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PG&E CORPORATION

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PG&E, Insys Bankruptcies Stumble in Bids for Bonuses, Severance

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09/05/2019 | 11:43am EDT

By Peg Brickley

Bankruptcy judges spurned requests for extra pay at PG&E Corp. and Insys Therapeutics Inc. in recent weeks -- a rare restriction that reflects outrage over the damage from wildfires linked to the California utility's equipment and the drugmaker's role in the opioid crisis.

U.S. Bankruptcy Judge Dennis Montali last week in San Francisco turned down a proposal that would have added as much as $16 million to this year's pay for a dozen top PG&E executives. The embattled California utility sought chapter 11 protection from claims for fire damages that could top $30 billion.

A week earlier in Delaware, Judge Kevin Gross spurned a request from Insys to hand out severance pay after the drugmaker's board of directors refused to certify that those on the receiving end hadn't participated in the company's criminal behavior.

"In both of these decisions, bankruptcy judges are policing the edges of what debtors are allowed to do and promoting confidence in the bankruptcy system," said Jared Ellias, professor at the University of California Hastings College of Law in San Francisco, where Judge Montali is presiding over PG&E's bankruptcy.

In a statement, PG&E said it "will work to determine any next steps related to compensation plans for key senior leaders at the company." Judge Gross told Insys to think it over and find a way to make sure the wrong people wouldn't be rewarded with severance packages.

The PG&E and Insys rulings aren't typical in big chapter 11 cases, where companies rarely hear "no" when they ask to pay bonuses to their leaders.

"It was gratifying to see that the PG&E judge scrutinized the bonus plan and turned it down," said Peter DeChiara, who represents labor interests in bankruptcy. "Sometimes judges will do that, but more often than not those plans are approved. It's a shame because typically, by the very nature of the bankruptcy, the stakeholders including the rank and file workers are sacrificing, taking a hit. While other stakeholders are suffering, management is getting bonuses."

But the rejected pay enhancements in the PG&E and Insys bankruptcy cases likely don't signal a new trend, either, Mr. Ellias said.

"It's an unusual set of circumstances," he said. A study Mr. Ellias released last year concluded that lawyers quickly found ways around restrictions that took effect in 2005, which were supposed to curb rewards to leaders of failed companies. Companies argue they pay extra for extra work and would have to pay more if executives leave.

Getting around the pay restrictions is tougher, however, when the bankruptcy process is making headlines, as the chapter 11 proceedings of both PG&E and Insys have, Mr. Ellias said.

Both cases involve powerful creditors who don't need the cooperation of management to ease negotiations over a chapter 11 plan: victims of alleged corporate wrongdoing who have racked up billions of dollars in damage to lives and property.

"Rarely do you see this level of objection," Mr. Ellias said, referring to PG&E's bonus proposal. In part that is because creditors with nothing to gain from rewarding management frequently have limited representation in bankruptcy cases, so their objections go largely unregistered.

"In most cases, the bondholders and the banks are the ones with the fancy lawyers, and they don't want to fight over these things because they don't want to upset management," he said.

Upsetting management isn't a big concern for PG&E's fire victims, or for Insys's creditors, including the states and municipalities struggling with the opioid epidemic.

Both Insys and PG&E also have criminal records directly connected to the troubles that brought them to bankruptcy. In 2015, a jury convicted the California utility of felony safety violations involving a pipeline explosion, and the company is still on probation. A court-appointed monitor has warned the utility isn't doing what it should to avoid another fire outbreak this year.

Additionally, PG&E has received some help from lawmakers, but needs more aid from Sacramento to take care of its wildfire damages in bankruptcy. The utility will have to think twice before returning to bankruptcy court to fight for bonuses, risking "another damaging sideshow that hurts the credibility of this company," Mr. Ellias said.

Given the mounting public and political pressure on PG&E's leaders to get the utility in shape, Judge Montali said there is little reason to spend the utility's cash to add to the incentives.

"The most vital of these incentives remains the pressure to avoid additional loss of life and property and accompanying civil and criminal liability, which can only be achieved by drastically improving [PG&E's] safety record," he wrote.

Insys, meanwhile, is dissolving its business in a bankruptcy case that started about a month after many of its top executives either pleaded guilty or were found guilty of criminal charges in connection with the sales of Subsys, an under-the-tongue formulation of the painkiller fentanyl. An Insys unit pleaded guilty to criminal charges in connection with illegal sales tactics.

Write to Peg Brickley at peg.brickley@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
PG&E CORPORATION -4.84% 11.61 Delayed Quote.-48.63%
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Sales 2019 17 781 M
EBIT 2019 3 437 M
Net income 2019 -598 M
Debt 2019 24 406 M
Yield 2019 -
P/E ratio 2019 -13,1x
P/E ratio 2020 7,82x
EV / Sales2019 1,72x
EV / Sales2020 2,07x
Capitalization 6 144 M
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Richard A. Meserve Independent Director
Barbara L. Rambo Independent Director
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