TLDR
- PG&E stock dropped 16% in premarket trading to $13.97 after California’s State Assembly amended Senate Bill 492 to exclude liability protection for utilities.
- The amended bill does not include Gov. Gavin Newsom’s proposal to block insurance companies from suing utilities over wildfire claims.
- Edison International and Sempra also fell 15% and 3.6% respectively.
- Mizuho downgraded PG&E, Edison, and Sempra to Neutral from Outperform; Morgan Stanley warned of “significant downside” for California utilities.
- UBS held its Buy rating and $22 price target on PG&E, noting the legislative session has not yet concluded.
PG&E stock fell 16% to $13.97 in premarket trading on Monday after California’s State Assembly amended Senate Bill 492 and removed liability protections that utility investors had been counting on.
The amended bill does not include a proposal from Gov. Gavin Newsom that would have blocked insurance companies from suing utilities over wildfire-related claims. That omission is at the heart of investor concern.
Edison International fell 15% and Sempra dropped 3.6% on the same news.
The move brings back painful memories for anyone who followed PG&E closely. The utility filed for Chapter 11 bankruptcy in early 2019 under the weight of wildfire liability claims and didn’t emerge until July 2020.
PG&E issued a statement Sunday saying the legislation “falls short of creating the long-term durability needed to attract affordable investment to support a safer, more reliable energy system.”
Wall Street Reacts
Mizuho analyst Anthony Crowdell downgraded PG&E to Neutral from Outperform and cut his price target to $16 from $21. He also downgraded Edison International and Sempra to Neutral from Outperform.
Crowdell said the legislature “largely blocked” Newsom’s push to shield utilities, banned hedge funds from “claim trading,” and prohibited executive bonuses if a utility starts a wildfire that destroys 500 or more structures.
“We view this bill as insufficient in shifting liability from utilities, more focused on victim protections without any new investor protections,” Crowdell wrote.
Morgan Stanley analyst David Arcaro said the legislation “falls short for shareholders” and flagged potential downside if California sees multiple large wildfires.
Wildfire Fund Concerns
Arcaro also raised concerns about California’s $21 billion wildfire fund, which is paid for by utility shareholders and ratepayers to cover liability costs.
The January 2025 Eaton Fire that burned through Los Angeles could drain that fund sooner than expected. Arcaro warned there is no “ongoing source of funding,” which creates added risk for PG&E and other California utilities.
Wells Fargo downgraded PG&E to Equal Weight from Overweight, keeping a $24 price target, citing the absence of a meaningful wildfire liability backstop. BMO Capital also downgraded PG&E to Market Perform from Outperform and cut its target to $21 from $28.
Not everyone is bearish. UBS reiterated a Buy rating and $22 price target, noting the legislative session has not finished. The firm said PG&E could reallocate capital away from California if reform fails, and could increase its dividend rather than pursue buybacks.
The amended bill is currently in the general assembly and needs a two-thirds majority vote in both chambers. Morgan Stanley expects it to pass early Tuesday and head to Newsom’s desk. The governor has 12 days to sign or veto before it automatically becomes law.
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