Key Takeaways
- Shares of PG&E plunged 16% to $13.97 in premarket hours following California State Assembly’s revision of Senate Bill 492, which stripped out critical utility liability shields.
- The revised legislation omits Governor Gavin Newsom’s key provision that would have prevented insurers from pursuing legal action against utilities for wildfire damages.
- Fellow California utilities Edison International and Sempra experienced declines of 15% and 3.6% respectively on the same development.
- Mizuho slashed ratings on PG&E, Edison, and Sempra from Outperform to Neutral; Morgan Stanley cautioned about substantial downside risks for state utilities.
- UBS maintained its Buy recommendation with a $22 target on PG&E, emphasizing that the legislative process remains ongoing.
Shares of PG&E tumbled 16% to $13.97 during Monday’s premarket session following the California State Assembly’s decision to revise Senate Bill 492, eliminating liability safeguards that investors in utility companies had been anticipating.
The revised legislation notably excludes Governor Gavin Newsom’s proposition that would have prevented insurance carriers from filing lawsuits against utility providers regarding wildfire-linked damages. This exclusion sits at the core of mounting investor anxiety.
Edison International saw shares decline 15%, while Sempra experienced a 3.6% decrease following the identical announcement.
This development revives troubling recollections for those familiar with PG&E’s history. The power company declared Chapter 11 bankruptcy protection in early 2019, overwhelmed by wildfire liability obligations, and remained in restructuring until July 2020.
In a statement released Sunday, PG&E expressed that the proposed legislation “falls short of creating the long-term durability needed to attract affordable investment to support a safer, more reliable energy system.”
Analyst Response
Mizuho analyst Anthony Crowdell lowered PG&E’s rating from Outperform to Neutral while reducing his price objective to $16 from $21. He similarly downgraded both Edison International and Sempra from Outperform to Neutral.
According to Crowdell, lawmakers “largely blocked” Newsom’s initiative to protect utilities, implemented restrictions on hedge funds engaging in “claim trading,” and introduced prohibitions on executive bonuses when a utility sparks a wildfire destroying 500 or more buildings.
“We view this bill as insufficient in shifting liability from utilities, more focused on victim protections without any new investor protections,” Crowdell stated in his note.
Morgan Stanley analyst David Arcaro characterized the legislation as disappointing “for shareholders” and highlighted possible downside scenarios should California experience several major wildfires.
Wildfire Fund Vulnerability
Arcaro additionally expressed apprehension regarding California’s $21 billion wildfire compensation fund, financed through contributions from utility shareholders and customer rates to address liability expenses.
The Eaton Fire in January 2025, which ravaged portions of Los Angeles, threatens to deplete this fund more rapidly than projected. Arcaro emphasized the absence of an “ongoing source of funding,” presenting heightened exposure for PG&E and neighboring California utility operators.
Wells Fargo reduced PG&E’s rating to Equal Weight from Overweight while maintaining a $24 price objective, pointing to the lack of substantial wildfire liability backstop mechanisms. BMO Capital similarly downgraded PG&E to Market Perform from Outperform, lowering its target to $21 from $28.
Some analysts remain optimistic. UBS reaffirmed its Buy stance and $22 price target, observing that the legislative process continues. The investment firm suggested PG&E might redirect capital investments outside California should reform efforts stall, and could prioritize dividend increases over share repurchase programs.
The revised bill currently awaits consideration in the general assembly and requires a two-thirds supermajority approval in both legislative chambers. Morgan Stanley anticipates passage early Tuesday, sending the measure to Newsom’s office. The governor has 12 days to either sign or reject the legislation before it automatically takes effect.
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