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Judge OKs Millions in Bonuses at Bankrupt Energy Future Holdings

Rejecting a bankruptcy monitor's objections, a Delaware federal district judge on Wednesday said Texas' largest power company can pay its executives up to $20 million in bonuses.

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Texas’ biggest power company may reward its executives with up to $20 million in bonuses even as it navigates one of the largest bankruptcies in U.S. history, a federal judge ruled Wednesday. 

In a ruling from his bench in Wilmington, Delaware, U.S. District Judge Christopher Sontchi said Energy Future Holdings may continue a handful of bonus programs despite objections from a federal bankruptcy monitor.

Saddled with about $42 billion in debt, the Dallas-based conglomerate called itself in court papers “one of the best operated companies in the industry,” and said the bonus programs drive its “operational and financial excellence.”

Under the plans, 26 of the company’s executives will be eligible for bonuses totaling up to $20 million – most going to the top seven executives. The payments hinge on whether the employees meet tough performance targets, the company says. 

U.S. Trustee Roberta DeAngelis, the bankruptcy monitor, had argued that the bonuses looked like “pay-to-stay” payments that ran afoul of federal law.

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, limiting severance payments and barring companies from rewarding executives for simply sticking around during the bankruptcy process. Since then, federal watchdogs have paid close attention to the purpose of bonuses.

“It’s a big issue,” Jay Westbrook, an expert on bankruptcy law at the University of Texas at Austin, said of the bonus dispute. “It’s being argued in a lot of cases.”

Fort Worth-based American Airlines was involved in a prominent case. In April 2013, a judge tossed out a nearly $20 million severance payment to chairman and chief executive Tom Horton after the company’s merger with U.S. Airways. But Horton later secured close to $17 million in cash and stocks after the merger, with the company no longer under the court’s jurisdiction.   

“The courts have said there’s got to be a real performance element, and it has to be not easy to achieve.” Westbrook said. “It’s difficult to draw that line.”

The federal monitor argued Energy Future fell short of that definition.

“It appears that the 'incentive' targets do not promote enhanced performance because most of them fall below the Debtors’ actual performance in prior years,” DeAngelis wrote, citing a federal auditor’s calculations.

Energy Future disputed that argument, calling the goals outlined in the program “difficult to attain," and pointed out that only the federal monitor – not its creditors – objected to the bonus proposals. The company said it tightened some requirements after its bankruptcy filing, and argued that the incentives will help it stay afloat during a complicated bankruptcy.

“While the Debtors’ operations remain strong, the demands placed upon the Debtors’ senior executives leading up to and during these chapter 11 cases have been and will continue to be significant,” the company said in its filings.

Judge Sontchi agreed.

“After applying the most stringent test … I find each plans easily and overwhelmingly meets the standard,” Sontchi said, according to The Dallas Morning News. “It is not a close call.”

Allan Koenig, a company spokesman, declined to comment on the ruling. 

The bonus battle came amid a bankruptcy proceeding that has proved more complicated than the company originally intended.

Energy Future owns the retail electric provider TXU Energy and Luminant, the state’s largest generator. It is also the majority owner of Oncor, whose 119,000 miles of transmission and distribution lines deliver power to more than 3 million homes and businesses.

The conglomerate – known as TXU Corp. before a massive leveraged buyout in 2007 – is mired in debt after betting big on natural gas prices that later plummeted. The company lost about $7.6 billion from 2011 to 2013, according to federal filings.

When it filed for Chapter 11 protection last April, Energy Future suggested it could complete the proceedings in less than a year. It presented a pre-negotiated deal with investors that would separate its electric generation and retail assets. That filing did not include Oncor.   

The company scrapped that plan after several companies showed interested in purchasing its shares of Oncor. Energy Future is now auctioning off those shares, and it has until February 2015 to present a restructuring plan, after the court extended its deadline.

The company says it does not expect the reorganization to affect its daily operations or threaten Texas' electric grid.

Disclosure: The University of Texas at Austin and Energy Future Holdings are corporate sponsors of The Texas Tribune. Oncor was a corporate sponsor of The Texas Tribune in 2012. A complete list of Texas Tribune donors and sponsors can be viewed here.

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