Well Fargo Downgrades Edison International On Liability Legislation Pessimism

PG&E Corporation PCG has rallied more than 18 percent since the company officially filed for bankruptcy on Jan. 29. However, one Wall Street analyst said he is increasingly pessimistic the state of California will modify its wildfire liability laws to help protect its public utilities.

The Analyst

Wells Fargo analyst Neil Kalton made the following adjustments to his California utilities coverage:

• PG&E reiterated at Market Perform, price target raised from $10 to $20.
• Edison International EIX downgraded from Outperform to Market Perform, price target cut from $66 to $65.
• Sempra Energy SRE reiterated at Outperform, price target raised from $126 to $128.

The Thesis

PG&E's stock appears to have rallied after multiple Wall Street analysts stepped in and said the company’s bankruptcy may not hold up to legal scrutiny given the company’s relatively stable cash flow situation. However, Kalton said investors banking on California to change its liability laws will likely be disappointed, at least in the near term.

Kalton said there’s simply too much risk of wildfire liability for Edison investors to continue to recommend the stock.

“Our downgrade reflects our increasing pessimism that there would be meaningful change to CA’s inverse condemnation (IC) law in the near-term,” Kalton wrote in the note.

At the same time, he said listed three reasons Sempra investors can sleep easy at night, even without IC legislation:

1. Sempra’s business is diversified, with less than a third of its EPS coming from California utilities.
2. Sempra’s service territory in California is less than 10 percent the size of PG&E and Edison’s.
3. Sempra is the gold standard in wildfire prevention and mitigation protocol.

Edison International traded around $58.13 per share at time of publication.

Related Links:

Morgan Stanley: 6 Questions For PG&E After Utility's Bankruptcy Filing

PG&E Officially Files For Bankruptcy