PG&E Stock Plummets. It May Not Be Shielded From Wildfire Liabilities.

The California General Assembly amended key wildfire legislation that didn’t include liability protect for utilities. (Photograph by Philip Pacheco/AFP via Getty Images)

Key Points

• The California State Assembly amends Senate Bill 492 to exclude liability protection for utilities, leaving investors without expected protections.
• PG&E stock drops sharply following the decision. Other utility stocks trade lower.
• The amended legislation doesn’t include Gov. Gavin Newsom’s proposal to block insurance companies from suing utilities over wildfire claims.

The California State Assembly is ready to put liability for wildfire damages squarely on utilities and Wall Street knows how that can turn out.

PG&E stock dropped 16% to $13.97 in premarket trading on Monday as investors were selling shares following the California State Assembly’s decision to amend Senate Bill 492 and not include liability protection for utilities.

Fellow California-based utility stocks Edison International and Sempra declined 15% and 3.6%, respectively.

The main issue for Wall Street is that the amended legislation doesn’t include California Gov. Gavin Newsom’s proposal that would block insurance companies from suing utilities over wildfire-related legal claims.

Wall Street knows all too well how that can play out for PG&E.

The utility in early 2019 filed for Chapter 11 bankruptcy under the weight of massive wildfire liability claims. Shares of PG&E also tumbled between October 2018 and October 2019 and have been slowly attempting a recovery ever since. The utility emerged from Chapter 11 bankruptcy in July 2020.

History might be set to repeat itself if the new wildfire legislation becomes law.

PG&E, in a written statement on Sunday, said the legislation would make some progress in helping wildfire survivors recover but that it “falls short of creating the long-term durability needed to attract affordable investment to support a safer, more reliable energy system and help keep costs down for customers.”

A handful of Wall Street firms also let their discontent be known.

Mizuho Securities analyst Anthony Crowdell wrote Monday the state legislature “largely blocked” Newsom’s push to shield utilities, barred hedge funds from “claim trading,” prohibited executives from receiving bonuses if a utility starts a wildfire that destroys 500 or more structures, and that, overall, the bill isn’t good for investors.

“We view this bill as insufficient in shifting liability from utilities, more focused on victim protections without any new investor protections,” Crowdell wrote.

Crowdell downgraded PG&E to Neutral from Outperform and cut his price target on the stock to $16 from $21. The analyst also downgraded Edison International and Sempra to Neutral from Outperform.

Morgan Stanley analyst David Arcaro on Monday added that the legislation “falls short for shareholders” and that there’s “significant downside” potential for California utilities “in the event of multiple catastrophic wildfires.”

Arcaro also noted that utility stocks will be under pressure if there isn’t a long-term funding solution for California’s $21 billion wildfire fund. That fund is paid for by utility shareholders and ratepayers to cover liability.

With the January 2025 Eaton Fire, which roared through Los Angeles, potentially depleting that fund sooner rather than later, Arcaro warned there isn’t any “ongoing source of funding” which could spell trouble for PG&E and other California utilities.

The amended legislation is currently in the general assembly and will have to be passed by a two-thirds majority vote in both the state assembly and the senate. Morgan Stanley expects the bill to be passed early Tuesday and then head to Newsom’s desk.

The California governor has 12 days to sign or veto the legislation before it automatically becomes law.

Write to Kit Norton at kit.norton@barrons.com

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