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WEIL, GOTSHAL & MANGES LLP 

Stephen Karotkin (pro hac vice) 

(stephen.karotkin@weil.com) 

Ray C. Schrock, P.C. (pro hac vice) 

(ray.schrock@weil.com) 

Jessica Liou (pro hac vice) 

(jessica.liou@weil.com) 

Matthew Goren (pro hac vice) 

(matthew.goren@weil.com) 

767 Fifth Avenue 

New York, NY 10153-0119 

Tel: 212 310 8000 

Fax: 212 310 8007 

KELLER & BENVENUTTI LLP 

Tobias S. Keller (#151445) 

(tkeller@kellerbenvenutti.com) 

Jane Kim (#298192) 

(jkim@kellerbenvenutti.com) 

650 California Street, Suite 1900 

San Francisco, CA 94108 

Tel: 415 496 6723 

Fax: 650 636 9251 

Attorneys for Debtors 

and Debtors in Possession

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

In re: 

PG&E CORPORATION, 

- and - 

PACIFIC GAS AND ELECTRIC 

COMPANY, 

 Debtors. 

Bankruptcy Case 

No. 19-30088 (DM) 

Chapter 11 

(Lead Case) (Jointly Administered) 

REPLY MEMORANDUM OF POINTS AND 

AUTHORITIES IN FURTHER SUPPORT OF 

MOTION OF DEBTORS PURSUANT TO 11 

U.S.C. §§ 105(a), 363(b), AND 503(c) FOR ENTRY 

OF AN ORDER (I) APPROVING DEBTORS’ 

INCENTIVE PROGRAM FOR CERTAIN KEY 

EMPLOYEES AND (II) GRANTING RELATED 

RELIEF 

Related Doc: Dkt. No. 2664

Date: August 9, 2019 

Time: 11:30 a.m. (Pacific Time) 

Place: United States Bankruptcy Court 

 Courtroom 17, 16th Floor 

 San Francisco, CA 94102 

☐Affects PG&E Corporation 

☐Affects Pacific Gas and Electric Company 

☒Affects both Debtors 

* All papers shall be filed in the Lead Case, 

No. 19-30088 (DM). 

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MEMORANDUM OF POINTS AND AUTHORITIES 

 The Debtors1 submit this Reply in further support of the Motion of Debtors Pursuant to 11 U.S.C. 

§§ 105(a), 363(b), and 503(c) for Entry of an Order (I) Approving Debtors’ Incentive Program for 

Certain Key Employees and (II) Granting Related Relief [Dkt. No. 2664] (the “Motion”) and in response 

to the Objections of the Official Committee of Tort Claimants (the “Tort Claimants Committee”) [Dkt. 

No. 3030]; the United States Trustee (the “U.S. Trustee”) [Dkt. No. 3029]; the Utility Reform Network 

(“TURN”) [Dkt. No. 3035]; James M. Eaneman, Sr. [Dkt. No. 2778]; the City and County of San 

Francisco (“CCSF”) [Dkt. No. 3029] (joinder); and the Plaintiffs’ Executive Committee [Dkt. No. 3086] 

(joinder) (collectively, the “Objections,” and the filing parties, the “Objectors”). 

 

1

 Capitalized terms used, but not otherwise defined, herein shall have the same meanings ascribed 

to such terms in the Motion. 

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I. PRELIMINARY STATEMENT 

 The Debtors operate a large, complex, and heavily regulated enterprise to provide safe and 

reliable gas and electric service to their 16 million customers. A fundamental element of properly 

operating the Debtors’ business is ensuring their key officers are appropriately incentivized to drive 

safety, financial, and operational performance. This is particularly true at this critical stage in these 

Chapter 11 Cases, when the Debtors are advancing forward toward a viable chapter 11 plan that 

maximizes value for all stakeholders and continuing critical efforts to “harden” their system to avoid 

future wildfires. 

 The KEIP was designed with the assistance of the Debtors’ advisors to ensure that key officers 

are motivated to meet and exceed a variety of performance targets and thereby have the opportunity to 

earn market compensation. As stated in the Motion, to place a greater emphasis on safety, the Debtors’ 

newly-constituted Compensation Committee of the Board determined that KEIP Awards should be 

subject to a downward modifier if the Debtors fail to meet the threshold or target performance metric 

most closely aligned with wildfire safety. 

 As with the 2019 STIP previously approved by the Court, the KEIP is entirely incentive-based 

and highly prioritizes safety performance metrics by giving them a 65% weighting. Further, as with the 

2019 STIP, KEIP Awards can be eliminated for any reason, in the total discretion of the Compensation 

Committee or Board, and such discretion applies to the entire program or on an individual participant 

basis. 

 The KEIP is consistent with the Debtors’ customary prepetition incentive programs, which are a 

basic element of the KEIP Participant’s market compensation. Indeed, as noted in the Friske 

Declaration, if the KEIP is not approved, total direct compensation for the KEIP Participants will only 

reflect current base salaries, which are significantly below median market total direct compensation 

levels. 

 The Debtors have actively engaged with the Official Committee of Unsecured Creditors (the 

“Creditors Committee”) and the Tort Claimants Committee to discuss the KEIP and related 

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performance metrics. In response, the Creditors Committee has made certain informal requests with 

respect to the proposed KEIP. As a result of these discussions, the Debtors have agreed to the following 

modifications of the KEIP. 

1. If earned and vested, the performance-based restricted stock unit (“PRSU”) awards 

shall be settled on or after the effective date of a chapter 11 plan of reorganization 

confirmed in these Chapter 11 Cases in equity of the reorganized PG&E 

Corporation to be issued thereunder at the value contemplated by such plan of 

reorganization; 

2. To the extent required to comply with the executive compensation provisions of 

Assembly Bill 1054, including section 8389 of the Public Utilities Code, as they 

may be amended or supplemented, the Debtors shall modify the terms of the KEIP; 

3. Upon a decision by the Compensation Committee or Board, as applicable, to 

approve a new participant in the KEIP, the Debtors shall provide the advisors of the 

Official Committee of Unsecured Creditors (the “Creditors Committee”) with the 

identity, job title, job responsibilities and compensation of any such new participant 

at least seven (7) business days prior to the new participant’s inclusion in the KEIP; 

4. The Debtors shall provide the advisors of the Creditors Committee with the 

calculations underlying the proposed settlement of any KEIP Awards at least seven 

(7) business days prior to the settlement of the KEIP Awards; and 

5. A copy of any information provided pursuant to this Order to the advisors of the 

Creditors Committee shall also be provided to the advisors of the Tort Claimants 

Committee. 

With the resolution of all issues raised by the Creditors Committee, the remaining Objections make the 

following assertions: 

1. The KEIP Performance Metrics do not adequately address safety issues; 

2. The Debtors fail to meet their burden to demonstrate the KEIP is not a retention 

plan under section 503(c)(1) of the Bankruptcy Code; and 

3. The Debtors have not established that the KEIP is justified by the facts and 

circumstances of the case. 

 As demonstrated in the Motion and as further demonstrated below, the Objections are without 

merit and should be overruled. The KEIP was carefully designed to align the interests of the KEIP 

participants with the Debtors’ other employees and to incentivize the KEIP Participants to not only meet 

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but also exceed challenging performance targets with an enhanced focus on safety. Further, the KEIP 

is a key element of compensation, enabling the participants to achieve market level compensation, but 

only if the performance targets are achieved. 

II. THE KEIP PERFORMANCE METRICS PROPERLY INCLUDE SAFETY, FINANCIAL, 

AND OPERATIONAL TARGETS 

 The Tort Claimants Committee’s assertion that the Performance Metrics should be “revised to a 

100% weighting on safety” not only fails to acknowledge the critical role the key employees play in 

driving the overall value of the Debtors’ enterprise, but also completely ignores the significant emphasis 

that has already been placed on the Debtors’ safety metric. As stated in the Motion, the Performance 

Metrics are designed to ensure that key members of the Debtors’ executive officer team are both properly 

aligned with the Debtors’ other employees and properly incentivized to meet and exceed safety, 

financial, and operational targets through the opportunity to earn market compensation. 

 The KEIP, similar to the 2019 STIP, heavily prioritizes safety performance metrics by giving 

them a 65% weighting but goes further than the 2019 STIP by placing additional emphasis on safety 

through the PSI Modifier. The Compensation Committee extensively considered safety, including 

wildfire mitigation, in crafting the performance metrics, and included two new performance metrics for 

wildfire mitigation (e.g., requiring enhanced vegetation management and system hardening measures 

within high-fire risk areas). Furthermore, the other safety metrics are relevant to other concerns, but 

still intersect with wildfire mitigation in material ways. For example, the Debtors’ metric for Asset 

Records Duration “is an important aspect of having a safe system” because accurate asset records are 

crucial to managing a complex gas and electrical system. See Mistry Dep. March 19, 2019 at 42:6-7. 

Similarly, the Serious Injuries and Fatalities Corrective Actions Index applies to a wide range of safety 

concerns, including wildfires, the installation of new equipment, and the Debtors’ nuclear power 

facilities. See id. at 42:15–17 (“The serious injuries and fatalities corrective action deals with the safety 

of our employees who are critical to maintaining the system.”). 

 As set forth in the Motion, in considering the appropriate metrics, the Compensation Committee 

looked to the 2019 STIP and then further emphasized safety by adding the PSI Modifier. It is abundantly 

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clear that safety is a fundamental element of the KEIP metrics and that there is a legitimate business and 

operational basis for the other metrics as well. The fact that section 8389(e) of the Public Utilities Code 

relied on by the Tort Claimants Committee suggests that after June 30, 2020 incentive compensation 

“may include” it being 100% tied to safety performance may be relevant, but hardly is a requirement 

now or even after June 30, 2020. Further, the Court is well versed in the metrics and how they are 

implemented, having had a complete tutorial on the same in connection with the hearing on the 2019 

STIP. 

III. THE KEIP IS NOT A RETENTION PLAN 

 The U.S. Trustee and TURN assert that the KEIP should be denied because the Debtors have not 

met their burden of proving the KEIP is not a retention plan governed by section 503(c)(1) of the 

Bankruptcy Code fails to acknowledge well established case law. 

 Courts have repeatedly held that compensation plans that set out specified challenging 

performance goals are primarily incentivizing. See, e.g., In re Residential Capital, LLC, 478 B.R. 154, 

171 (Bankr. S.D.N.Y. 2012) (“When a plan is designed to motivate employees to achieve specified 

performance goals, it is primarily incentivizing, and thus not subject to section 503(c)(1).”) (internal 

citations omitted); In re Dana Corp., 358 B.R. 567, 584 (Bankr. S.D.N.Y. 2006) (finding that “[b]y 

presenting an executive compensation package that properly incentivizes [management] to produce and 

increase the value of the estate, the Debtors have established that section 503(c)(1) does not apply”). 

Indeed, all successful incentive programs necessarily have the indirect benefit of incentivizing an 

employee to remain with the company. See In re Alpha Natural Resources, Inc., 546 B.R. at 356 (“[A] 

KEIP that merely has some retentive effect should not be analyzed under § 503(c)(1).”); In re Velo 

Holdings Inc., 472 B.R. 201, 210 (Bankr. S.D.N.Y. 2012) (holding that a purported KEIP will not be 

deemed retentive simply because it contains “some retentive effect”). 

TURN and the U.S. Trustee assert that without additional information, it is impossible to assess 

whether the Performance Metrics “present difficult targets and are not lay-ups.” See U.S. Trustee 

Objection at 14:5-6. Specifically, they both criticize the Debtors’ failure to put forth information about 

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their achievement of threshold performance over the past nine years. As set forth in the hearing on the 

2019 STIP, the metrics are designed to be “challenging but achievable.” Apr. 23, 2019 Hr’g Tr., 23: 6-

7. The Debtors have only achieved their target STIP metrics in five of the past nine years and have 

never achieved a maximum score, providing further evidence that historically the Debtors have not 

established metrics that are easily achievable. While the Debtors’ overall company score has met 

threshold level each of the past nine years, the Compensation Committee has exercised its discretion 

across multiple years to reduce executive payouts. Specifically, in 2010, the Compensation Committee 

zeroed out the score for all officers. In 2015, the Compensation Committee reduced the score for all 

employees. In 2016, the Compensation Committee reduced the score of all Senior Vice Presidents; in 

2017, the Compensation Committee zeroed out the score of the CEO and CFO; and in 2018, the 

Compensation Committee zeroed out the score for all employees. Accordingly, consistent with past 

practice and as stated in Mr. Lowe’s testimony with respect to the identical 2019 STIP performance 

metrics, “it’s in [the Compensation Committee’s] discretion [sic] to zero out the STIP, regardless of 

what the actual score is.” Apr. 23, 2019 Hr’g Tr., 68: 7-8. 

 The U.S. Trustee also asserts that the Motion fails to provide any information as to whether the 

Debtors are on track to satisfy the metrics. The U.S. Trustee contends this information is critical, 

because the Debtors have completed more than 50% of the Performance Period and thus what may have 

seemed like a challenging target in late April (when the 2019 STIP was approved) may now be a “layup.” See U.S. Trustee Objection at 13:18-19. As described in the Motion, the KEIP utilizes the same 

metrics as the 2019 STIP with the exception of the PSI Modifier. Unlike the 2019 STIP, however, KEIP 

Participants’ scores are calculated on an annual basis instead of quarterly and the Performance Metrics 

and weightings were established in the first quarter of the calendar year – months before the Motion was 

filed by the Debtors. In fact, the Compensation Committee ratified the KEIP months before the scoring 

results for the second quarter could be certified. The suggestion that the Debtors’ applied a “wait and 

see” approach to provide a lay-up simply does not survive scrutiny. 

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IV. PAYMENTS PURSUANT TO KEIP ARE JUSTIFIED BY THE FACTS AND 

CIRCUMSTANCES OF THE CHAPTER 11 CASES 

 The U.S. Trustee’s contention that the Debtors have failed to establish that payments pursuant 

to the KEIP are justified by the facts and circumstances of these cases is without merit. As discussed in 

the Motion, Courts have concluded that whether payments to employees are justified by the “facts and 

circumstances” of a case is to be determined by application of the same business judgment standard 

utilized under section 363(b) of the Bankruptcy Code. See In re Velo Holdings Inc., 472 B.R. at 209 

(Bankr. S.D.N.Y. 2012) (“[The] ‘facts and circumstances’ language of section 503(c)(3) creates a 

standard no different than the business judgment standard under section 363(b).”). Courts generally 

utilize the six-factor test identified in In re Dana Corp. when determining if the structure of a 

compensation proposal and the process for its development meet the business judgment standard. 358 

B.R. 567, 576-77. As discussed in detail in the Motion, all of these factors are satisfied as to the KEIP, 

and the U.S. Trustee’s objection establishes nothing to the contrary. 

 The KEIP was carefully designed to drive performance to achieve critical safety, financial, and 

operational objectives with additional emphasis on safety. As indicated by WTW, the KEIP falls within 

the range of competitive practice relative to the Debtors’ peer companies. The aggregate target direct 

total compensation for the KEIP Participants falls within the 25th to 50th percentile of the market. The 

KEIP comports with industry standards with respect to design and overall cost, including eligibility, the 

amount and type of awards and the Performance Metrics. And, implementation of the KEIP will provide 

the participants with the opportunity, solely through performance, to achieve market-based 

compensation. Under the circumstances, the requirements of section 503(c)(3) clearly are satisfied. 

 The U.S. Trustee also objects to the KEIP provision that authorizes up to $4 million in KEIP 

Awards for two additional employees that could be named as KEIP Participants in 2019 whose job roles 

and responsibilities would have qualified them to participate in the KEIP if they had held such positions 

at the time of the KEIP’s approval. This provision provides the Debtors with needed flexibility to hire 

or promote employees into the senior ranks and provide those employees with appropriate incentives 

and the same opportunity to realize market-based compensation as the Debtors’ other senior officers. 

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This limited authority certainly is appropriate and properly circumscribed to address legitimate business 

needs. 

V. CONCLUSION 

 For the reasons stated herein and in the Motion, the Court should approve the KEIP. 

Dated: August 7, 2019 WEIL, GOTSHAL & MANGES LLP 

 KELLER & BENVENUTTI LLP 

 By: /s/ Stephen Karotkin 

 Stephen Karotkin

Attorneys for Debtors and Debtors in Possession 

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