PG&E Receives Multiple Upgrades Following New California Wildfire Legislation

The state of California last week passed SB 901, a piece of legislation that includes language that reduced the wildfire liability risk for PG&E Corporation PCG. Wall Street is taking notice, and PG&E stock received a pair of upgrades.

The Analysts

Bank of America analyst Julien Dumoulin-Smith upgraded PG&E from Neutral to Buy and raised her price target from $48 to $56.

Evercore ISI analyst Greg Gordon also upgraded PG&E from In-Line to Outperform and raised his price target from $50 to $52.

The Theses

Dumoulin-Smith said the new legislation essentially caps the amount of exposure PG&E shareholders have for the 2017 California wildfires.

“While the true level of the ‘cap’ may not be known until 2H19, we see worse case scenarios as now off the table given securitization of costs would be allowed above the cap,” she wrote in a note.

Dumoulin-Smith said total claims related to the fires will likely now be under $10 billion, and the potential for major equity dilution is much lower than previously feared.

Gordon said the California legislation wasn’t a best-case scenario, but it likely removes the worst-case scenario from the table as well.

“This bill is far from perfect but should create a path for the CPUC to work with PCG to apportion and pay off wildfire claims without causing the company significant financial distress,” Gordon wrote.

He said the stock is currently discounting a massive and unrealistic liability related to the fires, opening up the possibility of a major rally once actual liability is determined. Evercore’s $52 target includes $12 billion in projected liabilities for the 2017 fires.

Price Action

Wall Street seemed to appreciate the implications of the new legislation on Tuesday. PG&E stock traded higher by 2.7 percent to $47.47 at time of publication.

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