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June 20, 2019 – The Debtors filed a motion to approve a key employee incentive plan (the “KEIP”) for twelve senior executives (the “KEIP Participants”) that would provide an aggregate award pool of between $5.4mn to $16.4mn [Docket No. 2664]. As with a related motion seeking approval of the terms of employment for new CEO William D. Johnson [Docket No. 2662, which we cover separately], the Debtors' KEIP motion pays special attention to the role of safety metrics in evaluating (and rewarding) senior management performance. In this instance, assigning a 65% weight to a basket of safety metrics and a 50% haircut on KEIP awards for failure to meet a threshold metric for public safety. Those numbers and the $16.4mn headline figure, will certainly catch the attention of many C-suiters and compensation committees. One is left wondering how life would be different for the Debtors if they had adopted a similar KEIP in advance of the Camp et al wildfires.
The KEIP motion states, “Critical to the Debtors’ safe and reliable operation of their business and the maximization of enterprise value for all their economic stakeholders, including the wildfire claimants, is the ability to appropriately incentivize their employees, to meet and exceed safety, financial, and operational targets through the opportunity to earn market compensation. To ensure that the key members of the Debtors’ executive officer team are properly incentivized in this regard, the Debtors, with the assistance of their advisors, have developed a key employee incentive program (the ‘KEIP’) whose participants currently consist of 12 senior executive officers (excluding the Chief Executive Officer) (collectively, the ‘KEIP Participants’). The KEIP is designed to ensure that key members of the Debtors’ executive officer team are properly incentivized to meet and exceed safety, financial, and operational targets through the opportunity to earn market compensation. Notably, to place a greater emphasis on safety, the newly constituted Compensation Committee of the Board of Directors of PG&E Corp. (the ‘Compensation Committee’) determined that the 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.
The KEIP Participants are vital to the Debtors’ safety, operations, and revenue generating capacity. For that reason, providing appropriate incentives is essential not only to providing safe and reliable service, but also to maximizing value and to the success of these reorganization cases. The Debtors established the metrics for the KEIP by considering, among other things, the Debtors’ safety, financial, and operational goals, with an emphasis on safety, to ensure that the metrics are challenging and drive enhanced performance by the KEIP Participants. In considering these objectives, the Debtors looked to the Debtors’ 2019 short-term incentive program approved by this Court on April 29, 2019 (the ‘2019 STIP’) to establish the appropriate metrics.
Consistent with the 2019 STIP, the KEIP is entirely incentive-based, conditioning the cash and equity portion of the awards (the equity portion being in the form of performance-based restricted stock units (‘PRSUs’)) granted under the incentive program (the ‘KEIP Awards’) on the Debtors meeting carefully designed safety, financial and operational metrics (collectively the ‘Performance Metrics’), which are described in further detail below. Like the 2019 STIP, the proposed KEIP heavily prioritizes safety performance metrics by giving them a 65% weighting.
Significantly, as described below, because the KEIP applies to the Debtors’ most senior officers, the KEIP places increased emphasis on the Public Safety Index metric, which is directly related to the Debtors’ implementation of their Wildfire Mitigation Plan. If the Debtors do not achieve the threshold level for the Public Safety Index metric, the full KEIP Awards will be reduced by 50%. If the Debtors achieve the threshold level, but do not achieve the target level, the KEIP Awards will be reduced by 25%. And again, because the KEIP applies to the Debtors’ senior officers, awards, if any, are made only at the end of the annual performance period and not quarterly as is the case with the 2019 STIP.”
KEIP Summary Terms
- KEIP Participants: Twelve senior executive officers, John Simon (EVP, Law, Strategy and Policy); Jason Wells (EVP and Chief Financial Officer); Janet Loduca (SVP and General Counsel); Melvin Christopher (VP, Gas Operations); Michael Lewis (SVP, Electric Operations; Julie Kane (SVP, Chief Ethics & Compliance Officer, & Deputy General Counsel); Dinyar Mistry (SVP, Human Resources, Shared Services and Chief Diversity Officer); Loraine Giammona (SVP and Chief Customer Officer); Fong Wan (SVP, Energy Policy & Procurement); Kathleen Kay (SVP and Chief Information Officer); James Welsch (SVP and Chief Nuclear Officer); and David Thomason (VP, CFO Utility and Controller).
- Total Program Cost: The aggregate value of the KEIP Awards at grant range from $5,465,500 at threshold performance, $10,931,000 at target performance, and $16,396,500 at maximum performance. The potential awards consist of 50% cash and 50% PRSUs, with the PRSU value at settlement subject to market fluctuation of PG&E Corp.’s common stock from the date of the grant to the date the PRSUs are settled. Accordingly, the actual value of earned awards may be above or below the threshold, target or maximum specified at grant as a result of the common stock price at settlement.
- Performance Period: January 1, 2019 through December 31, 2019 (the “Performance Period”).
- Form of KEIP Awards: Incentive compensation will consist of (i) 50% cash, and (ii) 50% PRSUs.
- Performance Metrics and Weighting:
- Safety Metrics (inclusive of all safety-related Performance Metrics) (Weight: 65%) –
- Nuclear Reliability and Safety Indicator (Weight: 5%): Measures nuclear power generation and safety based on performance indicators for nuclear power generation developed by the nuclear industry and applied to all U.S. nuclear power plants.
- Public Safety Index (Weight: 25%): This metric includes two equally weighted sub-metrics:
- Enhanced Vegetation Management (“EVM”): EVM measures how many circuit miles of vegetation have been cleared under the EVM program within high-fire risk areas.
- System Hardening: System hardening measures completed circuit miles within high-fire risk areas such as the updating or undergrounding of overhead circuitry.
- First-Time ILI Miles (Weight: 10%): Measures the number of miles of natural gas transmission pipelines that were successfully inspected for the first time following the introduction of inspection tools (sensors) within the pipelines.
- Asset Records Duration Index (Weight: 10%): Tracks the average number of days required to complete appropriate documentation of electric and gas construction projects.
- Serious Injuries and Fatalities Corrective Actions Index (15%): Measures the quality (as determined by an independent safety expert) and timeliness of corrective actions implemented in response to employee and contractor serious injuries and fatalities events
- Customer Satisfaction (Weight: 10%) – Measures the number of customer complaints escalated to the CPUC
- Financial Performance (Weight: 25%) – Earnings from Operations (“EFO”): Measures financial performance from ongoing core operations calculated as net income adjusted for income or expenses associated with events or circumstances outside of ongoing core operations.
The Court scheduled a hearing to consider the KEIP for July 24, 2019, with objections due by July 17, 2019.
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