Fire Victim Trust brings in $1 billion with PG&E stock on the rise but uncertainty remains

In the two and a half years since PG&E emerged from bankruptcy, survivors of the 2017 North Bay wildfires and other blazes sparked by the utility have found themselves tied to the financial success of the very company that harmed them.

That is because any hope of full compensation rides on the ailing utility's stock price.

Half of the $13.5 billion Fire Victim Trust, which was created out of the bankruptcy to compensate victims of the 2017 Napa and Sonoma County wildfires, the 2018 Camp Fire and others, is funded with company stock — some 477 million shares — the value of which plummeted after the settlement.

The looming question for the trust has always been whether the company's stock price would recover enough to reach $6.75 billion in value.

For a long time, it wasn't close.

Recently, though, PG&E's stock has begun to rebound, allowing the Fire Victim Trust to sell two chunks of 35 million shares in October and add almost $1 billion in cash to the fund. Following two previous sales, the trust has now offloaded 170 million, or roughly 36%, of those 477 million shares.

In the meantime, the Fire Victim Trust has paid out $5.51 billion to victims, who can only receive up to 45% of what they're owed for now until the fund's future is more certain.

One of the key events that helped increase the price was when PG&E was accepted back into the S&P 500, one of the most commonly followed stock indexes, in late September.

Since then, the utility's share value has consistently stayed above $14 with a high of $15.38.

That's several dollars above the price that led former trust administrator John Trotter to say in June that "sooner or later, we're going to run out of cash."

Current trust administrator Cathy Yanni is more optimistic, while still guarded. "I think it's a possibility" the trust will be made whole, she said in a September meeting with The Press Democrat editorial board.

"Now, I don't have a crystal ball," she added.

"The increase in the stock price is a good thing," said Tom Tosdal, a Southern California fire litigation attorney representing more than 1,000 victims of the trust who opposed the stock deal. "It's allayed some concerns, but not all of them, certainly."

That's in part because the mechanisms of the stock market act more to Wall Street's benefit than to that of victims waiting on money they need to put their lives back together.

Guided by a team of economists and bankers, the trust must balance a number of pressures and contractual obligations that essentially dictate how much stock can be sold how often and even the actual dollar return on any sales.

"Selling stock is a complicated exercise when your position is as large as the Trust's and your priority is to maximize returns," Yanni wrote in a letter to fire victims this month.

The letter underscored the trust's awkward position, which leaves victims in limbo and necessitates keeping PG&E afloat.

"Unloading all of the stock in a single sale, as some have suggested, so that Fire Victims can get paid and be done with their claims, would not be in anyone's best interest," the letter stated. "It would significantly drive down the price of PG&E stock, likely before the sale even occurs. Therefore, it's not just a question of timing sales but also calibrating how much you can sell at one time without flooding the market and depressing the value of the stock."

It's not lost on Wall Street traders and hedge fund managers that the trust holds a huge pile of stock in one of the nation's largest utilities, or, that the trust's main goal is selling off that stock.

"That's certainly something that savvy traders pay attention to," said Michael Visser, associate dean and professor of economics at Sonoma State University, "and there are a lot of savvy traders, and they have a lot of resources dedicated to identifying an opportunity."

Any sale that is made comes with what the trust calls "industry standard fees" to Morgan Stanley, which serves as the trust's investment banker and purchases stock from the Trust before reselling it on the market.

The buyers Morgan Stanley finds purchase the stock at a negotiated discount, which has ranged from 3.8% to 6.3% off the listed share price. The larger the block of shares, the larger the discount, which can amount to tens of millions of dollars.

"Each transaction in a competitive market, such as a stock market, can be thought of as a tiny little bargaining game between two parties, a buyer who submits a bid and a seller who submits an ask," Visser said. "In a situation such as this, where the seller is basically compelled to sell the shares they have on offer, and in particular the broker really doesn't want to wait very long to consummate the transaction, the buyer has the upper hand in the bargaining game."

Another hitch is a two-week "lock up" period after each sale where the trust is prevented from selling off any more stock, a protection for Morgan Stanley from the risk of holding or having to sell too much stock at once. Previously, that period was 60 days and then 30.

Even if these conditions are standard fare for the stock market, it's an unusual and constricting process for the trust to have to navigate and the victims to be beholden to.

"The problems that are happening are a function of the bankruptcy plan," Tosdal said, "a plan that was deeply flawed."

Victims desperate for cash were likely not made aware of the price Wall Street traders would exact on the sale of such large chunks of stock, Visser said, noting that factors like discounts should be considered in shaping the terms and structures of a trust that depends on stock. "They should build that into the deal."

"The people whose houses burned down were not thinking about that."

In 2020, as PG&E rushed to exit bankruptcy in order to gain access to a newly created state wildfire fund that would provide some protection from future liability, victims were under enormous pressure to accept the half-cash, half-stock deal on the table. Despite warnings of the troubles that the proposed structure would bring, many victims were led to believe it was their last best shot at compensation, and a majority of the 70,000 victims ultimately approved the plan.

"The deal was done in a hurry. And people voted for it out of fear, I think, and the court approved it," Tosdal said. "Nothing the trust can do but make the best of it."

Given the pace of the trust's stock sales and the constraints at play, Tosdal, at least, still has his "doubts that people will be made whole." He's warned his clients he expects the trust might not be able to cash out completely until late 2023.

"Meanwhile, the stock market is riding up here, there and everywhere," he said. "So, who knows what's gonna happen?"