburgh, Pennsylvania 15212

 

Record Date

March 9, 2020

 

Purpose

The Annual Meeting of Shareholders of Essential Utilities, Inc. (the “Company”) will be held for the following purposes:

1  To elect nine nominees for directors;

2  To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the Company for the 2020 fiscal year;

3  To approve an advisory vote on the compensation paid to the Company’s named executive officers for 2019;

4  To approve an amendment to the Amended and Restated Articles of Incorporation, as amended, (the “Articles of Incorporation”) to establish a majority voting standard in uncontested director elections;

5  To approve an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from 300 million to 600 million; and

6  To transact any other business as may properly come before the meeting or any adjournments or postponements thereof.

 

Who can vote

Only shareholders of record at the close of business on March 9, 2020 will be entitled to notice of, and to vote at, the meeting and at any adjournments or postponements thereof.

 

How to vote

 

Your vote is important

We urge each shareholder to promptly sign and return the enclosed proxy card, or to use telephone or internet voting. See our questions and answers about the meeting and the voting section of the proxy statement for information about voting by telephone or internet, how to revoke a proxy and how to vote your shares in person.

 

 

 

 

 

 

 

 

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to be held on May 6, 2020

 

The Notice of Annual Meeting, Proxy Statement and 2019 Annual Report to Shareholders are available at: www.essential.co/investor-relations

 

By internet*

(Photo)

www.proxyvote.com

By phone*

(Photo)

In the U.S. or Canada

dial toll-free

1-800-690-6903

In person

(Photo)

At the 2020 Annual Shareholders’ Meeting

By mail

(Photo)

Return your proxy card in the postage-paid envelope provided

       
       
*   You have until 11:59 p.m. (ET) on May 5, 2020 to vote through the internet or by phone, and if you are a plan participant you have until 11:59 p.m. (ET) on May 3, 2020 to vote through the internet or by phone. If you vote by Internet or by Phone, you do not need to mail back your proxy card.
       
As part of our precautions with respect to the coronavirus or COVID-19 outbreak, we may consider alternative arrangements for the 2020 Annual Meeting, which may include a change in date, time, or location of the meeting, including holding the meeting solely by means of remote communication. If we make any such changes, we will announce the decision in advance through all appropriate means, and provide details on our website.
       

By Order of the Board of Directors,

 

(Photo)

Christopher P. Luning

Secretary

March 27, 2020

 

 

 

2   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Contents

 

Proxy Summary 4
Proposal 1 Election of Directors 10
Corporate Governance 18
Shareholder Outreach 25
Environmental Stewardship and Corporate Responsibility 26
Governance Policies and Practices 30
Director Compensation 33
Ownership of Common Stock 36
Proposal 2 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Independent Registered Public Accounting Firm

37

Audit Committee Report 38
Proposal 3 Advisory Vote to Approve Named Executive Officers’ 2019 Compensation 39
Executive Compensation 40
Proposal 4 Approval of an Amendment to the Articles of Incorporation to Adopt a Majority Voting Standard in Uncontested Director Elections

83

Proposal 5 Approval of an Amendment to the Articles of Incorporation to Increase the Number of Authorized Shares of Common Stock

85

Annual Meeting Information 87
Questions and Answers about the 2020 Annual Meeting 87
Nominating Candidates for Director 91
Communications with the Company or Independent Directors 92
Other Matters 92
Appendix A Utility Industry Database Used for 2019 Executive Compensation A-1
Appendix B Reconciliation of Non-GAAP Financial Measures B-1
Appendix C Articles of Amendment of Essential Utilities, Inc. (Majority Voting Amendment)

C-1

Appendix D Articles of Amendment of Essential Utilities, Inc. (Authorized Shares Amendment)

D-1

 

 

 

Forward-Looking Information

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are based on management’s beliefs and assumptions. Various factors may cause actual results to be materially different than the suggested outcomes within forward-looking statements. Accordingly, there is no assurance that such results will be realized. For details on the uncertainties that may cause the Company’s actual future results to be materially different than those expressed in our forward-looking statements, see our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) and available on the SEC’s website at www.sec.gov. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than described. Forward-looking statements speak only as of the date they are made. Essential Utilities, Inc. expressly disclaims an obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   3

 
 

Proxy Summary

 

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement before voting. For more complete information regarding the Company’s 2019 performance, please review the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Summary of Matters to be Voted upon at the Annual Meeting

The following table summarizes the items that shareholders are being asked to vote on at the 2020 Annual Meeting:

 

 

Proposal

 

Description

Vote
Recommendation
Page
Reference

Proposal 1

Election of Directors

The Board of Directors of the Company (the “Board of Directors” or the “Board”) and the Corporate Governance Committee believe that the nine director nominees possess the necessary qualifications, attributes, skills, and experience to provide advice and counsel to the Company’s management and effectively oversee the business and the long-term interests of our shareholders. FOR each Director Nominee 10

Proposal 2

Ratification of Independent Accounting Firm

The Board believes the retention of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the 2020 fiscal year is in the best interests of the Company and its shareholders. As a matter of good corporate governance, shareholders are being asked to ratify the Audit Committee’s selection of PricewaterhouseCoopers LLP.

FOR 37

Proposal 3

Advisory Vote to Approve Named Executive Officers’ Compensation

The Company seeks a non-binding advisory vote to approve the compensation of its named executive officers for 2019 as described in the Compensation Discussion and Analysis (“CD&A”) and the compensation tables and narrative discussion. The Board values shareholders’ opinions, and the Compensation Committee will take into account the outcome of the advisory vote when considering future executive compensation decisions. FOR 39

Proposal 4

Approval of an Amendment to the Articles of Incorporation to establish a majority voting standard in uncontested director elections

The Board believes that amending the Company’s Amended and Restated Articles of Incorporation, as amended, (the “Articles of Incorporation”) to establish a majority voting standard in all uncontested director elections directly aligns the directors with the shareholders and allows for greater accountability of the directors. FOR 83

Proposal 5

Approval of an Amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from 300 million to 600 million

The Board believes that amending the Company’s Articles of Incorporation to increase the authorized shares of common stock is in the best interests of the Company and its shareholders by allowing the Company to have flexibility for acquisitions and other business combinations, public or private financing, and other various corporate programs or purposes.

FOR 85

 

What’s New

 

·  We enhanced our disclosures and made our proxy statement easier to read and understand.

·  We closed the acquisition of Peoples Natural Gas, and changed our name from Aqua America, Inc. to Essential Utilities, Inc.

·  The Executive Compensation Committee held in-depth discussions on the Company’s strategy and compensation program with our largest investors, assessing the peer group, and evaluating each component of the package

 

 

 

including base salaries, short term incentives, and long-term incentives.

·  Our new 2020 compensation program’s performance measures align the interests of our stakeholders and our named executive officers by correlating the amount of the named executive officer’s pay with the short-term and long-term performance of the Company and its stock price. See pages 48 through 49 for a summary of the extensive new compensation program changes.

 

 

4   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proxy Summary

 

Director Nominees

 

Director Nominees (page 10)

 

The following table provides summary information about each of the Company’s nine director nominees. Each director will serve a one-year term if elected.

 

All directors are independent except for Mr. Franklin and Mr. DeBenedictis.

 

     Current Committee Memberships

 

 

Director Nominee

 

 

Age

 

Director
Since

 

 

Principal Occupation

Other Public
Company
Boards

 

 

Executive

 

Executive
Compensation

 

 

Audit

Risk Mitigation
& Investment
Policy

 

Corporate
Governance

Elizabeth B. Amato 63 2018

Executive Vice President and Chief Human Resources Officer

United Technologies Corporation

 

   

Nicholas DeBenedictis 74 1992 Chairman Emeritus and Former Chief Executive Officer Essential Utilities, Inc.

3

   

CHAIR

 
Christopher H. Franklin 54 2015

Chairman, President and Chief Executive Officer

Essential Utilities, Inc.

Wendy A. Franks 45 2020 Senior Principal, Canada Pension Plan Investment Board

Daniel J. Hilferty

Lead Independent Director

63 2017 President and Chief Executive Officer Independence Health Group

CHAIR

Francis O. Idehen 42 2019 Chief Operating Officer GCM Grosvenor

   

 
Ellen T. Ruff 71 2006 Former President Duke Energy

CHAIR

   

Lee C. Stewart 71 2018 Private Financial Consultant 2   CHAIR  
Christopher C. Womack 62 2019 President, External Affairs Southern Company

Committee Meetings held in 2019       0 7 10 6 6
                     

Board Nominees

from left to right

Christopher H.

Franklin

Ellen T. Ruff

Francis O. Idehen

Wendy A. Franks

Lee C. Stewart

Christopher C. Womack

Daniel J. Hilferty

Elizabeth B. Amato

Nicholas DeBenedictis

 

(Photo)

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   5

 
 

Proxy Summary

 

Board Composition

 

Board Composition

 

Diversity of Skills and Experience

 

(Pie Chart)

 

Corporate Governance Highlights

 

We are committed to maintaining strong standards of corporate governance, which promote the long-term interests of our shareholders, strengthen Board and management accountability, and help build public trust in our Company. The “Corporate Governance” section beginning on page 18 describes our corporate governance framework.

 

Board Accountability

·  Annual election of directors

·  15 year term limit for directors who were elected after 2015

·  Mandatory retirement age of 75 for directors

Board Independence

·  Seven out of nine director nominees are independent

·  Independent audit, compensation, and governance committees

Lead Independent Director ·  Lead Independent Director with clearly defined and robust responsibilities
Board and Committee Evaluations ·  Peer evaluations of the Board and its committees
Board Diversity

·  Over 55% of the Board is diverse

·  33% of the Board is comprised of female directors

Board Refreshment ·  Since 2015, 66% of the directors are newly appointed or elected
Board Oversight

·  Risk oversight by full Board and all committees

·  Robust oversight of cybersecurity measures by full Board and Risk Mitigation and Investment Policy Committees

Stock Ownership Guidelines

·  Robust director and management stock ownership guidelines

–  Directors: 5x annual base cash retainer

–  CEO: 5x midpoint of average base salary

–  Other NEOs/EVPs: 3x midpoint of average base salary

Shareholder Engagement ·  Comprehensive shareholder outreach conducted in 2019 with more than 500 meetings held with investors

 

 

6   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proxy Summary

 

2019 Performance Highlights

 

2019 Performance Highlights

 

During 2019, our leadership team remained focused on growing our customer base through acquisitions, prudently investing capital to renew our aging infrastructure, obtaining regulatory approval for the Peoples Natural Gas acquisition, successfully closing on the Company’s first public equity offering since 2006 and its first corporate debt offering, and creating efficiencies across the organization. We see great opportunities ahead and remain focused on investing in infrastructure and delivering sustainable growth for our investors. We do this while building on our core values of respect, integrity, and the pursuit of excellence.

 

Financial Highlights

During 2019, we remained focused on our mission to be the best possible provider of essential resources by serving the needs and expectations of our customers, shareholders, employees and the communities we serve both today and for future generations. At the same time we continued to focus on growing our customer base through acquisitions, prudently investing capital to renew our aging infrastructure, and creating efficiencies across the organization.

 

All of this was in addition to working on efforts to integrate and close the Peoples Natural Gas transaction and to negotiate and sign the DELCORA municipal wastewater acquisition, which is the largest municipal acquisition in our history. We continue to see great opportunities ahead and remain focused on investing in infrastructure and delivering sustainable growth for our investors.

 

·  In 2019, we invested $550 million on infrastructure projects, helping to ensure safe and reliable water for all customers.

·  Revenues were $889.7 million in 2019, an increase of 6.2 percent over 2018.

·  Earnings per share were $1.04 in 2019, including items from the Peoples transaction. Excluding these items, adjusted (non-GAAP) earnings per share were $1.47 compared to earnings per share of $1.41 in 2018.*

·  We added approximately 12,000 customer connections thru acquisition in 2019 and increased customers served by more than 2 percent, which includes customers from organic growth and acquisitions. Our acquisitions in 2019 added over $50 million in rate base.

·  In September we announced the DELCORA acquisition, a $276 million acquisition of a wastewater authority which provides service to over half a million people. DELCORA has the equivalent of 198,000 retail customers.

 

·  From January 1, 2017 to December 31, 2019, the total return to our shareholders, including share price appreciation and dividends paid, shows 67.75 percent growth. In 2019 alone our total return to shareholders was 40.41 percent.

·  In July 2019, the Board of Directors approved a 7 percent increase in the quarterly dividend to an annualized rate of $0.9372 per share.

·  We completed the financing for the previously announced agreement to acquire Peoples Natural Gas, a natural gas distribution utility, that reflects an enterprise value of $4.275 billion. This included an equity offering which was oversubscribed and a debt offering locking in long-term rates at under 4%.

·  We revisited our ESG program, publishing new tear sheets and disclosures in February 2020 and submitted our second report to the CDP, receiving an increased grade of B-.

 

Revenues

$889.7M

up 6.2%é

Adjusted EPS*

$1.47 vs

$1.41

 

TSR

68%

Growth,

since 2017

Dividends to
Shareholders
7%é
Increase
*See Appendix B for a reconciliation of non-GAAP financial measures to GAAP financial measures.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   7

 
 

Proxy Summary

 

Compensation Highlights

 

2017–2019 Pay for Performance Alignment

 

Our pay programs are designed to reflect the Company’s performance. The following table shows the relationship between financial performance goals and executive performance-based payouts over the past three years:

 

Target EPS
(adjusted for comp plan)

EPS
(adjusted for comp plan)

 

STI Payout %

 

3 Year TSR Return

 

PSU Payout %

2017 $1.36 $1.37 118.44% 58.08% 109.19%
2018 $1.39 $1.44 136.34% 23.32% 70.68%
2019 $1.47 $1.50 126.45% 67.75% 159.91%

 

Comparison of Five Year Cumulative Total Return*

Below is a chart showing our Total Return to our shareholders over the past five years as compared to the S&P 500 Index and the S&P MidCap 400 Utilities Index.

 

(Line Graph)

 

*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

Compensation Highlights

 

Highlights of our executive compensation program include:

 

·  Extensive shareholder outreach designed to align compensation practices with shareholders

·  Compensation program highly correlated to total shareholder return, adjusted earnings per share, and other financial metrics

·  Emphasis on performance-based compensation

·  Significant portion of compensation is variable and at risk

·  Reasonable change-in-control agreements with double-trigger termination

·  Clawback policies in place

·  Anti-hedging and anti-pledging policy

 

·  No tax gross ups

·  Shareholding requirement ensures that executives are aligned with shareholders

·  Reasonable severance arrangements in line with market practices

·  Modest perquisites

·  Newly designed 2020 compensation program aimed at incenting management to drive safety and customer satisfaction following the acquisition of Peoples Natural Gas and to drive long-term shareholder growth

 

 

8   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proxy Summary

 

2019 Pay for Performance Compensation Program

 

2019 Pay for Performance Compensation Program

 

Our goal is to instill a pay-for-performance culture throughout our Company. Our compensation program for named executive officers is designed to:

 

·Provide compensation that is competitive with our industry peers and appropriately correlates incentive compensation to the achievement of the Company’s short- and long-term performance for customers and shareholders.
·Provide a total compensation package that is aligned with industry standards and enhances our ability to:
Motivate and reward our named executive officers for contributions to our financial success;
Attract and retain talented and experienced named executive officers; and
Ensure a significant portion of pay is performance based to better align pay with the successful achievement of our business objectives.
·Reward our named executive officers for leadership excellence and contribution to the organization’s success.
·Maintain an important focus on environmental, social, and governance issues while building shareholder value.

 

2019 NEO Total Compensation Pay Mix

 

CEO

25%

Base Salary

29%

Compensation Short-Term
Incentives (Cash)

32%

Stock Options

14%

Restricted Stock

Units (RSUs)

Performance Based

  75% Performance and/or Stock-Based Compensation
             
NEO            
37%
Base Salary

28%

Compensation Short-Term
Incentives (Cash)

25%

Stock Options

10%

Restricted Stock

Units (RSUs)

Performance Based

    63% Performance and/or Stock-Based Compensation

 

Shareholder Outreach and Results of 2019 Advisory Vote to Approve Executive Compensation

 

At our 2019 annual meeting of shareholders, fewer shareholders supported our say on pay proposal than the 2013-2018 average of 95%. The Board believes that the shareholder return result lagged the industry due to the impact of the then-pending large acquisition of Peoples Natural Gas and the overhang of the pending equity and debt issuances rather than the underlying performance of the Company. However, management and the Board took the resulting shareholder vote seriously and committed to take several steps to address the executive compensation program in 2020.

 

Over the course of 2019, management held more than 500 meetings with investors. Additionally, the Company requested meetings with the 25 largest shareholders, representing over 45% of our outstanding common stock. We engaged with every shareholder who accepted our offer to meet. During these meetings and calls, we discussed numerous topics, including strategic, executive compensation, and environmental, social and governance issues.

 

As a direct result of these meetings and calls, the Company took a number of actions in 2019 to address shareholder feedback on our executive compensation program and environmental, social, and governance programs.

 

For more information on our shareholder engagement program, investor feedback and the actions taken in response to that feedback, please see page 25 in this proxy statement.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   9

 
 

Proposal 1:

Election of Directors

 

All of the director nominees who are elected, will be elected for a one-year term expiring at the 2021 Annual Meeting of Shareholders, and until their successors are duly elected and qualified. The Corporate Governance Committee reviewed the qualifications of the directors in relation to the candidate nomination criteria under the Company’s Corporate Governance Guidelines. The Corporate Governance Committee voted to recommend to the Board of Directors, and the Board of Directors approved, the nomination of Ms. Amato, Mr. DeBenedictis, Mr. Franklin, Ms. Franks, Mr. Hilferty, Mr. Idehen, Ms. Ruff, Mr. Stewart, and Mr. Womack for election as directors at the 2020 Annual Meeting, with each nominee abstaining from the vote with respect to his or her nomination, as applicable.

 

Therefore, nine nominees will stand for election by a plurality of the votes cast at the 2020 Annual Meeting. At the 2020 Annual Meeting, proxies in the accompanying form, properly executed, will be voted for the election of the nine nominees listed below, unless authority to do so has been withheld in the manner specified in the instructions on the proxy card or the record holder does not have discretionary voting power under NYSE rules. Discretionary authority is reserved to cast votes for the election of a substitute should any nominee be unable or become unwilling to serve as a director. Each nominee has stated his or her willingness to serve and the Company believes that the nominees will be available to serve.

 

Director Independence

 

Based on a review applying the standards in the Company’s Corporate Governance Guidelines, including a review of the applicable NYSE, SEC, and Company standards, and considering the relevant facts and circumstances of any transactions, relationships, and arrangements between the directors and the Company, the Board of Directors has affirmatively determined that each director and nominee for director is independent, other than Mr. Franklin, the Company’s Chairman, President, and Chief Executive Officer, and Mr. DeBenedictis, the Company’s Chairman Emeritus and former Chief Executive Officer. For more information, see “Governance Practices & Policies” beginning on page 30 for our Director Independence Standards and Related Persons Transaction Policy.

 

Age and Term Limits

 

The Board believes that term limits are an important element of good governance. However, it also believes that it must strike the appropriate balance between the contribution of directors who have developed, over a period, meaningful insight into the Company and its operations, and therefore can provide an increasing contribution to the Board as a whole. Accordingly, in 2015, the Board established that upon the fifteenth anniversary of a director accepting an initial appointment or election to the Board of Directors, the director will tender his or her resignation to the Board (the “Term Limit Policy”). The Term Limit Policy does not apply to directors who were elected on or before December 1, 2015.

 

Following extensive research, including conducting an outreach program to the Company’s largest shareholders to seek their opinion, the Board determined that 75 years of age was the appropriate age for a director to submit his or her resignation from the Board of Directors. As such, all directors are required to submit their resignation from the Board effective as of their 75th birthday.

 

Information Regarding Nominees

 

For each of the nine nominees for election as directors at the 2020 Annual Meeting, set forth below is information as to the positions and offices with the Company held by each, the principal occupation of each during at least the past five years, the directorships of public companies and other organizations held by each and the experience, qualifications, attributes or skills that, in the opinion of the Corporate Governance Committee and the Board of Directors, make the individual qualified to serve as a director of the Company.

 

 

10   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 1 Election of Directors

 

Information Regarding Nominees

 

Director Experience, Qualifications, Attributes and Skills Criteria

 

The chart below summarizes the experience, qualifications, attributes, and skills of each of the nominees:

 

Experience, Qualifications,
Attributes and Skills
Utility
Industry

Regulatory

Financial

Legal/
Government

Leadership

Mergers &
Acquisitions
Geographic
Diversity
“C-Suite”
Experience
Amato      
DeBenedictis  
Franklin  
Franks      
Hilferty      
Idehen          
Ruff  
Stewart  
Womack  

 

Based upon these qualifications, attributes, and skills, the Board of Directors determined that the following members are best suited for service on the following Committees:

 

 

Committee Chair Other Members
Audit Lee C. Stewart* Wendy A. Franks, Francis O. Idehen*
Corporate Governance Daniel J. Hilferty Ellen T. Ruff, Elizabeth B. Amato, Christopher C. Womack
Executive Compensation Ellen T. Ruff Daniel J. Hilferty, Elizabeth B. Amato, Christopher C. Womack
Executive Christopher H. Franklin Daniel J. Hilferty, Lee C. Stewart, Ellen T. Ruff
Risk Mitigation and Investment Policy Nicholas DeBenedictis Wendy A. Franks, Lee C. Stewart, Francis O. Idehen, Christopher H. Franklin

 

*Audit Committee Financial Expert

 

Annually, the Corporate Governance Committee and the Board of Directors review the membership of the individuals on the Committees and re-organize the Committees, if necessary.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   11

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

Nominees for Election at the 2020 Annual Meeting

 

       

(Photo)

 

Board Committees

·  Corporate Governance Committee

·  Executive Compensation Committee

 

Key Skills

·  Legal/Government

·  Leadership

·  Mergers & Acquisitions

·  Geographic Diversity

·  “C-Suite” Experience

 

Elizabeth B. Amato

Executive Vice President and Chief Human Resources Officer,
United Technologies Corp.

Director since 2018

Age 63

Independent Director

     

Experience

·  Executive Vice President & Chief Human Resources Officer of United Technologies Corp. (“UTC”) 2015 to present.

·  Senior Vice President, Human Resources and Organization of UTC with global responsibility for UTC’s Human Resources and Communications functions 2012-2015.

·  Ms. Amato joined UTC in 1985 at Pratt & Whitney and has held a variety of the most senior human resources leadership positions across the corporation in both aerospace and commercial building systems, including UTC Climate, Controls & Security (2011-2012), Carrier (2010-2011), Pratt & Whitney (2006-2009) and Sikorsky (1997-2006).

 

Ms. Amato is a recipient of the YWCA Women Achievers Award and is currently a member of the Human Resources Policy Association, the CHRO Board Academy and is a member of the Board of Directors for Children’s Healthcare Charity, Inc. Ms. Amato holds a bachelor’s degree in political science from Davidson College and a law degree from the University of Connecticut.

 

Qualifications:

Ms. Amato has over 30 years of experience in various roles with responsibilities ranging from integrating acquisitions to human resources to executive compensation. The Board of Directors views Ms. Amato’s independence, her broad experience, and her leadership roles within the industry as important qualifications, skills and experience that support the Board of Directors’ conclusion that Ms. Amato should serve as a director of the Company.

 

Other current public company directorships (0).

 

       

(Photo)

 

Board Committees

·  Chairman, Risk Mitigation
and Investment Policy
Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Financial

·  Legal/Government

·  Leadership

·  Mergers & Acquisitions

·  “C-Suite” Experience

 

Nicholas DeBenedictis

Chairman Emeritus, Essential Utilities, Inc.

Director since 1992

Age 74

     

Experience

·  Chairman Emeritus of the Board, having retired as Chief Executive Officer of the Company in 2015 and as non-executive Chairman of the Board in 2017.

·  Chief Executive Officer from 1992 until 2015 and Chairman of the Board from 1993 until 2017.

·  Senior Vice President for Corporate Affairs of PECO Energy Company (an Exelon Corporation) 1989 to 1992.

·  President of the Greater Philadelphia Chamber of Commerce 1986 to 1989.

·  Secretary of the Pennsylvania Department of Environmental Resources 1983 to 1986.

 

Qualifications:

In addition to his knowledge and experience as the Company’s previous Chairman of the Board from 1993 to 2017 and Chief Executive Officer from 1992 to 2015, and his prior experience as a senior executive of a major electric utility, Mr. DeBenedictis has experience as the head of Pennsylvania’s environmental regulatory agency. He serves as a director of three other public companies, including, as member of the corporate governance, audit, finance and compensation committees of those companies. Mr. DeBenedictis has also held leadership positions with various, educational, business, civic and charitable institutions. The Board of Directors views Mr. DeBenedictis’ experience with various aspects of the utility industry and his demonstrated leadership roles in business and community activities as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. DeBenedictis should serve as a director of the Company.

 

Other current public company directorships (3):

Exelon Corporation, P.H. Glatfelter Company and Mistras Group.

 

Other current directorships:

Mr. DeBenedictis serves on the Boards of Pennsylvania area non-profit, civic, and business organizations, including Independence Health Group.

 

 

12   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

       

(Photo)

 

Board Committees

·  Audit Committee

·  Risk Mitigation and Investment Policy Committee

 

Key Skills

·  Financial

·  Leadership

·  Mergers & Acquisitions

·  Geographic Diversity

Wendy A. Franks

Senior Principal, Canada Pension Plan Investment Board

Director since 2020

Age 45

Independent Director

     

Experience

·  Senior Principal, Canada Pension Plan Investment Board (“CPPIB”) 2012 to present; responsible for sourcing and evaluating potential relationship investment opportunities, monitoring portfolio Company performance and development of the business network.

·  Associate principal at McKinsey & Co., where she helped a number of clients develop business strategies.
 

Ms. Franks has a bachelor’s degree in chemical engineering and a master’s degree in applied science in electrical and computer engineering from the University of Waterloo. She holds a Ph.D. in Natural Sciences from the Swiss Federal Institute of Technology, Zurich.

 

Ms. Franks joined the Board as a nominee designated by CPPIB under the terms of the Company’s private placement transaction with CPPIB.

 

Qualifications:

The Board has determined, based on her abilities, qualifications, knowledge, judgment, character, leadership skills, education, background and experience in fields and disciplines relevant to the Company, including her U.S. GAAP financial expertise, that Ms. Franks is qualified to serve on the Board and will make a positive contribution to the Board. The Board of Directors views Ms. Frank’s extensive experience with mergers and acquisitions, her auditing and evaluation of financial statements and complex accounting issues, her capabilities, and her demonstrated leadership roles as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Ms. Franks should serve as a director of the Company.

 

Other current public company directorships (0).

Other current directorships:

ReNew Power, the largest renewable energy independent power producer in India.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   13

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

 

 

(Photo)

 

Board Committees

·  Chair, Executive Committee

·  Risk Mitigation and
Investment Policy
Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Financial

·  Legal/ Government

·  Leadership

·  Mergers & Acquisition

·  “C-Suite” Experience

Christopher H. Franklin

Chairman, President, and Chief Executive Officer, Essential Utilities, Inc.

Director since 2015

Age 54

     

Experience

Chairman, President, and Chief Executive Officer of the Company.

 

 
·  Mr. Franklin has worked for the Company for 27 years in a variety of leadership positions: President and Chief Executive Officer since July 2015; Executive Vice President, and President and Chief Operating Officer, Regulated Operations 2012 to 2015; Regional President—Midwest and Southern Operations and Senior Vice President, Public Affairs 2010 to 2012; Regional President—Southern Operations and Senior Vice President, Public Affairs and Customer Relations 2007 to 2010); Vice President, Public Affairs and Customer Operations 2005 to 2007; Vice President, Corporate and Public Affairs 1997 to 2005); and Manager Corporate & Public Affairs 1992 to 1997.
 

Mr. Franklin earned his B.S. from West Chester University and his M.B.A. from Villanova University.

 

Qualifications:

Since 2015, under Mr. Franklin’s leadership as CEO, the Company’s customer base has nearly doubled by completing over 50 acquisitions and increased its market capitalization from $4.1 billion to $11 billion at the end of 2019. During the same period, total shareholder return has been in excess of 70%. During his long tenure at the Company, Mr. Franklin has held a series of roles. Among his accomplishments in public affairs was the passage of key legislation designed to provide customers with improved water quality and better water and wastewater systems while allowing a fair and reasonable return for shareholders; as vice president of customer operations, Mr. Franklin lead the implementation of a single-customer information system and the creation of three central call centers; as operating president, he integrated the acquisition of AquaSource and brought the utility back to full profitability.

 

The Board of Directors views Mr. Franklin’s extensive experience with the Company, capabilities, and his demonstrated leadership roles with the Company and in business and community activities as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. Franklin should serve as a director of the Company.

 

Other current public company directorships (0).

Other current and past directorships:

Past Board member of ITC Holdings (which was sold in 2016). Mr. Franklin is active in the community and serves on a number of nonprofit and higher education boards including the University of Pennsylvania Board of Trustees and the Franklin Institute of Philadelphia.

       

 

 

14   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

       

(Photo)

 

Lead Independent Director

Board Committees

·  Chair, Corporate Governance Committee

·  Executive Committee

·  Executive Compensation Committee

 

Key Skills

·  Regulatory

·  Financial

·  Leadership

·  Mergers & Acquisitions

·  “C-Suite” Experience

Daniel J. Hilferty

Lead Independent Director, Essential Utilities, Inc. President and CEO,
Independence Health Group

Director since 2017

Age 63

Independent Director

     

Experience

·  President and Chief Executive Officer of Independence Health Group (“IHG”), one of the nation’s leading health insurers serving nine million customers in 25 states and Washington D.C., since 2010.

Prior to 2010, Mr. Hilferty was:

·  President and Chief Executive Officer of the AmeriHealth Mercy Family of Companies

·  Executive Director of PennPORTS in the administration of Pennsylvania Governor Robert P. Casey

·  Assistant Vice President overseeing community and media relations for Saint Joseph’s University

 

Qualifications:

Mr. Hilferty has extensive knowledge and experience in the areas of mergers and acquisitions, the health care field, and government relations and regulation. Based on Mr. Hilferty’s experience, qualifications, and knowledge, in 2017, the Board of Directors determined that Mr. Hilferty should serve as its Lead Independent Director. The Board of Directors views Mr. Hilferty’s independence, his experience with regulation, his reputation in the healthcare industry, and his leadership roles in business and community activities as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. Hilferty should serve as a director of the Company.

 

Other current public company directorships (0).

Other current and past directorships:

Mr. Hilferty serves on several industry-based and nonprofit boards, including America’s Health Insurance Plans (serves on the Executive Committee), Greater Philadelphia Chamber of Commerce (serves as Chairperson), and on a fund board of FS Investments. In 2015, he served as co-chair on the Executive Leadership Cabinet of the World Meeting of Families; and, was the past Chairman of the Board of Directors for the Blue Cross and Blue Shield Association.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   15

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

       

(Photo)

 

Board Committees

·  Audit Committee

·  Risk Mitigation and Investment Policy Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Financial

·  Leadership

·  Mergers & Acquisitions

·  Geographic Diversity

·  “C-Suite” Experience

Francis O. Idehen

Chief Operating Officer, GCM Grosvenor

Director since 2019

Age 42

Independent Director 

     

Experience

·  Chief Operating Officer for GCM Grosvenor, an independent alternative asset management firm since May 2017.

·  Served in senior roles at Exelon Corporation from 2011 to 2017, serving as its treasurer, head of investor relations, and managing director of its investment office.

 

Mr. Idehen has a bachelor’s degree in economics from Yale University and an MBA from Harvard Business School.

 

Qualifications:

Mr. Idehen has extensive experience with large and complex businesses, including a major utility Company, in various management and financial positions. Mr. Idehen has lived and worked in Illinois, an important area of the Company’s operations, for many years. The Board of Directors views Mr. Idehen’s independence, his experience with various aspects of the utility industry, and his experience as a chief operating officer charged with making prudent financial investments as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. Idehen should serve as a director of the Company.

 

Other current public company directorships (0).








       

(Photo)

 

Board Committees

·  Chair, Executive Compensation Committee

·  Executive Committee

·  Corporate Governance Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Legal Government

·  Leadership

·  Mergers & Acquisitions

·  Geographic Diversity

·  “C-Suite” Experience

Ellen T. Ruff

Former President, Duke Energy

Director since 2006

Age 71

Independent Director

     

Experience

·  President, Office of Nuclear Development, for Duke Energy Corporation, 2008 until her retirement in January 2011.

·  Partner at the law firm of McGuire Woods LLP from 2011 to 2018.

·  President of Duke Energy Carolinas, an electric utility that provides electricity and other services to customers in North Carolina and South Carolina from 2006 to 2008.

 

Ms. Ruff joined Duke Energy in 1978 and during her career held a number of key positions, including: Vice President and General Counsel of Corporate, Gas and Electric Operations; Senior Vice President and General Counsel for Duke Energy; Senior Vice President of Asset Management for Duke Power; Senior Vice President of Power Policy and Planning; and Group Vice President of Planning and External Affairs.

 

Qualifications:

Ms. Ruff has over 30 years of experience with a major utility company in various management, operations, legal planning and public affairs positions. Ms. Ruff has lived and worked in North Carolina, an important area of the Company’s operations, for many years.

 

The Board of Directors views Ms. Ruff’s independence, her experience with various aspects of the utility industry, her knowledge of North Carolina and her demonstrated leadership roles in business and community activities as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Ms. Ruff should serve as a director of the Company.

 

Other current public company directorships (0).



 

 

16   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 1 Election of Directors

 

Nominees for Election at the 2020 Annual Meeting

 

       

(Photo)

 

Board Committees

·  Chairman, Audit Committee

·  Risk and Investment Policy
Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Financial

·  Leadership

·  Mergers & Acquisitions

·  Geographic Diversity

·  “C-Suite” Experience

Lee C. Stewart

Private Financial Consultant

Director since 2018

Age 71

Independent Director

     

Experience

·  Mr. Stewart is a private financial consultant with over 25 years of experience as an investment banker.

·  Vice President at Union Carbide Corporation from 1996 to 2001, responsible for various treasury and finance functions.

·  Chief Financial Officer of Foamex International, Inc. 2001 to 2002.
 

Qualifications:

 

Mr. Stewart has over 25 years of experience as an investment banker and over 20 years of experience as a director of a public Company. Mr. Stewart possesses significant experience with financial services, finance and banking, public Company accounting and financial reporting, strategic planning, operations and risk management, and corporate governance. The Board of Directors has determined that Mr. Stewart is an independent director. The Board of Directors views Mr. Stewart’s independence and his experience as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. Stewart should serve as a director of the Company.

 

Other current public company directorships (2):

Currently serves on the boards of P. H. Glatfelter Company, a New York Stock Exchange-listed global supplier of specialty papers and engineered materials, and Mood Media, Inc, an international in-store provider of music, digital signage, hold music, on-hold messaging, scent, integrated audio/video, and interactive mobile marketing products.





 

       

(Photo)

 

Board Committees

·  Corporate Governance Committee

·  Executive Compensation Committee

 

Key Skills

·  Utility Industry

·  Regulatory

·  Legal/Government

·  Mergers & Acquisitions

·  Leadership

·  Geographic Diversity

·  C-Suite” Experience

Christopher C. Womack

President, External Affairs, Southern Company

Director since 2019

Age 62

Independent Director

     

Experience

·  President, External Affairs, Southern Company, a leading American gas and electric utility holding company based in Atlanta, Georgia, 2008 to present.

·  He has worked in various executive leadership positions at Southern Company since 1988, including Executive Vice President, Georgia

Power Company from 2006 to 2008; Senior Vice President, Fossil & Hydro Power, Georgia Power Company from 2001 to 2006; and Senior Vice President, Human Resources from 1998 to 2001.

·  From 1979 to 1987 he served as a legislative aide in the U.S. House of Representatives.

 

Qualifications:

Mr. Womack has over 20 years of experience as an executive of a gas and electric utility. Mr. Womack possesses significant experience with utility operations, human resources and governmental affairs. The Board of Directors views Mr. Womack’s independence and his experience as important qualifications, skills and experience supporting the Board of Directors’ conclusion that Mr. Womack should serve as a director of the Company.

 

Other current public company directorships (0).






 

   
(Image) The Board of Directors unanimously recommends a vote FOR the election of each of these nominees as director.
   

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   17

 
 

Corporate Governance

 

The Board sets high standards for our employees, officers and directors. Implicit in this philosophy is the importance of sound corporate governance. Following the principles of our Corporate Governance Guidelines, the Board serves as a prudent fiduciary for shareholders and oversees the management of our business.

 

Governance Materials Available on our Website

Corporate Governance Guidelines provide the principles governing the Board. Developed by the Corporate Governance Committee, the Committee annually reviews these Guidelines and recommends any necessary changes to the full Board.

 

Board Committee Charters Each of the standing Committees of the Board of Directors operates under a written Committee Charter.

 

Code of Ethical Business Conduct applies to our directors, officers, and employees and covers a number of important subjects, including: conflicts of interest; corporate opportunities; fair dealing; confidentiality; protection and proper use of Company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of illegal or unethical behavior. In 2019, it was updated to reflect changes in our leadership structure and to stress our Core Values of Respect, Integrity, and the pursuit of Excellence. The Company intends to post amendments to or waivers from the Code of Ethical Business Conduct (to the extent applicable to the Company’s executive officers, senior financial officer, or directors) on its website.

 

Copies of our Corporate Guidelines, Code of Ethical Business Conduct, Committee Charters and other governance materials can be obtained free of charge from the Corporate Governance portion of the Investor Relations section of the Company’s website: www.essential.co.

 

Our Corporate Social Responsibility Report is available at www.csr.aquaamerica.com. For additional information see pages 26 through 29 in this proxy statement.

 

Board Leadership Structure

 

Mr. Franklin serves as Chairman of the Board and Chief Executive Officer. The Board of Directors deliberately and intentionally determined that the structure of the combined chairman and Chief Executive Officer along with the position of a strong lead independent director and independent Committee Chairs to be the most appropriate and efficient approach to managing the Company, while providing clear accountability to the execution of the Company’s strategy and its results.

 

Lead Independent Director

The Board of Directors annually elects the lead independent director to execute the following clear and specific duties:

 

·  Presides at all meetings of the Board at which the Chairman of the Board is not present, including executive sessions of the independent directors;

·  Serves as liaison between the independent directors and the Chairman of the Board;

·  Consults with the Chairman of the Board, reviewing and approving meeting agendas and information provided to the Board for meetings, including the authority to add items to the agendas for any Board meeting;

·  Reviews and approves meeting schedules to assure there is sufficient time for discussion of all agenda items;

·  Possesses the authority to call executive sessions of the independent directors and to prepare the agendas for the executive sessions;

 

·  If requested by major shareholders, ensures that he is available for consultation and direct communications;

·  Serves as a member of the Executive Committee;

·  In the event of the death or incapacity of the Chairman, becomes the acting Chairman of the Board until a new Chairman is selected; and

·  Has the authority (with the approval of at least the majority of the directors) to engage legal, financial or other advisors as the independent directors deem appropriate at the Company’s expense and without consultation or the need to obtain approval from any officer of the Company.

 

 

18   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Board Committee Membership, Meetings and Director Attendance

 

Board Committee Membership, Meetings and Director Attendance

 

Under our Bylaws, the Board of Directors may designate an Executive Committee and one or more other committees, with each committee to consist of two or more directors except for the Audit Committee and Executive Compensation Committee, which must have at least three members. The Board of Directors annually elects from its members the Executive, Audit, Executive Compensation, Risk Mitigation and Investment Policy, and Corporate Governance Committees. The Board may also appoint ad hoc committees. The Retirement and Employee Benefits Committee, which is comprised of senior management of the Company, reports periodically to the Board of Directors.

 

The Board of Directors held 12 meetings in 2019

·In 2019, each director attended at least 75% of the aggregate of all meetings of the Board and the Committees on which each director served.
·All of the directors who were elected at the 2019 Annual Meeting of Shareholders attended the 2019 Annual Meeting of Shareholders.

 

Board Committees

 

     

(Photo)

Chair

Lee C. Stewart

 

Members

Wendy A. Franks

Francis O. Idehen

All members are independent under NYSE listing requirements and SEC rules

All members are financially literate and two members of the Committee are financial experts within the meaning of applicable SEC rules.

Audit

Meetings Required: 4

2019 Meetings Held: 10

The Committee’s primary responsibilities are to:

·  monitor the integrity of the Company’s financial reporting process and systems of internal controls, including the review of the Company’s annual audited financial statements; and

·  monitor the independence of our independent registered public accounting firm.

The Committee has the exclusive authority to select, evaluate and, where appropriate, replace the Company’s independent registered public accounting firm.

 

The Committee has considered the extent and scope of non-audit services provided to the Company by its independent registered public accounting firm and has determined that these services are compatible with maintaining its independence.


 

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   19

 
 

Corporate Governance

 

Board Committee Membership, Meetings and Director Attendance

 

     

(Photo)

Chair

Ellen T. Ruff

 

Members

Elizabeth B. Amato

Daniel J. Hilferty

Christopher C. Womack

All members are independent under NYSE listing requirements

 

Executive Compensation

2019 Meetings Held: 7

The Committee is responsible for administering our equity compensation plans and determining executive compensation each year.

 

As part of its annual compensation-setting process, the Committee:

 

·  reviews the recommendations of the Chief Executive Officer as to appropriate compensation of the Company’s executive officers (other than the Chief Executive Officer) and determines the compensation of these executive officers; and

·  reviews and recommends to the Board of Directors the compensation for the Chief Executive Officer, which is subject to final approval by the independent members of the Board of Directors.

 

The Committee has retained an independent compensation consultant, Pay Governance LLC, to assist in designing our executive compensation program and assessing its competitiveness through benchmarking peer analysis and other methodologies.

 

The Committee has the power to delegate aspects of its work to subcommittees, with the approval of the Board of Directors.

 

     

(Photo)

Chair

Daniel J. Hilferty

 

Members

Elizabeth B. Amato

Ellen T. Ruff

Christopher C. Womack

All members are independent under NYSE listing requirements

Corporate Governance

2019 Meetings Held: 6

The Committee’s primary responsibilities include:

·  identifying and considering qualified nominees for directors;

·  developing and periodically reviewing the Corporate Governance Guidelines;

·  advising the Board of Directors on director nominees, executive selections and succession planning, including a succession plan for the CEO and other senior executives; and

·  implementing and overseeing the comprehensive Board, Committee and peer review process.

 

The Committee also reviews and approves, ratifies or rejects related person transactions under the Company’s written policy.

 

 

 

20   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Board Committee Membership, Meetings and Director Attendance

 

     

(Photo)

Chair

Nicholas DeBenedictis

 

Members

Christopher H. Franklin

Wendy A. Franks

Francis O. Idehen

Lee C. Stewart

Risk Mitigation and Investment Policy

2019 Meetings Held: 6

The Committee oversees the Company’s risk management process, policies, and procedures for identifying, managing and monitoring critical risks, including cyber-related risks, and its compliance with legal and regulatory requirements.

 

·  The Committee also oversees the Company’s acquisition process in which it is briefed on all potential transactions in excess of $10 million, and reviews all acquisitions valued in excess of $20 million and all transactions that involve the Company’s stock.

·  The Committee’s Chairperson communicates with other Board of Directors Committees to avoid overlap and potential gaps in overseeing the Company’s risks.

·  The Committee advises the Board of Directors in its performance of its oversight of enterprise risk management.

 

 

     

(Photo)

Chair

Christopher H. Franklin

 

Members

Daniel J. Hilferty Ellen

T. Ruff

Lee C. Stewart

Executive Committee  

2019 Meetings Held: 0

 

The Committee has and exercises all the authority of the Board in the management of the business and affairs of the Company, with certain specified exceptions.

 

·  The Committee is intended to serve in the event that action by the Board of Directors is necessary or desirable between regular meetings of the Board, or at a time when convening a meeting of the entire Board is not practical, and to make recommendations to the entire Board with respect to various matters.

·  The Chairman of the Board of Directors serves as Chairman of the Committee.

 

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   21

 
 

Corporate Governance

 

Board and Committee Evaluations

 

Board and Committee Evaluations

 

Each year, the directors complete a targeted questionnaire that is administered by a neutral, non-affiliated entity to assess the performance of the Board and each of the standing Committees. Every second year, directors complete a targeted questionnaire to assess the performance of the directors individually. Both questionnaires elicit quantitative and qualitative ratings in key areas of Board operation and function. Each Committee member completes questions to evaluate how well the Committees on which he or she serves are functioning and to provide suggestions for improvement.

 

In 2019, the Lead Independent Director and the Chairman met with each director, provided the results of the evaluations to each director, and discussed the director’s participation, preparation, and performance.

 

Board Refreshment

 

In 2015, the Board of Directors undertook a multi-year program aimed at refreshing the Board to encourage new ideas, expertise, and oversight while maintaining the institutional experience of the then-current directors. As a result, the Board of Directors now consists of nine directors, with seven of those directors having been hired since 2015. Each of these directors brings his or her own level of expertise and experience.

 

Director Onboarding and Continuing Education

 

In 2019, the Company appointed Mr. Womack and Mr. Idehen as directors. As part of its transaction with CPPIB in March 2020, the Company appointed Ms. Franks as a director. In addition to informal meetings with the existing directors, and in conjunction with their appointment, Messrs. Womack and Idehen and Ms. Franks participated in an onboarding process that included in-depth meetings with the executive officers focused on items such as:

 

·merger and acquisition strategy;
·regulatory matters;
·utility accounting and financing;
·water and wastewater operations;
·Board governance functions;
·Pennsylvania law; and
·the Company’s Articles of Incorporation, its Bylaws, and its Corporate Governance Guidelines.

 

In addition, during 2019, the Board of Directors participated in several education sessions that included rate making, repair tax deduction, and various sessions aimed at financing mechanisms.

 

 

22   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Oversight of Risk Management

 

Oversight of Risk Management

 

(Image)

 

Full Board

The Board believes that the present leadership structure, along with the important risk oversight functions performed by management, the Audit Committee, the Risk Mitigation and Investment Policy Committee, the Executive Compensation Committee, and the full Board, permits the Board to effectively perform its role in the risk oversight of the Company.

 

Role of Management

In addition to updates at each Board meeting by operating management regarding any significant operational, acquisition, or environmental matters, management provides the Board with an annual update on:

·environmental matters by our Chief Environmental Officer;
·the Company’s proposed capital spending plans by our Vice President, Corporate Engineering; and
·the Company’s Enterprise Risk Management program by our Executive Vice President, General Counsel, and Secretary.

 

The Risk Mitigation and Investment Policy Committee

The Risk Mitigation and Investment Policy Committee’s primary purpose is to assist the Board of Directors in fulfilling its oversight responsibilities for the Company’s risk management practices, the Company’s compliance with legal and regulatory requirements, the Company’s potential investments in acquisitions and growth vehicles, and to review and approve the Company’s risk management framework.

 

Management receives approval from the Risk Management and Investment Policy Committee on all potential acquisitions valued in excess of $20 million, and the Board approves every acquisition valued in excess of $50 million or which involves the issuance of the Company’s common stock as part of the consideration.

 

Spotlight on Cybersecurity Management
In 2019, the Board of Directors oversaw the Company’s cybersecurity risk assessment and security measures. By receiving at least quarterly reports, the Board of Directors and the Risk Mitigation and Investment Policy Committee ensure that the Company is devoting the appropriate amount of resources to ensure that the risk of a cybersecurity breach is mitigated and that there is a clear response plan in the event of a breach.
The Board of Directors annually reviews and approves the capital and operating budgets, ultimately reviewing and approving the amount of spending that the Company is to spend on cyber security measures.

 

Enterprise Risk Management

The Corporation maintains a Company-wide Enterprise Risk Management process intended to identify, prioritize and monitor key risks that may affect the Company. Management reports the progress and the results of the Enterprise Risk Management program to the Risk Mitigation and Investment Policy Committee at least quarterly.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   23

 
 

Corporate Governance

 

Oversight of Risk Management

 

The Risk Mitigation and Investment Policy Committee regularly reviews the results of the Company’s enterprise risk management process, and management presents to the Board a report on the status of the risks and the metrics used to monitor those risks.

·Each risk that is tracked as part of the enterprise risk management process has a member of the Company’s management who serves as the owner and monitor for that risk. The risk owners and monitors report on the status of their respective risks at the quarterly meeting of management’s Compliance Committee.
·The information discussed at the Compliance Committee meeting is then reviewed by the Disclosure Committee composed of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Accounting Officer and Director of Internal Audit. The results of the Disclosure Committee’s meetings are presented to the Risk Mitigation and Investment Policy Committee or the Audit Committee each quarter, as appropriate.

 

The Audit Committee

The Audit Committee, in consultation with management, the independent registered public accountants and the internal auditors, discusses the Company’s policies and guidelines regarding risk assessment and risk management as well as the Company’s significant financial risk exposures and the steps management has taken to monitor, control and report such exposures.

·The Audit Committee meets in executive session with the Director of Internal Audit and with the independent registered public accountants at the end of each Audit Committee meeting.
·The Company’s General Counsel reports to the Audit Committee quarterly regarding any significant litigation involving the Company and his opinion of the adequacy of the Company’s reserves for such litigation.
·The Company’s Internal Audit department reports directly to the Chair of the Audit Committee.

 

The Corporate Governance Committee

The Corporate Governance Committee leads an annual discussion by the Board of Directors regarding the Company’s strategic plans and management’s performance with respect to such plans.

 

The Executive Compensation Committee

The Executive Compensation Committee reviews the Company’s overall compensation program in the context of the various behaviors that the program may encourage and the risks to the Company as a result of the program. At least annually, the Executive Compensation Committee considers the risks that may be presented by the structure of the Company’s compensation programs and the metrics used to determine individual compensation under that program.

 

Consideration of Compensation Risk

In administering the executive compensation program, the Executive Compensation Committee aims to strike an appropriate balance among the elements of our compensation program to achieve the program’s objectives. Each of the elements of the program is discussed in greater detail in this proxy statement. As a result of its review of the Company’s overall compensation program in the context of the risks identified in the Company’s enterprise risk management processes, the Executive Compensation Committee does not believe that the risks the Company faces are materially increased by the Company’s compensation programs. Therefore, the Executive Compensation Committee believes that the compensation program does not create the reasonable likelihood of a material adverse effect on the Company.

 

Consideration of Human Rights Risk Management

The Board of Directors is responsible for overseeing human rights risk management. In 2019 it enacted a Human Rights Policy that underscores the Company’s commitment to conducting business in a way that minimizes the adverse effects our operations may have on people and the communities that we serve. As more fully described on page 28, at a minimum, the Company and its vendors will:

 

·make efforts to avoid causing or contributing to human rights violations;
·mitigate and/or remediate adverse human rights impacts of our operations where possible;
·prohibit the use of child labor, forced labor, or human trafficking; and
·be transparent in our efforts, successes and challenges.

 

 

24   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Succession Planning

 

Succession Planning

Under the Company’s Corporate Governance Guidelines, the Board of Directors is responsible for the development and periodic review of a management succession plan for the Chief Executive Officer and other executives. At least annually, including in 2019, the Board of Directors reviews the Company’s succession planning process for the Chief Executive Officer and the named executive officers. During this review, the directors review succession candidates on an immediate basis and more developmental candidates so that the Company is well-prepared for the future.

 

Shareholder Outreach

At our 2019 annual meeting of shareholders, fewer shareholders supported our say on pay proposal than the 2013-2018 average of 95%. The Board believes that the shareholder return result lagged the industry due to the impact of the large acquisition of Peoples Natural Gas and the overhang of the pending equity and debt issuance rather than the underlying performance of the Company. However, management and the Board took the resulting shareholder vote seriously and committed to take several steps to address the executive compensation plan in 2020.

 

Over the course of 2019, management held more than 500 meetings with investors. Additionally, the Company requested meetings with the 25 largest shareholders, representing over 45% of our outstanding common stock. We engaged with every shareholder who accepted our offer to meet. During these meetings and calls, we discussed numerous topics, including strategic, executive compensation, and environmental, social and governance issues.

 

As a direct result of these meetings and calls, the Company took a number of actions in 2019 to address shareholder feedback on our executive compensation program and environmental, social, and governance programs.

 

2019 Shareholder Feedback and Actions Taken

 

Board Response to
Shareholder Feedback

 

2019 Actions Taken

Conducted an analysis of our
executive compensation program

New Peer Group and New Compensation Methodologies

Using the expertise of its compensation consultant, Pay Governance, the Executive Compensation Committee completed an evaluation of the Company’s short-term incentive plan and its long-term incentive plan.

In doing so, the Executive Compensation Committee re-evaluated the peer group used to determine relative total return to shareholders and its methodology for establishing pay for performance compensation.

As a result, and as more fully discussed in the CD&A, the Company established a markedly smaller new peer group of fifteen companies and new methodologies aimed to ensure that the Company’s executive compensation program is in line with the market and shareholder expectations.

Reviewed our governance
programs and shareholder rights
policies

Voting Resolution for Majority Voting

As a direct result, the Board of Directors voted to endorse a change to the voting standard in director elections from plurality voting to majority voting so that each of the directors is more fully aligned with the shareholders. This change is being presented to shareholders for approval at the 2020 Annual Meeting.

Completed a review of our
environmental and social programs
and disclosures.

Expanded ESG Disclosure

As a direct result, we have committed to expanding the disclosures of our environmental and social policies in a renewed CSR report, and by making it easier to locate these policies. Our CSR report can be found at: www.csr.aquaamerica.com and other relevant policies can be found at www.essential.co/investor-relations.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   25

 
 

Corporate Governance

 

Environmental Stewardship and Corporate Responsibility

 

Environmental Stewardship and Corporate Responsibility

 

Essential’s ESG Program Objectives

At Essential, looking to the future is ingrained in our corporate responsibility and in how we conduct our business with environmental, social and governance (ESG) initiatives. For over 130 years, it has been our mission to be the best possible provider of essential resources by serving the needs and expectations of our customers, shareholders, employees and the communities we serve both today and for future generations. We are committed to being responsible stewards of our environment, maintaining a safe, diverse, competitive and respectful culture, and overseeing the governance of Essential with the utmost transparency.

 

We have been in the business of practicing sustainability and corporate social responsibility for more than 130 years. Each year, we deliver more than 86 billion gallons of water, the Earth’s single most essential resource, to approximately 3 million people across eight states. Our top priority is to provide our customers with water that is safe to drink and is treated through the most environmentally sustainable methods available. We also focus on rebuilding aging infrastructure in the states in which we operate.

 

In 2018, the Company published its first Corporate Social Responsibility (“CSR”) report and reinforced its commitment to environmental stewardship by joining the CDP, an international not-for-profit organization that runs a global disclosure system for companies to manage their environmental impacts. For 2019, the Company’s CDP rank improved to a “B-”, ranking it among the top 40 percent of U.S. companies and among the top 25 percent of worldwide companies in terms of its understanding of climate change impact on business and the positioning of senior leadership to oversee key environmental issues. Our CSR Report and additional information can be found at csr.aquaamerica.com.

 

2020 Update
In February 2020, the Company published summaries of our ESG policies (“Tear Sheets”) that contain additional disclosure of relevant metrics to Essential’s business, as well as those included in the Sustainability Accounting Standards Board (SASB) standards for the infrastructure sector and the United Nations Sustainable Development Goals (UN SDGs). The Company is committed to supporting environmental, social and governance (ESG) initiatives that are integrated into our strategy and culture and continue to drive our corporate responsibility. These Tear Sheets cover ESG disclosures for Essential Utilities Inc., formerly Aqua America, Inc. for the period January 1, 2019 through December 31, 2019, unless otherwise noted, and can be found at essential.co/investor-relations.

 

Oversight Responsibility

The Board of Directors receives reports at regularly scheduled meetings on ESG matters including safety, sustainability, and environmental stewardship matters. These programs are overseen and managed by the Company’s senior leadership. A significant portion of the performance-based goals for our executives focus on these important issues.

 

Our corporate responsibility and sustainability programs include the following:

 

·  conservation and stewardship of water, including compliance with federal and state regulations, delivering safe water, implementing programs to manage water resources and reducing water loss, and consistently assessing and updating our water treatment technology;

·  focusing on proper treatment of wastewater;

·  reducing solid waste production;

·  aiming for efficient and responsible energy usage in the Company’s facilities, its fleet of vehicles, and its construction

 

equipment, including a commitment to the use of renewable energy;

·  reducing greenhouse gas emissions and energy consumption;

·  responding to natural disasters, such as hurricanes and floods; and

·  rebuilding water and wastewater infrastructure from our position as a national leader in infrastructure investment.

 

As just one example, in 2019, the Company signed an agreement for our New Jersey, Pennsylvania, Ohio and Illinois water and wastewater subsidiaries to purchase 100% renewable power by 2022. This will put our Company in compliance with the Paris Accord and will allow us to make a significant contribution toward the environment. These commitments to renewable energy reduce the Company’s overall absolute greenhouse gas emissions by nearly 60% from a 2018 baseline*.

 

 

26   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Environmental Stewardship and Corporate Responsibility

 

Water as a Human Right

 

In 2019, the Board of Directors considered the Company’s responsibility to its customers and its ongoing commitment to the betterment of the societies in which we serve. It reviewed various policies and objectives. Following a review and recommendation by its Corporate Governance Committee, the Board of Directors unanimously adopted the following resolution:

 

Right to Water Resolution

In November 2002, the United Nations Committee on Economic, Social and Cultural Rights adopted a resolution on the right to water. The resolution states that “the human right to water is indispensable for leading a life in human dignity. It is a prerequisite for the realization of other human rights.” Further, the right to water was defined as the right of everyone to sufficient, safe, acceptable and physically accessible and affordable water for personal and domestic uses.

 

Essential Utilities, Inc. recognizes and agrees with the United Nations Resolutions. Essential’s mission is to deliver exceptional quality water and service to customers and communities while protecting the environment and providing a fair return to shareholders;

 

It is the policy of all Essential’s water utilities to provide a reliable supply of safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes in accordance with State and Federal statutes, laws and regulations at rates established by our governing Public Utility Commissions.

 

Diversity and Inclusion

Essential is dedicated to creating a sustainable working atmosphere for its employees to attract and retain the best employees. We are committed to diversity, building a culture of inclusion, supporting employee wellness and facilitating a strong corporate culture where safety is paramount.

 

Diversity of backgrounds, ideas, thoughts, and experiences is essential to our culture and the way we do business. Creating an environment where our differences are valued and where every person feels a sense of belonging and engagement supports a thriving organization that cares about our customers. In 2019, unconscious bias workshops and action planning sessions were held across the Company’s footprint in order to improve the dialogue and build on an inclusive culture. These workshops explored the perspectives and pre-conceived notions individuals bring to work each day that impact others. These engagement sessions will continue in 2020 to further build a more inclusive workforce.

 

Diversifying the workforce continues to be a focus at all levels of the Company. Since 2015, the minority population of the workforce has grown from 17% to 22%. Diversity at the management team has also grown with 29% of the management team comprised of minorities and women.

 

At the Board of Director’s level, in 2019 the Company was named as a winning “W” Company by 2020 Women on Boards and received the Forum of Executive Women’s Advancing Women Company Award. Over 55% of the Board is diverse including 33% female directors.

 

Our commitments to
renewable energy
reduce the Company’s
overall absolute
green house gas
emissions by nearly

60%

from a 2018 baseline*

 

(image)

 

 

 

 

 

 

(image)

Since 2015, the
minority population
of the workforce has
grown from

17%–22%

 

Minorities and
women now
make up

29%

of the

management team

 

*2018 baseline is based on the Company’s water and wastewater operations only.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   27

 
 

Corporate Governance

 

Environmental Stewardship and Corporate Responsibility

 

In 2019, the Board
adopted our Human
Rights Policy and
an updated Equal
Employment
Opportunity and
Anti-Harassment
Policy

 

(image)

 

In 2019 the Board amended the Company’s Equal Employment Opportunity and Anti-Harassment Policy to provide that all employees are entitled to a work environment in which they are treated with dignity and respect and which is free of harassment and discrimination, of any kind including discriminatory, emotional, physical and sexual.

 

The policy states that the Company will not tolerate any form of harassment on the job by managers, other employees, or by non-employees, such as customers, vendors or contractors and clearly defines harassment as including verbal comments that are offensive or unwelcome regarding a person’s national origin, race, color, religion, gender, sexual orientation, age, body, disability or appearance, including epithets, slurs and negative stereotyping and nonverbal harassment to include distribution, display or discussion of any written or graphic material that ridicules, denigrates, insults, belittles or shows hostility, aversion or disrespect toward an individual or group because of national origin, race, color, religion, age, gender, sexual orientation, pregnancy, appearance, disability, sexual identity, marital status or other protected status.

 

Human Rights Policy

The Board of Directors is responsible for overseeing human rights risk management. In 2019 it enacted a Human Rights Policy that underscores the Company’s commitment to conducting business in a way that minimizes the adverse effects our operations may have on people and the communities that we serve. At a minimum, the Company and its vendors will:

 

·  make efforts to avoid causing or contributing to human rights violations;

·  mitigate and/or remediate adverse human rights impacts of our operations where possible;

·  prohibit the use of child labor, forced labor, or human trafficking; and

·  be transparent in our efforts, successes and challenges.

 

Together, these policies ensure that that the Company is committed to providing all of its employees with a work environment in which they are treated with dignity and respect and which is free of harassment of any kind, and affirmatively commits the Company to making efforts to avoid causing or contributing to human rights violations. Copies of these policies can be found at www.essential.co/investor-relations.

 

Employee and Customer Wellness

 

Growth and Development

We invest significant resources to develop the talent needed to keep the Company at the forefront of quality, delivering multi-modes of training throughout the year. providing rotational or temporary assignment development opportunities. Through our new “Inclusion and Bias” workshops, we are training every employee in the Company on inclusive practices to ensure a respectful workforce.

 

Communication and Engagement

We believe that our success depends on employees understanding how their work contributes to the Company’s overall strategy. We use a variety of communications channels to facilitate open and direct communication, including open forums with our executives, quarterly Town Halls, regular engagement surveys, and employee resource groups. In 2019, we conducted a survey of our employees’ satisfaction and, in 2020, plan on semi-annual “pulse” surveys so that management can be closely in tune with the Company’s employees.

 

 

28   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Environmental Stewardship and Corporate Responsibility

 

Safety & Wellness

Safety is not just a topic we talk about — it is our top priority, the foundation of our business and what guides all our employees’ actions. We continue to invest in safety improvements, implement policies and procedures, develop technical training and guidelines for our employees, and leverage new tools and technology to improve our maps, records and infrastructure performance. We are focused on identifying and mitigating risk and safeguarding our plants and distribution lines.

 

Our employees take actions each day to keep themselves, one another, our customers and our communities safe. Our teams make safety a focus on the job, in meetings, and our surrounding work environments to ensure employees and our customers safety is treated with the highest level of concern.

 

In fact, our workplace is safer. Since 2015, our safety record has improved significantly. Our lost time incidents are down 76% and our responsible vehicle accidents have declined by 23%. To incentivize managers to promote a safe environment, these metrics, among others, are incorporated in management’s incentive compensation plans and are further discussed in the CD&A.

 

The health of our employees is just as important to us as is their safety. We provide access to a variety of innovative, flexible, and convenient employee health and wellness programs. We proactively conduct communications outreach to our employees and their family members on health topics that are relevant to them. With the focus on mental health becoming more of a central part of an employee’s well-being, we have added additional resources and counseling access for employees to utilize to ensure they are taking care of themselves and their families.

 

Customer Satisfaction

We are focused on improving the customer experience. Our capital investments are designed to enhance our customers’ experience and ensure smooth interaction with our utilities. In 2019, we made numerous enhancements to our website and billing platforms in order to provide timely information on usage and billing for our customers. We expanded our payment methods and e-billing efforts to enable more convenience for customers as well as promote environmentally focused paper reduction.

 

We continue to learn by monitoring industry best practices and gathering customer feedback following service interactions and through external surveys to address pain points, streamlining the customer experience and anticipating future customer needs.

 

In 2019, we embarked on a customer engagement project to better understand how our customers would like to be served. Our project is an investment in measuring customer experience at every touchpoint along the customer journey to establish baselines for measuring future performance. Our research will help predict and prioritize customer needs and trends, identify key engagement and experience drivers, and enable us to build a customer service program that ensures a consistent, high-quality experience with Essential.

 

In conjunction with our customer engagement project, we participated in several J.D. Power customer satisfaction reports which provide industry standards in customer satisfaction. During 2019, the Company performed in the top 25th percentile in the Northeast and South regions and in the top 30th percentile in the Midwest Region in the 2019 J.D. Power customer satisfaction study. In addition, the Company was awarded Top Brands across all of its operating regions for maintaining infrastructure and was awarded Top Brands in customer notifications and alerts in the Southern region.

 

 

Since 2015 our lost

time incidents are

down

76%

and our responsible

vehicle accidents have

declined by

23%

(image)

 

 

 

 

 

 

 

2019 J.D. Power

customer satisfaction

study:

 

Top 25th

percentile

in the Northeast and

South regions

 

Top 30th

percentile

in the Midwest Region

(image)

 

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   29

 
 

Corporate Governance

 

Governance Policies and Practices

 

Governance Policies and Practices

Anti-Hedging and Anti-Pledging Policy

We believe that issuance of incentive and compensatory equity awards to our directors and named executive officers along with our stock ownership guidelines help to align their interests with our shareholders. As part of our insider trading policy, we prohibit all directors and employees from engaging in hedging or pledging activities with respect to any owned shares or outstanding equity awards. The policy specifically prohibits all insiders from engaging in any short sales of the Company’s securities, buying or selling puts, calls or other derivative securities relating to the Company’s securities, or pledging the Company’s securities as collateral for a loan. None of our directors nor any of our named executive officers engaged in any hedging or pledging activities with respect to the Company stock during 2019.

 

Director Independence Standards

The Board of Directors is responsible for determining whether each of the directors is independent. The Board has adopted Corporate Governance Guidelines that contain categorical standards of director independence that are consistent with the listing standards of the NYSE. Under the Company’s Corporate Governance Guidelines, a director will not be deemed independent if:

 

·the director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer of the Company;
·the director (A) or an immediate family member is a current partner of a firm that is the Company’s internal or external auditor, (B) is a current employee of such a firm, (C) has an immediate family member who is a current employee of such a firm and personally works on the Company’s audit, or (D) or an immediate family member was within the last three years (but is no longer) a partner or employee of such firm and personally worked on the Company’s audit within that time;

·the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another Company where any of the Company’s present executive officers at the same time serves or served on that Company’s compensation committee;
·the director has received, or has an immediate family member who has received, during any twelve month period within the last three years, more than $120,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service) and, in the case of an immediate family member who is not an executive officer, other than compensation for service as an employee of the Company;
·the director is an executive officer or employee, or someone in her/his immediate family is an executive officer, of another Company that, during any of the other Company’s past three fiscal years made payments to, or received payments from, the Company for property or services in an amount which, in any single fiscal year of the other Company, exceeded the greater of $1 million or 2% of the other Company’s consolidated gross revenues; or
·the director serves as an executive officer of a charitable organization and, during any of the charitable organization’s past three fiscal years, the Company made charitable contributions to the charitable organization in any single fiscal year of the charitable organization that exceeded the greater of $1 million or two percent of the charitable organization’s consolidated gross revenues.

 

For purposes of the categorical standards above:

 

(a)a person’s immediate family includes a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law and anyone (other than domestic employees) who shares such person’s home,

(b)the term “executive officer” has the same meaning specified for the term “officer” in Rule 16a-1(f) under the Exchange Act, and

(c)the “Company” includes Essential and its consolidated subsidiaries.

 

In addition to these categorical standards, no director will be considered independent unless the Board of Directors affirmatively determines that the director has no material relationship with the Company (either directly, or as a partner, shareholder, director or officer, of an organization that has a relationship with the Company). When making independence determinations, the Board of Directors broadly considers all relevant facts and circumstances surrounding any relationship between a director or nominee and the Company. Transactions, relationships and arrangements between directors or members of their immediate family and the Company that are not addressed by the categorical standards may be material depending on the relevant facts and circumstances of such transactions, relationships and arrangements.

 

 

30   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Corporate Governance

 

Governance Policies and Practices

 

Policies and Procedures for Approval of Related Person Transactions and Determination of Director Independence

 

Review of Transactions for Director Independence Determination

The Board of Directors considered the following transactions, relationships and arrangements in connection with making the independence determinations for the current Board of Directors:

 

1.During 2019, the Company made contributions to charitable or civic organizations for which the following directors serve as directors, trustees or executive officers: Mr. DeBenedictis, Mr. Franklin, and Mr. Hilferty. None of the Company’s contributions exceeded the greater of $1 million or 2% of the recipient organization’s consolidated gross revenues.
2.During 2019, the Company provided water service at normal tariff rates to IHG or its affiliates, and Exelon Corporation (“Exelon”) or its affiliates. Mr. Hilferty serves as President and Chief Executive Officer of IHG, and Mr. DeBenedictis serves as a member of the Board of Directors of Exelon. Exelon or its affiliates provides electric service at tariff rates to the Company. Southern Company or its affiliates provides electric service at tariff rates to the Company. Mr. Womack serves as President, External Affairs of Southern Company. United Technologies Corp. or its affiliates sold elevators and related services to the Company under contractually negotiated terms and conditions. Ms. Amato serves as the Executive Vice President, Chief Human Resources Officer of United Technologies. The amounts paid to the Company by these other entities, and paid by the Company to Exelon and Southern Company are pursuant to tariff rates and are not material to these entities or the Company.

3.The Company has insurance arrangements with IHG or its affiliates. The Company contracts with IHG to serve as the administrator of the Company’s self-insured medical plans for the Company’s employees. As a benefit of employment, the Company offers its employees medical insurance benefits through plans established by IHG. The Company is self-insured for all of these plans, and has contracted with IHG to serve as the administrator of the Company’s medical plans. As compensation for these administrative services, the Company paid fees to IHG. For each of the last three fiscal years, the fees paid to IHG, IHG’s gross revenues, and the fees as a percentage of IHG’s gross revenues were as follows:

 

Fiscal Year

Fees Paid to IHG

IHG Gross Revenues

Fees Paid as a Percentage
of IHG Gross Revenues
2017 $2,313,302 $16,500,000,000 0.014%
2018 $2,125,045 $17,000,000,000 0.013%
2019 $2,205,381 $19,200,000,000 0.011%

 

Under the self-insured nature of the medical plans, the Company also submitted payments to IHG to maintain the necessary insurance reserves and to pay medical claims made for such years. As administrator, these payments were “pass through” payments and do not represent compensation to, or revenue of, IHG. The following “pass through” payments were made to IHG in the last three fiscal years:

 

Fiscal Year Pass Through Payments
2017 $12,763,289
2018 $14,303,630
2019 $13,711,289

 

Mr. Hilferty is President and Chief Executive Officer of IHG. Mr. DeBenedictis is a member of the Board of Directors of IHG. The amounts paid by the Company to IHG are not material to IHG or to the Company.

 

4.Ms. Franks’ role as Senior Principal of CPPIB.

 

Related Person Transactions

Additionally, the Board has a written policy for related person transactions to document procedures for reviewing, approving or ratifying these transactions. The policy applies to any transaction in which: (1) the Company is a participant, (2) any related person has a direct or indirect material interest, and the annual amount involved exceeds $120,000, but excludes certain types of transactions in which the related person is deemed not to have a material interest.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   31

 
 

Corporate Governance

 

Governance Policies and Practices

 

Under this policy, a related person means:

(a)any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director, an executive officer or a director nominee;
(b)any person known to be the beneficial owner of more than 5% of any class of the Company’s voting securities;
(c)any immediate family member of a person identified in items (a) or (b) above, meaning such person’s spouse, parent, stepparent, child, stepchild, sibling, mother- or father-in-law, son- or daughter-in-law, brother- or sister-in-law or any other individual (other than a tenant or employee) who shares the person’s household; or
(d)any entity that employs any person identified in (a), (b) or (c) or in which any person identified in (a), (b) or (c) directly or indirectly owns or otherwise has a material interest.

 

The Corporate Governance Committee, with assistance from the Company’s General Counsel, is responsible for reviewing and approving any related person transaction. In its review and approval of related person transactions (including its determination as to whether the related person has a material interest in a transaction), the Corporate Governance Committee will consider, among other factors:

 

·The nature of the related person’s interest in the transaction;
·The material terms of the transaction, including, without limitation the amount and type of transaction;
·The importance of the transaction to the related person;
·The importance of the transaction to the Company;
·Whether the transaction would impair the judgment of a director or executive officer to act in the best interests of the Company; and
·Any other matters the Corporate Governance Committee deems appropriate.

 

The Corporate Governance Committee intends to approve only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders.

 

There were no related person transactions in 2019.

Based on a review applying the standards in the Company’s Corporate Governance Guidelines, including a review of the applicable NYSE, SEC, and Company standards, and considering the relevant facts and circumstances of the transactions, relationships, and arrangements between the directors and the Company described above, the Board of Directors has affirmatively determined that each director and nominee for director is independent, other than Mr. Franklin, the Company’s Chairman, President, and Chief Executive Officer, and Mr. DeBenedictis, the Company’s Chairman Emeritus and former Chief Executive Officer.

 

Director Independence Determination
All directors are independent except Mr. Franklin, the Company’s Chairman, President, and Chief Executive Officer, and Mr. DeBenedictis, the Company’s Chairman Emeritus and former Chief Executive Officer.

 

 

32   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Director Compensation

 

In late 2018, as part of its annual review, the Executive Compensation Committee retained Pay Governance, LLC (“Pay Governance”) to review and benchmark the Board of Directors’ compensation. As a result of this review, the Board of Directors did not change its compensation for 2019 and voted that its compensation remain the same:

 

2019 Director Compensation Program

 

Role Annual Cash Compensation Annual Equity Compensation
Each Non-Employee Director $90,000 Stock grant equal to $90,000 in value
Chair, Audit Committee + $12,500
Chair, Executive Compensation Committee + $12,500
Chair, Corporate Governance Committee + $10,000
Chair, Risk Mitigation and Investment Policy Committee + $10,000
Lead Independent Director + $25,000

 

Similarly, in late 2019, the Executive Compensation Committee retained Pay Governance to review and benchmark the Board of Directors’ compensation. Pay Governance compared the directors’ compensation to the Company’s peers and made certain suggestions and recommendations to the Executive Compensation Committee and to the Company’s Corporate Governance Committee. As a result, upon the recommendation of its Executive Compensation Committee and the Corporate Governance Committee, the Board of Directors approved the following revised directors’ compensation program effective April 1, 2020:

 

2020 Director Compensation Program

(effective April 1, 2020)

 

Role Annual Cash Compensation Annual Equity Compensation
Each Non-Employee Director $100,000 Stock grant equal to $100,000 in value
Chair, Audit Committee + $12,500
Chair, Executive Compensation Committee + $12,500
Chair, Corporate Governance Committee + $10,000
Chair, Risk Mitigation and Investment Policy Committee + $10,000
Lead Independent Director + $25,000

 

Ms. Franks has elected to designate CPPIB as the recipient of the annual cash compensation and to waive the annual equity compensation awarded to directors.

 

All directors are reimbursed for reasonable expenses incurred in connection with attendance at Board or Committee meetings.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   33

 
 

Director Compensation

 

Director Stock Ownership Guidelines

 

Director Stock Ownership Guidelines

 

The Board of Directors approved stock ownership guidelines for each director to own shares of Company common stock having a value equal to five times the annual base cash retainer for directors. Directors have up to three years from appointment to attain the stock ownership requirement. The Board of Directors also prohibits a director from selling Company common stock until the director has attained the required stock ownership. Once the required stock ownership level is attained, the director must maintain the level of stock ownership for the duration of the director’s service. Ms. Franks was not a director in 2019.

 

2019 Director Stock Ownership

 

The chart below shows the shareholdings of the directors as of December 31, 2019:

 

(Bar Chart)

 

(1)Mr. Franklin is a management Director and his stock ownership guidelines and current shareholdings are detailed on pages 67 and 68.
(2)Because Ms. Franks elected to waive the annual equity compensation awarded to directors, the Board of Directors exempted Ms. Franks from the director stock ownership guidelines.
(3)These directors have up to three years to attain the required stock ownership level.

 

 

34   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Director Compensation

 

Total 2019 Director Compensation

 

Total 2019 Director Compensation

 

Name Fees Paid in
Cash ($)
Stock
Awards ($)(1)
Option
Awards ($)
Non-Equity
Incentive Plan
Compensation ($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings ($)
All Other
Compensation ($)
Total ($)
Amato 87,500 87,535 175,035
Burke(3) 65,000 65,018 130,018
DeBenedictis 87,500 87,535 175,035
Franklin(2)
Hankowsky(3) 74,375 65,018 139,393
Hilferty 122,500 87,535 210,035
Holland(3) 20,000 42,528 62,528
Idehen 45,000 45,007 90,007
Ruff 100,000 87,535 187,535
Stewart 93,750 87,535 181,285
Womack 45,000 45,007 90,007

 

(1)The grant date fair value per share of the stock awards, which are paid quarterly, were: January 2, 2019 - $33.92; March 30, 2019 – $36.730; June 30, 2019 – $40.890; and September 30, 2019 – $44.855. The directors were issued their stock awards for the fourth quarter of 2018 in January 2019.
(2)As an officer of the Company, Mr. Franklin does not receive any compensation for his service on the Board of Directors.
(3)Messrs. Hankowsky and Holland and Ms. Burke did not stand for re-election at the 2019 Annual Meeting.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   35

 
 

Ownership of Common Stock

 

The table below shows the number of shares of our common stock beneficially owned (as of the close of business on March 9, 2020. by: (1) each person known to the Company to be the beneficial owner of more than 5% of the Common Stock of the Company; (2) each director, nominee for director and executive officer named in the Summary Compensation Table; and (3) all directors, nominees and executive officers of the Company as a group. This information has been provided by each of the directors, executive officers and nominees at the request of the Company or derived from statements filed with the SEC under Section 13(d) or 13(g) of the Exchange Act. Beneficial ownership of securities as shown below has been determined in accordance with applicable guidelines issued by the SEC. Beneficial ownership includes the possession, directly or indirectly, through any formal or informal arrangement, either individually or in a group, of voting power (which includes the power to vote, or to direct the voting of, such security) and/or investment power (which includes the power to dispose of, or to direct the disposition of, such security). Unless otherwise indicated, the address of the beneficial owners is Essential Utilities, Inc., 762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010.

 

 

Certain Beneficial Owners

Sole Voting and/or Sole
Investment Power
(1)
Shared Voting and/or
Investment Power
Total Percentage of
Class Outstanding
(2)

BlackRock, Inc.(3)

55 East 52nd Street, New York, NY 10055

23,368,775   23,368,775 10.46%

The Vanguard Group(4)

100 Vanguard Blvd., Malvern, PA 19355

23,103,947 209,016 23,312,963 10.44%

State Street Corporation(5)

One Lincoln Street, Boston, MA 02111

  11,248,979 11,248,979 5.04%
Directors, Nominees and Named Executive Officers
Elizabeth B. Amato 3,277 3,277 *    
Nicholas DeBenedictis 23,452 23,452 *    
Richard S. Fox 26,270 26,270 *    
Wendy A. Franks *    
Christopher H. Franklin 161,215 161,215 *    
Daniel J. Hilferty 10,852 10,852 *    
Francis O. Idehen 1,530 1,530 *    
Christopher P. Luning 35,441 35,441 *    
Matthew R. Rhodes 6,907 6,907 *    
Ellen T. Ruff 29,272 29,272 *    
Daniel J. Schuller 21,064 21,064 *    
Lee C. Stewart 13,277 13,277 *    
Christopher C. Womack 1,530 1,530 *    
All Directors, Nominees and Named Executive Officers as a Group (14 persons)
  395,719 27,430(6) 423,149    

 

*less than one percent.
1Includes shares held under the Company 401(k) plan.
2Percentage of ownership for each person or group based on 223,307,879 shares of Common Stock outstanding as of March 9, 2020 and all shares issuable to such person or group upon exercise of outstanding stock options exercisable within 60 days of that date.
3The information from BlackRock, Inc. was obtained from the Schedule 13G/A filed by BlackRock, Inc. with the SEC on February 10, 2020.
4The information from The Vanguard Group was obtained from the Schedule 13G/A filed by The Vanguard Group with the SEC on February 12, 2020.
5The information from State Street Corporation was obtained from the Schedule 13G/A filed by State Street Corporation with the SEC on February 13, 2020.
6The shareholdings indicated include 27,430 shares (i) held in joint ownership with spouses, (ii) held as custodian for minor children, (iii) owned by family members, or (iv) in trusts for adult children.

 

 

36   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 2:

Ratification of the Appointment of

PricewaterhouseCoopers LLP as Independent

Registered Public Accounting Firm for Fiscal 2020

 

The Audit Committee of the Board of Directors appointed PricewaterhouseCoopers LLP (“PwC”) as the independent registered public accounting firm for the Company for the 2020 fiscal year. PwC has been the Company’s independent registered public accountants since 2000. The Board of Directors recommends that shareholders ratify the appointment.

 

Although shareholder ratification of the appointment of PwC is not required by law or the Company’s Bylaws, the Board of Directors believes that it is desirable to give our shareholders the opportunity to ratify the appointment. If the shareholders do not ratify the appointment of PwC, the Audit Committee will take this into consideration and may or may not consider the appointment of another independent registered public accounting firm for the Company for future years. Even if the appointment of PwC is ratified, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm during the year if the Audit Committee determines such a change would be in the best interests of the Company. Representatives of PwC are expected to be present at the 2020 Annual Meeting, will have the opportunity to make a statement at the meeting if they desire to do so, and will be available to respond to appropriate questions.

 

PwC has informed us that they are not aware of any independence-related relationships between their firm and the Company other than the professional services discussed in “Services and Fees” below. The Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent registered public accounting firm. As a result, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent registered public accounting firm in order to assure that such services do not impair the auditor’s independence from the Company. The Audit Committee has established a procedure to pre-approve all auditing and non-auditing fees proposed to be provided by the Company’s independent registered public accounting firm prior to engaging the accountants for that purpose. Consideration and approval of such services occurs at the Audit Committee’s regularly scheduled meetings, or by unanimous consent of all the Audit Committee members between meetings. All fees and services were pre-approved by the Audit Committee for the 2019 fiscal year.

 

Services and Fees

 

The following table presents the fees paid to PwC for professional services rendered with respect to the 2019 fiscal year and 2018 fiscal years:

 

Fiscal Year
  2019 2018
Audit Fees(1) $ 2,032,000 $1,690,000
Audit-Related Fees(2) $      50,000 $      77,000
Tax Fees(3) $      35,752 $      34,546
All Other Fees(4) $        5,000 $      14,484
TOTAL $2,122,752 $1,816,030

 

(1)Represents fees for any professional services provided in connection with the audit of the Company’s annual financial statements (including the audit of internal control over financial reporting), reviews of the Company’s interim financial statements included in Form 10-Qs, audits of the Company’s subsidiaries, issuance of consents, and comfort letter procedures.
(2)Represents fees for services in connection with accounting consultations of acquisitions, consultation concerning implementation of auditing standards and regulator required workpaper reviews.
(3)Represents fees for any professional services in connection with the review of the Company’s federal and state tax returns.
(4)Represents fees for software licensing for accounting research, disclosure checklist, a utility and technical accounting seminar, and an accretion/dilution analysis.

 

   
(Image) The Board of Directors unanimously recommends a vote FOR ratifying the appointment of PricewaterhouseCoopers LLP as the Company’s Independent Registered Public Accounting Firm for the 2020 fiscal year.
   

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   37

 
 

Proposal 2 Ratify Appointment of PricewaterhouseCoopers LLP as Independent Registered Public
Accounting Firm for Fiscal 2020

 

Audit Committee Report

 

Audit Committee Report

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal control. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited financial statements in the Annual Report, including: the quality of the accounting principles, practices and judgments; the reasonableness of significant judgments; the clarity of disclosures in the financial statements; and the integrity of the Company’s financial reporting processes and controls. The Committee also discussed the selection and evaluation of the independent registered public accounting firm, including the review of all relationships between the independent registered public accounting firm and the Company.

 

The Audit Committee reviewed with the independent registered public accounting firm, which is responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles in the United States of America, their judgments as to the quality of the Company’s accounting principles and such other matters as required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board. In addition, the Audit Committee has discussed with the independent registered public accounting firm, the firm’s independence from management and the Company, including the matters in the written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and considered the compatibility of non-audit services with the accountants’ independence.

 

The Audit Committee discussed with the Company’s internal auditors and independent registered public accounting firm, the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for filing with the SEC.

 

Respectfully submitted,

 

Lee C. Stewart, Chairman

Daniel J. Hilferty

Francis O. Idehen

February 27, 2020

 

 

38   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Proposal 3:

Advisory Vote to Approve Named Executive Officers’

2019 Compensation

 

Shareholders are entitled to an advisory (non-binding) vote on the executive compensation as described in this proxy statement for our named executive officers (sometimes referred to as “Say on Pay”). Currently, this vote is conducted every year. Accordingly, the following resolution is being presented by the Board of Directors at the 2020 Annual Meeting:

 

“RESOLVED, that the compensation paid to the Company’s named executive officers for 2019, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”

 

This vote is non-binding. The Board of Directors and the Executive Compensation Committee, which is comprised of independent directors, expect to take into account the outcome of the vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant negative voting results.

 

Before you vote

Shareholders are encouraged to read the Compensation Discussion and Analysis, the accompanying compensation tables and the related narrative disclosure.

 

As described in detail under our Compensation Discussion and Analysis on pages 40 through 44 of this proxy statement, our executive compensation program is designed to motivate our executives to achieve our primary goals of providing our customers with quality, cost-effective and reliable water and wastewater services and providing our shareholders with a long-term, positive return on their investment.

 

We believe that our executive compensation program, with its balance of short-term incentives and long-term incentives and share ownership guidelines, reward sustained performance that is aligned with the interests of our customers, employees and long-term shareholders.

 

   
(Image) The Board of Directors unanimously recommends a vote FOR the approval, on an advisory basis, of the 2019 compensation of the Company’s named executive officers.
   

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   39

 
 

Executive Compensation

 

Contents

Compensation Discussion and Analysis 40
Executive Summary 41
Introduction 41
Impact of Peoples Natural Gas Acquisition  
and Shareholder Feedback on Executive  
Compensation 41
Our 2019 Performance Highlights 42
Our Pay for Performance Compensation Program 43
Pay for Performance and Results of the 2019  
Advisory Vote to Approve Executive Compensation 44
Section 1. Our Compensation Philosophy 45
Components of Compensation for Named  
Executive Officers 45
Competitive Pay Positioning 46
Section 2. How We Determine Executive
Compensation
47
The Role of the Compensation Committee 47
The Role of Management 47
The Role of the Compensation Committee’s  
Independent Consultant 47
Our 2019 Benchmarking for Competitive Pay 47
Our 2020 Benchmarking for Competitive Pay 48
Shareholder Advisory Vote Impact on  
Compensation Committee Actions 49
Section 3. 2019 Executive Compensation  
Program 50
Overview 50
Base Salary 51
Short-Term Incentive Awards 52
Long-Term Equity Incentive Awards 55
Other Benefits 59
Section 4. 2019 NEO Compensation  
and Performance Summaries 61
Section 5. Our New 2020 Short-  
and Long-Term Incentive Programs 64
Section 6. Compensation Governance  
Policies and Practices 67
Stock Ownership Guidelines 67
Executive Compensation Committee Report 68
Executive Compensation Tables 69
Summary Compensation Table 69
Grants of Plan-Based Awards 70
Outstanding Equity Awards at Fiscal Year-End 71
Options Exercised and Stock Vested 72
CEO to Median Employee Pay Ratio 73
Retirement Plans and Other  
Post-Employment Benefits 73
Pension Benefits 73
Retirement Income Plan (the “Retirement Plan”) 74
Non-Qualified Retirement Plan 74
Actuarial Assumptions used to Determine Values  
in the Pension Benefits Table 75
Non-Qualified Deferred Compensation 76
Potential Payments Upon Termination or  
Change-In-Control 76

Compensation
Discussion and
Analysis

 

In this Compensation Discussion and Analysis (“CD&A”), we address our compensation philosophy and program, and compensation paid or earned by the following executive officers:

 

 
Christopher H. Franklin
Chairman, President, and Chief Executive Officer
Daniel J. Schuller
Executive Vice President, and Chief Financial Officer
Richard S. Fox
Executive Vice President, and Chief Operating Officer
Matthew Rhodes
Executive Vice President, and Chief Strategy & Corporate Development Officer
Christopher P. Luning
Executive Vice President, General Counsel, and Secretary
 

 

We refer to these executive officers as our “named executive officers” or “NEOs”.

 

As used in this CD&A,

 

·“Total cash compensation,” is referred to as the total of base salary and annual cash incentive compensation; and
·“Total direct compensation.” is referred to as the total of base salary, annual cash incentive compensation and equity incentive compensation

 

The purpose of the CD&A is to explain the elements of compensation; why the Executive Compensation Committee (the “Compensation Committee”) selects these elements; and how the Compensation Committee determines the relative size of each element of compensation.

 

Compensation decisions for Messrs. Schuller, Fox, Rhodes, and Luning were made by the Compensation Committee.

 

Compensation decisions for Mr. Franklin were made by the independent members of our Board of Directors based on the recommendation of the Compensation Committee.


 

 

40   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Executive Summary

 

Executive Summary

 

Introduction

 

Essential Utilities, Inc.’s mission is to improve quality of life and economic prosperity by safely and reliably delivering life’s most essential resources. We are uniquely positioned to play an important role in solving today’s water and natural gas infrastructure challenges by renewing and improving infrastructure through thoughtful capital investment, operational excellence, environmental stewardship and rigorous safety standards. Through our work, we help strengthen communities, improve service and enhance economic development, enabling people to live better lives. This vital work empowers us to grow as an organization and as individuals. We believe that, together, we will make a difference for generations to come.

 

Our executive compensation program is designed to promote this mission and strategy. Our compensation program does so by providing market-based pay and by rewarding the achievement of our strategic objectives. The principles and components of our compensation strategy are regularly reviewed by our Executive Compensation Committee, our Chief Executive Officer, and the Executive Compensation Committee’s independent compensation consultant, Pay Governance, to ensure that they meet the objectives of the program, the Company, and its stakeholders.

 

Impact of Peoples Natural Gas Acquisition and Shareholder Feedback on Executive Compensation

In 2019, the Compensation Committee spent significant time on the review and design of the executive compensation plans for 2020. Every element of the program was analyzed using industry best practices to evaluate and modify the plans accordingly. Pay Governance LLC (“Pay Governance” or the “consultant”), the independent compensation consultant retained by the Compensation Committee, provided advice and guidance throughout the process.

 

A review of the plan was critical given the pending acquisition of Peoples Natural Gas, which in 2020, will increase the Company’s rate base by 45% and broaden the executive roles to encompass gas and water responsibilities.

 

The Committee also sought to incorporate investor feedback on the compensation program design to ensure alignment with the market’s expectations about our compensation and performance. The Committee engaged in in-depth discussions on the Company’s strategy and compensation program with our largest investors, assessing the peer group, and evaluating each component of the package including short term incentives, long-term incentives, and base salaries.

 

The performance measures for each element of the program were examined to ensure they aligned with the interests of our shareholders, customers, and employees as well as being competitive with the compensation practices of our industry peer group. The new program design, types of compensation vehicles, and the relative proportion of the named executive officers’ total direct compensation represented by these vehicles is consistent with current competitive compensation practices in the utility industry.

 

The new 2020 compensation program’s performance measures align the interests of our stakeholders and our named executive officers by correlating the amount of the named executive officer’s pay with the short-term and long-term performance of the Company and its stock price.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   41

 
 

Executive Compensation

 

Executive Summary

 

Our 2019 Performance Highlights

Our 2019 performance demonstrates continued execution of our strategic goals and plans. During 2019, by effectively managing costs, strategically growing when it was prudent, maintaining strong regulatory relationships, and focusing on our customers, employees, and shareholders as we continue to create value for all of our stakeholders, we had the following results.

 

Financial Highlights

During 2019, we remained focused on our mission to be the best possible provider of essential resources by serving the needs and expectations of our customers, shareholders, employees and the communities we serve both today and for future generations. At the same time we continued to focus on growing our customer base through acquisitions, prudently investing capital to renew our aging infrastructure, and creating efficiencies across the organization. This was in addition to working on efforts to integrate and close our Peoples transaction and the announcement of our DELCORA municipal wastewater acquisition, which is the largest in our history. We continue to see great opportunities ahead and remain focused on investing in infrastructure and delivering sustainable growth for our investors.

 

·In 2019, we invested $550 million on infrastructure projects, helping to ensure safe and reliable water for all customers.
·Revenues were $889.7 million in 2019, an increase of 6.2 percent over 2018.

·Earnings per share were $1.04 in 2019, including items from the Peoples transaction. Excluding these items, adjusted (non- GAAP) earnings per share were $1.47 compared to earnings per share of $1.41 in 2018.*
·We added approximately 12,000 customer connections through acquisition in 2019 and increased customers served by more than 2 percent, which includes customers from organic growth and acquisitions. Our acquisitions in 2019 added over $50 million in rate base.
·In September we announced the DELCORA acquisition, a $276 million acquisition of a wastewater authority which provides service to over half a million people. DELCORA has the equivalent of 198,000 retail customers.
·From January 1, 2017 to December 31, 2019, the total return to our shareholders, including share price appreciation and dividends paid, shows 67.75 percent growth. In 2019 alone our total return to shareholders was 40.41 percent.
·In July 2019, the Board of Directors approved a 7 percent increase in the quarterly dividend to an annualized rate of $0.9372 per share.
·We completed the financing for the previously announced agreement to acquire Peoples Natural Gas, a natural gas distribution utility, that reflects an enterprise value of $4.275 billion. This included an equity offering which was over-subscribed and a debt offering locking in long-term rates at under 4%.
·We revisited our ESG program by publishing new Tear Sheets and disclosures in February 2020 and submitted our second report to the CDP, receiving an increased grade of B-.


Revenues

$889.7M

up 6.2%é

Adjusted EPS*

$1.47 vs

$1.41

 

TSR

68%

Growth,

since 2017

Dividends to
Shareholders
7%é
Increase

 

*See Appendix B for a reconciliation of non-GAAP financial measures to GAAP financial measures

 

 

42   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Executive Summary

 

2017-2019 Pay for Performance Alignment

Our pay programs are designed to reflect the Company’s performance. The following table shows the relationship between financial performance goals and executive performance-based payouts over the past three years:

 

Target EPS
(adjusted for comp plan)

EPS

(adjusted for comp plan)

 

STI Payout %

 

3 Year TSR Return

 

PSU Payout %

2017 $1.36 $1.37 118.44% 58.08% 109.19%
2018 $1.39 $1.44 136.34% 23.32% 70.68%
2019 $1.47 $1.50 126.45% 67.75% 159.91%

 

Our Pay for Performance Compensation Program

 

Our compensation program for named executive officers is designed to:

 

·Provide compensation that is competitive with our industry peers and appropriately correlates incentive compensation to the achievement of the Company’s short- and long-term performance for customers and shareholders;
·Provide a total compensation package that is aligned with industry standards and enhances our ability to:
Motivate and reward our named executive officers for contributions to our financial success;
Attract and retain talented and experienced named executive officers; and
Ensure a significant portion of pay is performance based to better align pay with the successful achievement of our business objectives;

·Reward our named executive officers for leadership excellence and contribution to the organization’s success; and
·Maintain an important focus on environmental, social, and governance issues while building shareholder value.

 

Highlights of our Compensation Policies

 

(Image) 

What We Do

·  Tie a high ratio of our executives’ pay to Company performance

·  Require significant stock ownership for Directors and NEOs

·  Tie incentive compensation to a clawback polity

·  Use an independent compensation consultant

(Image) 

What We Don’t Do

·  Provide golden parachute tax gross ups

·  Permit pledging or hedging of Company securities

·  Provide a single trigger vesting cash and equity severance upon a change of control

·  Provide employment agreements to a broad group

·  Encourage excessive or inappropriate risk taking through our compensation programs

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   43

 
 

Executive Compensation

 

Executive Summary

 

Pay for Performance and Results of the 2019 Advisory Vote to

Approve Executive Compensation

 

Our goal is to instill a “pay for performance” culture throughout the Company. At our 2019 Annual Meeting, we submitted a proposal to our shareholders for a non-binding advisory vote on our 2018 compensation awarded to our named executive officers. Our shareholders approved the proposal at a lower than expected approval rate. This approval level further propelled the Committee to take an in depth look at the Company’s compensation program for our named executive officers. During our outreach to investors, we received feedback to provide more information on our incentive programs’ metrics and measurements. You will see we have incorporated that feedback in our 2019 compensation information with added detail on incentive programs’ targets and performance.

 

Aligning Interests of NEOs and Shareholders

In 2019, we solicited the opinions of our top shareholders on several items, including our executive compensation program design. We did this to ensure that the pay balance and alignment was viewed as driving long-term high performance of our named executive officers and other members of management.

 

As a result of these meetings and conversations, and other analysis, the following actions were taken by the Compensation Committee for 2020.

 

Compensation Committee Actions for 2020

·  Approved a highly competitive peer group based on Essential’s post-acquisition revenue and market cap scope as well as business mix. The industry peer group was substantially modified. The number of peer group companies was reduced to 15 and encompass both the gas and water utility industry to reflect the Peoples acquisition. The revised peer group provides a more representative comparison between Essential, the relative utility industry, and those companies used as comparators by institutional investors.

·  Redesigned short-term incentive metrics to include both water and gas lines of business. Environmental compliance and stewardship goals are incorporated into the plan to emphasize our commitment to environmental sustainability. Payout leverage (thresholds and maximums) was validated at the peer group level by the Compensation Committee’s independent consultant, Pay Governance.

·  Revamped long-term incentives to focus on driving Company value through performance share units and promoting retention of key employees through RSUs. For 2020, our long-term incentive mix will weight heavier on PSUs at 65% and RSUs at 35%. Once the peer group and incentive plan recommendations were drafted, shareholder meetings were conducted with the top 10 shareholders including Vanguard, State Street, BNY Mellon, Jennison Associates, Pictet, T. Rowe Price, Northern Trust, Invesco and Impax Asset Management to solicit feedback before Executive Compensation Committee approval.

 

The shareholders provided input on the compensation changes being proposed for 2020 including our revised peer group and incentive plan designs. There was strong support to increase disclosures in the proxy as well as include environmental measures in the STI plan elements, which you will see as you review our 2019 compensation performance summaries and our 2020 compensation program designs.

·  Sought shareholder approval of the Amended and Restated Omnibus Equity Compensation Plan during the 2019 annual shareholders meeting. The changes to the plan included:

–  establishing minimum vesting or forfeiture periods for all awards;

–  revising the plan to reflect elimination of certain requirements, on a going forward basis, related to performance-based compensation to reflect the changes to 162(m) of the IRS code;

–  clarifying and including in the plan the standard impact of various termination of service events on outstanding awards;

–  adding an automatic exercise feature for expiring in-the-money stock options; and

–  providing each of the Board and the Compensation Committee with the authority to amend or terminate the plan.

 

 

44   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Section 1 Our Compensation Philosophy

 

Section 1

Our Compensation Philosophy

Our compensation program for named executive officers is designed to:

 

·Provide compensation that is competitive with our industry peers and appropriately correlates incentive compensation to the achievement of the Company’s short- and long-term performance for customers and shareholders;
·Provide a total compensation package that is aligned with industry standards and enhances our ability to:
Motivate and reward our named executive officers for contributions to our financial success;
Attract and retain talented and experienced named executive officers; and
Ensure a significant portion of pay is performance based to better align pay with the successful achievement of our business objectives;
·Reward our named executive officers for leadership excellence and contributions to the organization’s success; and
·Maintain an important focus on environmental, social, and governance issues while building shareholder value.

 

Components of Compensation for Named Executive Officers

The following chart provides a brief summary of the principal elements of our executive compensation program for 2019. We describe these elements, as well as retirement, severance and other benefits, in more detail on pages 50 through 61.

 

  Compensation Element Form Compensation Objective Relation to Objective

Fixed

 

Base Salary Fixed annual cash paid
bi-weekly
Compensate executives for their level of responsibility and sustained individual performance based on market data. Merit salary increases are based on subjective performance evaluations as well as actual performance against defined objectives.

Variable

 

Performance- and/or
Stock-Based Compensation

 

Annual Cash

Incentive Awards

 

Variable cash paid on an annual basis based on achievement of pre-established goals Motivate executives to focus on achievement of our annual business objectives. The amount of the annual incentive award, if any, is entirely dependent on achievement of pre-established Company and individual goals.
Long-Term Equity Incentive Awards

Restricted Stock Units

 

Align executive interests with shareholder interests; retain key executives. Provide equity that will have same value as shares owned by shareholders; subject to stock ownership guidelines.
  Performance Share Units Aligns executive interests with shareholder interests; creates a strong financial incentive for achieving or exceeding long-term performance goals. The named executive officers receive equity only if the pre-established goals are achieved.
  Performance-Based Stock Options* Aligns executive interests with shareholder interests; through financial performance- based nature, provides strong incentives to achieve core Company goals. The named executive officers receive options only if the pre-established performance goals are achieved. Stock options only have value if the Company’s share price has increased since the grant date.

 

*In light of the anticipated acquisition of Peoples Natural Gas, the long-term incentive program was modified for 2019 to provide time-based RSU awards and performance stock options, but no PSUs. This action was taken because the Compensation Committee recognized the difficulty in establishing performance-based measures given the uncertainty in the timing of the closing. Because the timing became more certain in the fourth quarter of 2019, the Compensation Committee included performance share units in the 2020 program.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   45

 
 

Executive Compensation

 

Section 1 Our Compensation Philosophy

 

Competitive Pay Positioning

We measure the competitiveness of our program for our named executive officers against the median compensation for comparable positions at other companies in our benchmark group composed of other investor owned utilities. Since compensation levels often vary based on the Company’s revenues, we adjust the Company’s revenues in the manner described below to align with the companies in the benchmark group. We then size adjust the market data using revenue-based regression analysis to determine the market medians for our named executive officer positions.

 

Our goal is to provide total direct compensation that is competitive with the market median for each named executive officer. Based on the information supplied by the consultant, the total target direct compensation for each of our named executive officers was within the competitive range of the benchmark market data for each of their positions during 2019.

 

 

46   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Section 2 How We Determine Executive Compensation

 

Section 2

How We Determine Executive Compensation

We emphasize pay for performance, especially for our higher-level executives. Therefore, the named executive officers receive a substantial portion of their total direct compensation from annual cash incentives and long-term equity incentives, which are risk- based incentives based upon achieving company goals. In addition, the percentages of total direct compensation represented by base salary, annual cash incentive opportunities, and equity incentives, respectively, for the named executive officers are generally in line with competitive market median benchmark percentages.

 

The Role of the Compensation Committee

The Compensation Committee determines the actual amount of each element of annual compensation to award to the Company’s named executive officers with the goal of having the target total direct compensation opportunity for each named executive officer generally within a range of 15% above or below the market median rate for his or her position over time.

 

The Role of Management

·Our Senior Vice President, Chief Human Resources Officer assists the Compensation Committee by preparing schedules showing the present compensation of executives, market median rates, target annual cash incentives and target range of equity compensation awards from the information provided by the Compensation Committee’s consultant.
·Our Chief Executive Officer compiles and presents the supporting information for the individual executives’ performance against their objectives and his recommendations for any discretionary compensation based on his evaluation of the extent of achievement of individual goals (the “Individual Factor”) under the Annual Plan. He also provides the Compensation Committee with his recommendations for annual salary increases, any changes in target annual cash incentive percentages and equity incentive awards for the other executive officers, but the ultimate decisions with respect to compensation for the named executive officers is made by the Compensation Committee.
·Our Chief Financial Officer provides the Compensation Committee with certifications as to our financial performance for purposes of the Compensation Committee’s determination of the achievement of the Company-specific goals (the “Company Factor”) for the Annual Plan, our performance against the criteria established by the Compensation Committee for the vesting of restricted share grants and the earning of performance shares. These financial measures are also certified by our Director of Internal Audit.

 

The Role of the Compensation Committee’s Independent Consultant

The Compensation Committee retained Pay Governance, a nationally recognized compensation consulting firm, as the Compensation Committee’s independent consultant to assist in designing and assessing the competitiveness of our executive compensation program. The Compensation Committee concluded that Pay Governance is an independent consultant after considering the factors relevant to Pay Governance’s independence from management, and NYSE and SEC rules regarding compensation consultant independence.

 

Annually, the Compensation Committee has the consultant develop a market rate for base salary, total cash compensation, and total direct compensation for each of the named executive officer positions, including the allocation between cash compensation and equity incentives. Each market rate represents the median compensation level that would be paid to a hypothetical, seasoned performer in a position having similar responsibilities and scope, in an organization of similar size and type as the Company.

 

Our 2019 Benchmarking for Competitive Pay

In developing the market median for the named executive officers, the Compensation Committee’s consultant, Pay Governance, used compensation data from all 59 investor-owned utilities in the utility industry database we use to determine the market median for similarly situated executives of utility companies. All 59 companies in the utility industry compensation database used by the consultant are listed in Appendix A to this proxy statement. The Company has no involvement in the selection of the companies that are included in the database used by the consultant. Each Company in Appendix A was used in the development of the market median, as described in this paragraph.

 

Because the companies in our peer group vary widely in terms of revenues, Pay Governance applied regression analysis to size-adjust the benchmark data for each named executive officer’s revenue responsibility using the Company’s actual and adjusted revenues to account for the lack of cost of goods sold component for a water utility, where possible, and then averaging the results to determine the market medians for base salary, total cash compensation, and total direct compensation for each named executive officer. Tabular data was used where regression data was unavailable due to insufficient correlation between officer positions in

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   47

 
 

Executive Compensation

 

Section 2 How We Determine Executive Compensation

 

the Company and the companies in the database and/or limited sample size to ensure the accuracy of the regression analysis. Regression analysis is an objective calculation that identifies a relationship between one variable (in this case, compensation) and another variable that is correlated to it (in this case, total Company revenues).

 

Therefore, in developing the market medians for base salary, total cash compensation, and total direct compensation, Pay Governance used regression analysis to determine what our peer group companies would pay at the median for positions comparable to those of our named executive officers.

 

The combination of salary, short-term incentives, and long-term incentives is intended to compensate executives at approximately the 50th percentile of the market when the Company performs at target level.

 

Pay Governance reviews the Company’s executive compensation program for the Compensation Committee and annually provides the data and analysis described above. The compensation consultant discusses the proposed actual compensation awards for the named executive officers and provides research and input to the Compensation Committee on changes to the compensation program.

 

In 2019, Pay Governance also analyzed the Company’s executive compensation program to ensure that it remained competitive. Pay Governance uses the median to show the market rate for base salary, total cash compensation and total direct compensation, including the allocation between cash compensation and equity incentives. Pay Governance provides no other services to the Company other than serving as the Compensation Committee’s compensation consultant for executive and director compensation decisions.

 

Our 2020 Benchmarking for Competitive Pay

In July 2019, Pay Governance worked with the Compensation Committee to review and recommend a simplified 15 Company peer group based on the anticipated post-Peoples Natural Gas acquisition. Our primary rationale for developing a custom peer group was to address concerns with the historical practice of using the entire utility-Company industry and size adjusting the data to the Company revenues.

 

How We Selected our New Peer Group

 

A multi-step screening process was used to determine the final comparator companies.

 

(Image) 

 

 

48   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Section 2 How We Determine Executive Compensation

 

Shareholder Advisory Vote Impact on Compensation Committee Actions

 

The Compensation Committee also takes into consideration the results of the advisory votes on the Company’s executive compensation program for the few years prior to the year for which the executive compensation decisions are being made. For the years 2014 through 2018, the shareholders approved the advisory vote on the compensation of our named executive officers by 93% to 94% of the votes cast. In 2019, our approval rate decreased to 67%. The Compensation Committee took immediate action to review and respond to our approval rating drop through an in-depth study on the compensation program with its independent compensation consultant, Pay Governance and accelerated engagement starting in the summer of 2019 with our largest shareholders. Additionally, shareholders asked for more transparency in metrics and measurements, which you will see as you review our 2019 incentive plan results.

 

     

Highlights of 2020 Compensation Plan Changes

During 2019, the Compensation Committee made the following key decisions for the 2020 compensation plan designs:

·  Redesigned the Company’s 2020 peer group to be a select group of fifteen companies with revenues, market capitalization and industry focus comparable to Essential’s expansion from water to a combined water and gas Company;

·  Underscored the Company’s commitment to gas safety and environmental protection by altering the 2020 short-term incentive program to incorporate specific measures focused on gas safety and gas environmentalism;

·  Eliminated stock options and replaced them with performance stock units (“PSUs”) in the long-term incentive program to align with industry norms and the company’s strategic plan;

 

·   Retained the Company’s focus on retention of key employees, by continuing to issue restricted stock units (“RSUs”);

·  Refined the 2020 Total Shareholder Return (TSR) portion of the PSUs from two measures to one TSR measure based on the new fifteen Company peer group; and

·  Revised the balance between cash compensation and long-term incentives for Mr. Franklin to a heavier weighting (53%) on long-term incentives in the total compensation package to further underscore the drive for long-term value creation for shareholders.

 

 

 

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Executive Compensation

 

Section 3 2019 Executive Compensation Program

 

Section 3

2019 Executive Compensation Program

 

Overview

 

Peoples Natural Gas Transaction Impact on 2019 Compensation
The acquisition of Peoples Natural Gas was anticipated to close in 2019. Because of this projected closing date, the Compensation Committee reviewed several different alternatives for addressing the uncertainty associated with the acquisition. Among other items, the Compensation Committee considered various performance metrics with a goal of aligning management’s interests with the Company’s shareholders. In the end, the Compensation Committee determined that keeping management engaged and aligned with the Company’s shareholders was paramount and that granting performance-based stock options, with performance based on stock price, and continuing to award service-based restricted stock units would be the best way to align the interests for 2019.
 
Accordingly, the Compensation Committee determined that the 2019 executive long-term incentive (LTI) compensation plan consisted of 70% performance-based stock options with the ROE goal described on pages 52 through 53, with a three-year pro- rata vesting cycle and 30% service-based restricted stock units with a three-year cliff vesting cycle. The Compensation Committee believes this LTI program closely aligned the interests of management with the shareholders for this transition year. For management to be rewarded, the Company’s share price must increase.
 
Similarly, the grant of restricted stock units, when coupled with our stock ownership requirements, further aligns interests of management with the shareholders by increasing the number of shares each member of management holds.
 
The 2019 strategy for LTI did indeed support growth. The management team worked diligently throughout the year to ensure successful equity and debt offerings and conducted active outreach to investors to promote the merits of the acquisition and focus on integration efforts.
 
As detailed in Our 2019 Performance Highlights on page 42, we saw an increase in total return to shareholders of 40.41% in 2019.

 

Our executive compensation program is composed of the following seven elements, which we believe are important components of a well-designed, balanced and competitive compensation program. We use these elements to achieve our compensation program objectives as follows:

 

 

Element of Compensation Objectives
Competitively
benchmarked base
salaries
Designed to attract and retain named executive officers consistent with their talent and experience; market-based salary increases are designed to recognize the executives’ performance of their duties and responsibilities; and promotions and related salary increases are designed to encourage executives to assume increased job duties and responsibilities.
Short-term incentives
or annual cash
incentive awards

Intended to reward executives for:

·  improving the quality of service to our customers;

·  controlling the cost of service to our customers by managing expenses and improving performance;

·  achieving economies of scale by the acquisition of additional water and wastewater systems that can benefit from our resources and expertise;

·  disposing of under-performing systems where appropriate; and

·  enhancing our financial viability and performance by the achievement of annual objectives.

Long-term equity
incentives

Designed to reward named executive officers for:

·  enhancing our financial health, which also benefits our customers;

·  improving our long-term performance through both revenue increases and cost control; and

·  achieving increases in the Company’s equity and in absolute shareholder value and shareholder value relative to peer companies, as well as helping to retain executives due to the longer-term nature of these incentives.

 

 

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Executive Compensation

 

Section 3 Overview

 

Retirement benefits Intended to assist named executive officers to provide income for their retirement.
Non-qualified deferred
compensation plan
Designed to allow eligible executives to manage their financial and tax planning and defer current income until a later date, including following retirement or other separation from employment without an additional contribution from the Company.
Double-trigger Change-in-control agreements Designed to promote stability and dedication to shareholder value in the event of a fundamental transaction affecting the ownership of the Company and to enable the named executive officers to evaluate such a transaction impartially.
Stock ownership
guidelines
Designed to focus named executive officers on the long-term performance of the Company and align the interests of our executives with our shareholders by encouraging named executive officers to maintain a significant ownership interest in the Company.

 

Base Salary

Base salary is designed to provide the named executive officer and all our other employees, with a level of fixed pay that is commensurate with the employee’s role and responsibility. We believe that by delivering base salaries that are reflective of market medians, we are positioned to attract and retain top caliber executives in an increasingly competitive labor market. In 2019, no turnover of the top executive team is indicative of our success in attracting and retaining the executives throughout a significant acquisition and growth process. The Compensation Committee annually reviews the base salaries of the named executive officers as well as all our senior executives, to evaluate whether they are competitive with our Natural Gas industry peers. Multiple reviews were required in 2019 to assess the impact of expanded scopes of responsibility relating to the People’s acquisition.

 

The Compensation Committee, composed entirely of independent directors, determines any base salary changes for the named executive officers based on a combination of factors including competitive peer market pay, level of responsibility, experience, and internal pay equity. Additionally, the Compensation Committee considers recommendations from our CEO, Mr. Franklin, reflecting his assessment of the individual’s performance and their contributions to the achievement of business objectives. Mr. Franklin’s pay is evaluated separately by the Compensation Committee with the final recommendation approved by all the independent members of the Board.

 

A competitive base salary is necessary to attract and retain a talented and experienced workforce. Actual salaries for the named executive officers, other than the Chief Executive Officer whose salary is determined by the Board of Directors using the same criteria, are determined by the Compensation Committee by considering both the market median rate for the position and internal equity with both the other named executive officers and other employees of the Company. The Compensation Committee’s goal is to maintain base salaries generally in line with the market median rate over time for each of the named executive officers, although deviations from this goal may occur due to promotions.

 

Base salaries are considered for adjustment annually and adjustments are based on general movement in external salary levels, changes in the market rate for the named executive officers’ positions, individual performance, internal equity and changes in individual duties and responsibilities.

 

NEO 2019 Base Salary

For 2019, the annual increases to the salaries for the named executive officers reflected these assessments and averaged 4.8%.

The base salaries approved by the Compensation Committee for 2019, effective April 1, 2019, were as follows: Mr. Franklin, $805,000; Mr. Fox, $400,790; Mr. Schuller, $432,526; Mr. Rhodes, $402,730; and Mr. Luning, $360,451.

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   51

 
 

Executive Compensation

 

Section 3 Overview

 

Short-Term Incentive Awards

 

The 2019 Annual Cash Incentive Awards

The Annual Cash Incentive Award Plan is a non-equity Incentive Plan which provides each named executive officer with the opportunity to earn a cash award tied primarily to Company performance against business objectives with a small Individual Performance element.

 

A balanced scorecard approach to this cash incentive ensures that all employees work in the best interests of the shareholders, employees, and customers.

             
Metric/Weighting     Metric Rationale and Definition Target Performance Range: 50% - 150% of Target
50% Financial  

Half of the total award funding is based on the financial performance of the overall Company with the majority (35%) based on Essential Earnings Per Share and 15% based on Return on Equity.

This award measure aligns the executive to results for the shareholders.

                            
·  Adjusted Earnings Per Share* 35%    
·  Return on Equity 15%    
15% Safety   From the employee perspective, Essential has a strong commitment to safety with an additional 15% of the award based on the ability of the Company to manage OSHA defined lost time incidents and recordable incidents as well as responsible vehicle accident rates, defined as the number of responsible vehicle accident (RVA) during which the driver failed to do everything reasonable to avoid the accident per million miles driven. The determination of the preventability is based on criteria similar to that found in the National Safety Council’s Guide to Determine Motor Vehicle Accident Preventability Report.
           
·  Lost Time Incidents  
·  Responsible Vehicle Accident Rate  
·  Recordable Incidents  
15% Compliance     Environmental stewardship as measured by water and wastewater compliance rates accounts for another 15% of the overall funding. Compliance is defined as a Water or Wastewater event causing the operating system to be out of compliance for at least 1 day out of the available days of the year (365 days in 2019).
           
·  Water  
·  Wastewater  
10% Customer Satisfaction   The customer satisfaction metric (10%) ensures that we balance financial, safety and environmental concerns with our customer service levels. This metric measures the “service level” in terms of timeliness to answer calls within 30 seconds of receiving a customer call.
           
· Service Level  
10% Individual Performance   Individual performance based on specific goals that align with broader Company goals represent 10% of the formula. At the beginning of 2019, two individual goals were identified for each named executive officer that aligned with the broader Company goals. Each named executive officer was rated on the achievement of each goal.
           
· Two individual goals set  

 

*Adjusted EPS is a non-GAAP financial measure. See Appendix B for reconciliation to the GAAP financial measure and adjustments made for purposes of the compensation metric attainment.

 

 

52   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Section 3 Overview

 

2019 Annual Cash Incentive Award Metrics

The tables and the narrative below detail the 2019 Annual Cash Incentive Award Metrics.

 

Metric
Weight
    Target Achievement
Metric Metric Components & Weights 50% 100% 150%
           
50% Financial Adjusted Earnings Per Share* [35%] $1.42    1.47     1.52
           
           
    Return on Equity [15%] –3.75    0     3.75
           
           
15% Safety Lost Time Incidents 22    19     16
       
       
Responsible Vehicle Accident Rate 4.5   4.1     3.7
       
       
Recordable Incidents 78   74     59
           
           
15% Compliance Water 99.10% 99.50% 99.90%
       
       
Wastewater 91.50% 94.50% 96.50%
           
           
10% Customer Satisfaction Service Level 80.00% 82.00% 84.00%
           
           
10% Individual Goals   50% 100% 150%
           

 

*See Appendix B for a reconciliation of non-GAAP financial measures to GAAP financial measures.

 

2019 Performance

Based on the factors described above, the following table shows the 2019 performance of the Company compared to the targets set in the Annual Plan. The Compensation Committee evaluated the actual attainment of each performance goal, with particular emphasis on the above-target achievement of all goals and determined that the aggregate achievement of the corporate goals was 126.45%. Based on this determination, the table below shows the target annual cash incentive awards and the actual annual cash incentive awards, based on both corporate and individual goals, approved by the Compensation Committee for 2019 for the named executive officers.

 

2019 Company Performance Metric Scorecard

 

 

 

Metric

 

Metric Component

Target -
50%
Target -
100%
Target -
150%
Actual Actual
Attainment
Weight

Final
Achievement

Financial Aqua Earnings Per Share $1.42 $1.47    $1.52    $1.50    130.00% 35.0% 45.50%
  Return on Equity –3.75% 0.00% 3.75% 1.03% 113.69% 15.0% 17.05%
Safety Lost Time Incidents 22    19    16    9    150.00% 5.0% 7.50%
  Recordable Incidents 78    74    59    59    150.00% 5.0% 7.50%
  Responsible Vehicle Accident Rate 4.5    4.1    3.7    3.0    150.00% 5.0% 7.50%
Compliance Water 99.10% 99.50% 99.90% 99.66% 120.00% 7.5% 9.00%
Wastewater 91.50% 94.50% 96.50% 95.46% 124.00% 7.5% 9.30%
Customer Satisfaction Service Level 80.00% 82.00% 84.00% 83.24% 131.00% 10.0% 13.10%
Individual Goals Individual Goals 50.00% 100.00% 150.00% 100.00% 100.00% 10.0% 10.00%
Total Score               126.45%

 

 

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Executive Compensation

 

Section 3 Overview

 

Additionally, the named executive officers had the following individual goals and achieved the results as listed in the table below:

 

2019 Individual Metric Objectives in Short Term Incentive

 

Goals Results 
Christopher H. Franklin Peoples Natural Gas Transaction: Obtain regulatory approvals, achieve all necessary financing, and close transaction Regulatory approval complete, financing complete in accelerated timing, March 16, 2020 acquisition close
  Accomplish detailed implementation plan for installing SAP across the combined company organization Extensive SAP and supporting technologies plan completed and reviewed by Board in December 2019
  Rename holding company and consider changing ticker symbol Completed creation of new name and ticker symbol in 2019. New name and ticker launched February 2020
Daniel J. Schuller Raise equity and debt capital to complete the Peoples Natural Gas acquisition Completed public equity and debt issuances for Peoples in April 2019 which included raising nearly $2B in common equity and tangible equity units, and raising $436M in acquisition debt as part of a $900M public debt offering
  Ready Peoples Natural Gas for SOX compliance and Company close processes Reduced monthly close from 20 days to 7 days; aligning accounting policies; substantially completed two-phase SOX initiative
Richard S. Fox Drive state operation metrics Achieved operational metrics for a total of 90% completion
  Complete rate cases in PA, NJ and champion fair market value legislation in key states Achieved rate cases in PA and NJ
Matthew Rhodes Close municipal transactions and deliver >$100M in rate base in 2019 Closed and progressed municipal transactions that will add in excess of $100 million in rate base.
  Sign municipal acquisitions that will close and add over $200M of additional rate base in 2020 Signed deals with ~$290M in rate base in 2019 (including DELCORA), that have closed or will likely close in 2020
Christopher P. Luning Negotiate and close debt and equity offering for Peoples Natural Gas acquisition Completed public equity and debt issuances for Peoples Natural Gas in April 2019 which included raising nearly $2B in common equity and tangible equity units and raising $436M in acquisition debt as part of a $900M public debt offering
  Negotiate closing issues to bring Peoples Natural Gas transaction ready for closing Completed main negotiation for Peoples Natural Gas close.

 

2019 Named Executive Officer Short Term Incentive Award

 

 

 

Name

 

2019 Salary
Rate* ($)

 

2019 Target
Bonus %

2019 Company
Metric Excluding
Individual Metric

 

2019 Individual
Metric

 

 

Total Factor

 

 

STI Payment ($)

Christopher H. Franklin 805,000 90% 116.45% 14% 130.45% $945,110
Daniel J. Schuller 432,526 60% 116.45% 15% 131.45% $341,133
Richard S. Fox 400,790 65% 116.45% 10% 126.45% $329,420
Matthew Rhodes 402,730 55% 116.45% 14% 130.45% $288,949
Christopher P. Luning 360,451 55% 116.45% 13% 129.45% $256,632

 

*The ”2019 Salary Rate” is an annualized rate

 

 

54   ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT

 
 

Executive Compensation

 

Section 3 Overview

 

Long-Term Equity Incentive Awards

Our use of equity incentive awards is intended to reward our named executive officers for:

 

·enhancing the Company’s financial health, which also benefits our customers;
·improving our long-term performance through both revenue increases and cost control; and
·achieving increases in the Company’s equity and shareholder value, as well as helping to retain these executives due to the longer- term nature of these awards.

 

We make these equity incentive awards under our Amended and Restated Omnibus Equity Compensation Plan (the “Plan”). Under the Plan, the Compensation Committee and the Board of Directors may grant stock options, dividend equivalents, performance- based or service-based stock units and stock awards, stock appreciation rights and other stock-based awards to officers, directors, key employees and key consultants of the Company and its subsidiaries who are in a position to contribute materially to the successful operation of our business.

 

Starting in 2011, the Compensation Committee began using a combination of performance share units and restricted stock units to better link the named executive officers’ long-term incentive compensation to performance results that led to increased shareholder value and enhanced our long-term financial stability, which also benefits our customers. As noted, previously, however, the Compensation Committee did not make performance share units awards in 2019 due to the uncertainties associated with the pending Peoples Natural Gas acquisition.

 

We aim to strike a balance between the incentive and retention goals of our equity grants:

 

·  All of the equity grants to our Chief Executive Officer are subject to performance goals.  

·  For our other named executive officers, seventy percent of the equity grant is performance-based, and thirty percent is in the form of service-based restricted stock units.

 

Using the market median rates developed by Pay Governance, the Compensation Committee evaluates the annual equity incentive awards made to the named executive officers as part of the total compensation package designed to be competitive with the benchmarked group and our industry. The Compensation Committee does not consider any increase or decrease in the value of past equity incentive awards in making these annual decisions.

 

In considering the number of equity incentive awards to be granted in total to all employees each year, the Compensation Committee considers the number of equity incentive awards outstanding and the number of equity incentive awards to be awarded as a percentage of Essential’s total shares outstanding.

 

The number of equity incentive awards granted annually to all employees has been less than 1% of Essential’s total shares outstanding per year for the past several years. It is our equity granting policy to make all equity incentive awards on the same grant date.

 

Long Term Equity Incentive Awards Mix

Performance-based equity awards provide guidance and incentives to management for building shareholder growth, while restricted share units provide retention benefits while closely aligning management with the shareholders. The Compensation Committee is also focused on tying the awards to the appropriate metric. Below are charts describing the balance between the performance share units’ metrics, performance-based options, and restricted stock units payouts for 2017-2020:

 

Performance Goals for 2017-2020 PSUs

 

 

Award Year

Performance
Period

Payment
Year
Performance
Share Units
Performance Based
Stock Options

 

Restricted Stock Units

2017 2014-2016 2020 57% 10% 33%
2018 2015-2017 2021 53% 13% 33%
2019 2016-2018 2022 N/A 70% 30%
2020 2017-2019 2023 65% N/A 35%

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   55

 
 

Executive Compensation

 

Section 3 Overview

 

As a result of the Compensation Committee’s analysis, it established the target percentages of base salary for each named executive officer:   2019 Target LTI (%)
Christopher H. Franklin 185
Daniel J. Schuller 100
Richard S. Fox 110
Matthew Rhodes 85
Christopher P. Luning 85

 

Vested Performance Share Awards and Status of Outstanding Performance Share Awards

Performance share or performance share unit grants (“PSU”) (together referred to as performance shares) provide the named executive officer with the opportunity to earn awards of shares based on Company performance against designated pre-determined, objective metrics. Participants are granted a target number of shares or units that can increase to 200% of the target or decrease to zero based on the Company’s actual performance compared to the designated metrics. Dividends or dividend equivalents, as applicable, on the performance shares accrue and will be paid when the performance shares are earned and paid based on the number of shares actually earned, if any. Performance shares vest three years after the grant date.

 

Performance Goals for 2017 PSUs

The performance goals to be achieved under the PSU awards have been based on the following performance goals, with the weighting of each goal assessed each year. 

 

   
Metric 1: Essential TSR vs Large Investor-owned Water Companies TSR

Our total shareholder return ordinal ranking at the end of the performance period as compared to the TSR of the other large investor-owned water companies (defined as “Metric 1”)

 

·  American Water Works Company

·  American States Water Company

·  Connecticut Water Service, Inc.

·  California Water Service Group

·  Middlesex Water Company

·  SJW Corporation 

Payout as a Percent of Target Award (7 companies)

(Line Graph)

 

 

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Executive Compensation

 

Section 3 Overview

 

     
Metric 2: Essential TSR vs S&P Midcap Utility Index TSR

Our TSR ordinal ranking compared to the TSR for the companies in the S&P Midcap Utility Index

(defined as “Metric 2”)

Payout as a Percent of Target Award (18 companies)

(Line Graph)

 

·  Pnm Resources Inc.

·  Aqua America Inc.

·  Atmos Energy Corp.

·  Hawaiian Electric Industries, Inc.

·  One Gas Inc.

·  Oge Energy Corp.

·  Idacorp Inc.

·  Black Hills Corp.

·  Northwestern Corp.

 

·  New Jersey Resources Corp.

·  Vectren Corp.

·  Mdu Resources Group Inc.

·  Southwest Gas Holdings Inc.

·  Great Plains Energy

·  WGL Holdings Inc.

·  National Fuel Gas Co.

·  Ugi Corp.

·  Westar Energy Inc.

 

 

   
Metric 3: Operating and Maintenance Expense

The achievement of maintaining Operating and Maintenance (“O&M”) expenses within the Company’s regulated operations over the performance period.

 

Payout Scale

(Line Graph)

 

   
Metric 4: Rate Base Growth

The achievement of targeted cumulative level of rate base growth as a result of acquisitions.

Payout as a percent of Target Award

(Line Graph)

 

 

ESSENTIAL UTILITIES, INC. 2020 PROXY STATEMENT   57

 
 

Executive Compensation

 

Section 3 Overview

 

2017-2019 PSU Awards Achievement

The three-year performance period for the PSU awards made by the Compensation Committee in 2017 ended on December 31, 2019. In February 2020, the Compensation Committee determined the achievement of performance goals for the 2017 PSUs.

 

As a result, the Compensation Committee certified that a 159.91% payout of the 2017 PSU awards was earned in accordance with the following results and weightings:

 

2017 PSU Metrics Payout Weight Product
Metric 1: TSR Large Investor Owned Water Utilities 100.00% 26.5% 26.47%
Metric 2: TSR S&P Mid-Cap Utilities index 197.22% 26.5% 52.20%