Thousands of 2015 California forest fire victims who are eligible for payments under a $ 13.5 billion agreement with the state’s largest utility company learn that the amount they ultimately receive is at the whims of the Wall Street is subject to.
So says the retired California appellate judge who oversees the trust fund set up as part of PG & E’s bankruptcy reorganization last year, as well as the court records and other documents reviewed by CNBC’s “American Greed”.
“We don’t know how much money we have because a significant portion of the assets that are used to pay you off are common stocks of Pacific Gas and Electric,” said court-appointed trustee John K. Trotter of Tro of Fire Victim Trust, in a video message sent last month to the more than 70,000 burn victims who have filed claims.
The fund aims to compensate the victims of 24 forest fires, including the devastating Camp Fire that killed at least 84 people in 2018 and destroyed much of the city of Paradise. The largest and most devastating fire in California history, an investigation found the fire was caused by the failure of a device known as a C-hook on a centuries-old PG&E transmission tower.
“This is the smoking gun. This is the weapon that destroyed the lives, hopes, dreams and souls of 84 of our Butte County citizens,” said Mike Ramsey, District Attorney for Butte County.
Those who survived are still struggling to rebuild. The fire destroyed almost 19,000 buildings.
PG & E’s bankruptcy filing on January 29, 2019 effectively prevented victims from suing the company, as bankruptcy automatically puts all other legal action on hold. Instead, the fund was created through the court-approved recovery plan, led by Trotter, who is also a seasoned arbitrator.
Alameda County Sheriff’s police officers search for human remains after the campfire ripped through the Paradise, California area on November 12, 2018.
Josh Edelson | AFP | Getty Images
Financing part of the trust with shares is unusual, according to experts. The Trust received 478 million shares in the reorganized company, making it the utility company’s largest shareholder.
To make matters worse, according to Trotter, is the possible tax impact of redeeming the shares to pay the victims. When the trust was formed, Trotter said, the stock was valued at around $ 9 per share. Anything beyond that could be subject to high capital gains taxes. The stock recently traded at around $ 10, a potential taxable gain on paper of around $ 478 million.
“45 percent of that would go to the government,” said Trotter.
He said the trust recently received a decision from the Internal Revenue Service that should allow it to avoid the tax bite. But waiting for that verdict, plus the complicated process of monetizing the stock without the tax ramifications, has delayed payments to victims.
Also worrying: while the stock has appreciated in value since PG & E’s bankruptcy last year, it has not risen as much as some architects of the deal anticipated.
“The stock is down 17% this year in the face of a very buoyant stock market. So it didn’t go well,” said Trotter. He noted that the stock would be valued at approximately $ 4.8 billion at current prices.
“Your deal called for $ 6.75 billion worth of shares,” he said. “That didn’t happen.”
When a court approved the fund last June as part of PG & E’s plan to emerge from Chapter 11 bankruptcy, the company hailed the establishment of the fund as a “critical milestone” in reorganizing the company and compensating victims.
“While nothing will heal the wounds caused by the campfire, we hope that the measures we are taking to reduce the risk of forest fires harden our systems and get the victims compensated will help build the confidence of our communities and restore their confidence that we are working on. ” keep them safe, “said Bill Johnson, President and CEO of PG&E.
A Cal Fire firefighter monitors a burning home as the campfire moves through the area on November 9, 2018 in Magalia, California.
Justin Sullivan | Getty Images
The June 20, 2020 statement stated that the stock’s valuation at $ 6.75 billion was “based on an agreed formula” and that “the final value of the stock could be higher or lower”.
Even more worrying for the victims was the pace of payments under the settlement. The trust’s trustee, Cathy Yanni, said it would likely take at least two years to settle all claims.
The process started slowly.
According to the trust’s first annual report, which Trotter filed in bankruptcy court in April – which covered the period from the trust’s inception on July 1, 2020 to the end of the year – the fund only had about $ 7.2 million in claims on 499 Sacrifice paid. while amassing $ 38.7 million in operating expenses. An investigation by KQED in San Francisco found that the trust spent an additional $ 12.7 million provided by PG&E to set up the claims process, a total of $ 51.4 million – more than seven times that what the trust had paid out.
Payments to victims have risen dramatically this year. This week, the Trust reported that as of June 30, it had paid more than $ 436 million to more than 13,000 claimants. More than half of the money was paid out through a special process that allows victims to request preliminary payments of up to $ 25,000 with limited documentation to help them survive the initial hardship.
In addition, the Trust is suing several third parties, including former PG&E officials and directors, as well as outside contractors, potentially increasing the cash pool available to victims.
The Trust has not provided updated figures on its operating costs.
In an earlier video message to the victims on May 17, Trotter defended the large amount of upfront spending, which he believed was necessary to mention given the complicated task of handling all claims – in most cases multiple claims per victim to set up the entire claims system from scratch.
“We have over 250,000 separate claims,” said Trotter. “So the enormity of this case also makes it different.”
“We’re building the process by which you get paid,” he said. “I would think that if we didn’t spend any money, you would be worried. If we weren’t going to hire 300 people to resolve your claims, then you should be concerned. “
Trotter said he hopes to ultimately cap the spending to 1% of the payout. He said a more typical expense ratio in such cases is around 4%.
“One percent is very low,” he said. “I don’t know if I can keep this. But I’ll try.”
A new sheet
However, the share price makes things even more difficult. Trotter said the victims should work for the reorganized company’s success.
An aerial view of Paradise, California, off Clark Road on November 15, 2018. The campfire burned more than 7,000 buildings in Paradise.
Carolyn Cole | Los Angeles Times | Getty Images
“You own 25 or 24½ percent of PG&E, so it’s important to you that PG&E does well,” he said. “The old PG&E, I don’t have to tell you, was certainly less than an exemplary corporate citizen. The new PG&E, which now appears regularly before the California Utilities Commission, tries a lot more and does a much better job.”
After filing for Chapter 11 bankruptcy protection in 2019, the “old” PG&E pleaded guilty to 84 campfire-related homicides. A judge fined the company $ 3.5 million.
In a statement to American Greed, the company denied putting profits above safety.
“We can’t change the past, but we can learn from it,” said the company. “We can never slack off in our pursuit of security and doing the right thing.”
But thousands of burn victims still waiting to get better are stuck in a nightmare.
See PG&E go from being a model utility company to being a convicted killer. Watch a BRAND NEW episode of “American Greed” on CNBC only on Monday, July 5th at 10pm ET / PT.