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Victims of California wildfires face dilemma over settlement offer

by Sujeet Indap, Financial Times |

Helen Sedwick awoke in her Santa Rosa, Calif., home about 1:30 a.m. Oct. 9, 2017, noticing the night sky glowing and ash falling.

Her husband, Howard Klepper, jumped in his car and drove to a nearby high spot and confirmed that a wildfire was approaching. The couple grabbed a few essential items and fled, observing brush burning everywhere on the way out. A few days later, Sedwick returned, slipping past a police cordon to find that her house and possessions had been destroyed, including Klepper’s woodworking studio that had several guitars he had built.

“If we had waited another 15 minutes to leave, I’m not sure we would have made it,” Sedwick said. A series of fires in 2017 and 2018, including the one that leveled Sedwick’s home, ripped through Northern California, killing more than 100 people and destroying thousands of homes and businesses.

The fires were eventually attributed to the power transmission equipment of the utility company PG&E. Facing tens of billions of dollars in liabilities for the fires, PG&E – formerly known as Pacific Gas & Electric – filed for bankruptcy and quickly became one of Wall Street’s favorite restructuring plays.

Investment groups including Apollo Global, Elliott Management and Baupost Group scooped up its shares, bonds and other claims, believing PG&E could settle fairly with fire victims and then reorganize as a vastly profitable company.

But unlike in many big corporate bankruptcies, the outcome is not going to be decided exclusively by investors, investment bankers and lawyers. Sedwick and about 80,000 other fire victims not only have a seat at the negotiating table, but are perhaps the kingmakers.

A committee representing fire victims struck a deal in December for $13.5 billion in compensation, half of that total coming in PG&E shares. Yet as a voting deadline Friday nears, a vocal group of dissident victims such as Sedwick are loudly sharing their discontent in Facebook message boards and Zoom town halls, believing they have been shortchanged.

“Although I knew how big money controlled the world in an abstract way, when I saw what it was like to be someone powerless in that chess game, it motivated me to action,” she said.

It came as a surprise to many observers when PG&E decided to file for Chapter 11 bankruptcy in January 2019. Its publicly traded shares had fallen because of worries about its liabilities from the wildfires but had not been wiped out, and its bonds were still trading at roughly 100 cents on the dollar, implying no serious risk of default.

The company made the choice that the best way to resolve all of its wildfire liabilities, which it initially estimated at more than $30 billion, was in a judicially supervised process.

Four key stakeholder groups would emerge. First were PG&E shareholders led by hedge funds Abrams Capital and Knighthead Capital. Second, were bondholders including Elliott, Apollo, Pimco, Capital Group and Citadel. Third, were “subrogation” claims holders, which represented insurers that had made payouts that then had the legal right to chase PG&E for reimbursement. And fourth were the individual fire victims.

The $13.5 billion was at the high end of what the fire victims could have expected, observers noted, and taking equity was what made the figure achievable. Under the terms of the deal, first put forward by the company and its shareholders, $6.75 billion of new PG&E stock would be placed into a trust whose administrator would sell shares over time to distribute cash. In all, $25 billion in payments were designated to fire victims and subrogation claims.

“The risk is on the fire victims,” said Jared Ellias, a law professor at University of California Hastings Law School, who has been following the case.

By spring, what seemed like a foregone conclusion – that the necessary two-thirds of fire victims would vote in favour of the shareholder plan – had become dicier.

Three members of the victims committee have resigned in 2020 over concerns about the plan. The committee in late March unsuccessfully tried to get the bankruptcy court to send out a supplementary disclosure form to fire victims noting, among other things, that “the coronavirus pandemic and the coronavirus’ economic ripple effect present an unforeseeable and significant risk that the shares of stock will not have the value necessary to match the $13.5 billion that PG&E has stated would be available to pay fire victim claimants”.

The $6.75 billion stock component was based on a theoretical valuation that pegs PG&E enterprise value at approaching $70 billion. The committee and some fire victims have, however, come to doubt that figure. An expert consultant for the committee submitted a valuation to the court in April that pegged the shares at less than $5 billion, based on the current valuation of PG&E’s competitor, Edison International.

Rifts have emerged among the various law firms representing fire victims. Many of these were personal injury specialists, some from out of state who had set up shop in northern California after the fires. These firms typically work on a contingency basis and are set to collect a third of the settlement proceeds if the deal goes through.

A group of lawyers that said it represented 70 percent of fire victims argued against the supplemental disclosure. One of these lawyers, Gerald Singleton, said the deal on the table was the only one available that would be practical to implement.

“Some people are voting on moral grounds and are saying ‘I understand it is not in my best financial interest but PG&E needs to be put out of business.’ Frankly, that’s a legitimate view. But the one thing that upsets me is that there are some people giving deliberately false information that there are other plans,” Singleton said. “It’s despicable to try to mislead victims.”

Still, the wobbly stock market has some lamenting the rejection of a plan by PG&E’s bondholders that would have wiped out the utility’s existing shareholders in order to limit the amount of debt the company would be saddled with, post-bankruptcy. In the late stages of talks, that alternative plan even envisaged paying the victims entirely in cash.

However, the idea of turning over the company to its bondholders met resistance in Sacramento, where politicians worried about the likes of Elliott’s Paul Singer and Apollo’s Leon Black taking control of critical state infrastructure.

Sedwick, who has now relocated to Glen Ellen, Calif., just two miles from her previous home in Santa Rosa, is hoping the company will come back to the table and offer more cash or other concessions.

Regardless of the outcome, she remains worried. “Even if it’s a new PG&E, we’ve got a long way to go to feel safe. Every time the wind blows, you are unsettled.”