Shares of California's largest publicly traded utilities crashed on Monday morning after state lawmakers unveiled wildfire legislation that failed to provide the liability protections Wall Street analysts had hoped for.
PG&E plunged as much as 21%, its sharpest decline since 2020, while Edison International crashed as much as 24%, its largest drop since 2018. Sempra fell 5%.
The development sparked a wave of Wall Street downgrades tracked by Bloomberg. Mizuho Securities downgraded PG&E, Edison, and Sempra to neutral from outperform, citing the absence of meaningful liability reform, while also reducing its price targets.
BMO Capital Markets analyst James Thalacker, who downgraded PG&E to market perform from outperform, wrote in a note to clients that California's proposed wildfire legislation failed to provide durable liability protections.
Thalacker cut his price target to $21 from $28, writing that Senate Bill 492 "sets fire to hopes for meaningful reform."
Thalacker wrote:
Bottom Line:
We move to Market Perform following the release of SB492, which failed to address/improve upon key elements of the state's wildfire framework. The proposed legislation does nothing to ensure the wildfire fund's long-term solvency (and associated liability cap), which exposes investors to open-ended wildfire-related tail risk.
We currently do not see support to revisit this critical deficiency. Our $21 target now reflects assumptions for uncapped future wildfire liability post-2030. While management is expected to respond with a revised capital allocation strategy shortly, we do not see that response as sufficient to improve investor sponsorship.
Thalacker continued:
Although the state's iterative approach established a robust legislative wildfire framework via AB1054/SB254, the proposed SB492 in our view falls woefully short of codifying the elements necessary to ensure the wildfire fund's solvency and protect the state's investor-owned utilities (IOUs) from wildfire-driven bankruptcies. As such, we expect PCG to be down materially at the open tomorrow and, longer term, to find it incrementally harder to attract capital relative not only to its utility peers given investors' preference for accelerating, large-load-driven growth and aversion to significant wildfire-related liabilities, but also for generalist investors given the challenge of open-ended wildfire-related tail risk despite the company's low absolute valuation. Moreover, given the lack of progress this year despite a more wildfire-educated legislature, the CEA's third-party road map and clear message on "the cost of doing nothing," it is unclear if there will be sufficient political interest in 2027 to revisit the legislation (particularly absent Newsom's support for reform) to improve further California's wildfire framework, which is key to unlocking PCG's terminal value and associated upside.
Despite the significant relative discount to its utility peers, we are downgrading PCG to Market Perform and reducing our target price to $21 to reflect revised wildfire liability assumptions in our MTM/SOTP framework. While we still employ the framework that discounts the liability to PCG shareholders from future wildfires through 2040, we raise assumed liabilities above the 20% T&D liability cap for fires beyond 2030 to reflect a depleted fund/eliminated liability cap. While our revised target price still implies meaningful upside capital appreciation, without the visible prospect for a meaningful improvement to the state's wildfire framework, we believe PCG shares will struggle to find both dedicated and generalist sponsorship, leaving the stock range-bound despite its attractive absolute valuation (~8x).
Thalacker outlined a downside scenario that values PG&E at just $3 a share if wildfire claims exhaust the state fund and adverse regulatory outcomes follow. His upside case reaches $35 if lawmakers enact meaningful reform in 2027.
California Democrats need utilities to invest tens of billions of dollars in grid reliability, wildfire prevention, electrification, and power capacity for AI data centers. Yet, lawmakers have refused to provide the liability framework needed to attract new investment.