PG&E thought it had a deal with California wildfire victims. Then came the coronavirus

Like a lot of Paradise residents who lost their homes in the Camp Fire, Michael Zuccolillo is furious at PG&E Corp. and isn’t thrilled about the utility’s plan for paying wildfire victims to get out of bankruptcy.

But in a world suddenly consumed with economic uncertainty caused by the coronavirus pandemic, he isn’t sure he and his fellow wildfire victims can afford to walk away from PG&E’s most recent offer.

“If we say no to this, what’s coming down the pike?” said Zuccolillo, the vice mayor of Paradise. “It’s possible … a no vote puts us in a riskier position.”

PG&E just finished securing Gov. Gavin Newsom’s blessings for its bankruptcy plan, agreeing to overhaul its leadership and beef up its safety personnel. Newsom, who rejected an earlier offer and had spent months blasting the company, said the agreement represents “the end of business as usual for PG&E.”

California’s largest utility now faces a potentially tougher audience: the estimated 80,000 Northern Californians who lost homes, businesses and loved ones to massive wildfires linked to PG&E’s equipment.

A compromise negotiated by PG&E and lawyers representing most of the victims, the bankruptcy plan would pay $13.5 billion for damages not covered by insurance. The money would go to victims of the 2015 Butte Fire in Amador and Calaveras counties, the 2017 wine-country fires, the 2018 Camp Fire and the deadly 2016 Ghost Ship fire in Oakland.

The victims will vote on PG&E’s plan in the coming weeks, and their decision could go a long way toward determining whether the troubled utility can meet a state-mandated June 30 deadline for having its bankruptcy plan approved.

They’ll be marking those ballots during a time of unprecedented turmoil. The coronavirus has sunk the stock market, shut down much of the economy and all but guaranteed a recession.

That leaves wildfire victims with little in the way of foolproof options. If they approve the plan, they’ll get paid partially in PG&E stock, whose value has fluctuated wildly in recent weeks. If they vote down PG&E’s offer, they risk having the whole plan collapse at a time of extreme uncertainty.

“The coronavirus has really turned everything upside down,” said Frank Pitre, a lawyer who represents fire victims.

Bankruptcy judge hold power over deal

Another X factor is U.S. Bankruptcy Judge Dennis Montali.

He would have the power to approve the plan regardless of how victims vote — a move known in bankruptcy circles as a “cramdown.” But the judge, who has displayed sympathy for the victims, might be reluctant to OK the plan in the face of overwhelming opposition. Ballots must be mailed in by May 15.

Montali “signaled that he doesn’t want to approve a plan that the victims don’t want,” said Jared Ellias, a bankruptcy-law expert at the UC Hastings College of Law in San Francisco. “On the other hand, he does legally have the power to confirm this plan even if the fire victims don’t support it.”

Asked how it thinks victims will vote, PG&E issued a statement saying the settlement has the support of law firms “representing individuals holding approximately 70%” of the wildfire claims. “PG&E remains on track to have its plan of reorganization confirmed by the statutory deadline of June 30, 2020.”

The $13.5 billion settlement is controversial because half the money, or $6.75 billion, would come in the form of PG&E stock. Individual victims wouldn’t actually receive shares. Instead, the stock will become part of a settlement trust fund, and an administrator would sell shares over time to raise cash for paying claims.

Still, the stock contribution is horrifying to some victims, who detest PG&E and don’t want to own shares in the company, even indirectly.

Perhaps more importantly, the stock injects a degree of risk into the payout plan, as the value of half the payout package will rise and fall with the share price.

This element of uncertainty only deepened as the COVID-19 pandemic sent financial markets into a free-fall. PG&E shares have lost about 40 percent of their value in the past month.

“Does the $6.75 billion of stock have $6.75 billion of value in today’s market?” said victims’ lawyer Robert Julian, who led the negotiations with PG&E on the settlement fund. Julian said his team is in mediation with PG&E in an attempt to tweak the plan and satisfy fire victims’ concerns about the stock volatility.

Some victims say they have the solution: Get rid of the PG&E stock.

“Give us the cash,” said Adolfo Veronese, whose restaurant in Sonoma County was destroyed in the October 2017 wine country fires. “This volatility is going to kill the stock. How do we know the value is still there? That’s the raw end of the deal.”

PG&E may not have helped its cause by disclosing last week that it planned to use $4 million of the $13.5 billion settlement fund to pay a criminal fine in Butte County Superior Court. The utility agreed to plead guilty to 85 felony charges in connection with the Camp Fire, the deadliest wildfire in California history.

Late Monday, PG&E backed off and said it worked out an alternative plan to pay the $4 million fine.

But for some fire victims, the public relations damage from the earlier announcement could be difficult to unwind.

“The question to me is, what other sneaky things have they done?” said Kirk Trostle, who lost his home in the Camp Fire and is opposed to the terms of the $13.5 billion settlement. “What else have they hidden, or don’t want publicly disclosed, about this plan?”

Until recently, Trostle and Veronese served on a court-appointed committee designed to represent fire victims in the bankruptcy. They resigned so they could speak out publicly against PG&E’s reorganization plan.

“As more fire victims get educated as to the reality of this plan, their approval turns to, ‘I oppose this,’” Trostle said.

Coronavirus raises risk of rejecting PG&E plan

But rejecting PG&E’s offer could bring other risks.

PG&E’s reorganization plan rests on commitments by hedge funds and other Wall Street investors to pour billions of dollars into the company — commitments that could unravel if the plan is voted down and a new deal has to be renegotiated. Investors who’ve become nervous about the coming recession would have an excuse to exit the deal.

“Putting this deal back together with all the financing commitments would be very challenging,” said Ellias, the bankruptcy law professor.

Other complications have surfaced. In December, PG&E tentatively agreed to a $1.6 billion wildfire penalty imposed by the California Public Utilities Commission, only to see a PUC hearing officer propose increasing the penalty to $2.1 billion.

PG&E is fighting that proposal, arguing in court papers that the additional penalty could prompt its financial backers “to terminate their commitments and deploy their capital in other investments.”

PG&E must have its bankruptcy plan confirmed by June 30, as ordered by the Legislature last year in AB 1054. Otherwise, it would be ineligible to participate in a state-run insurance fund to help California’s major utilities pay claims from future wildfires.

What’s more, under the deal it made with Newsom, the utility agreed to a process that could have the entire company put up for sale if it misses the June 30 deadline.

Unless the economic climate brightens quickly, it would be very difficult to find a buyer that’s willing to put $13.5 billion on the table for fire victims.

“This plan was negotiated in the hottest economy in a long time, with tons of interest in investing in this company,” Ellias said. “The world is different now.”

This story was originally published April 1, 2020 at 5:00 AM.