Wells Fargo Still Cautious On California Utilities

The long-term future for California utility stocks is riding on the state’s willingness and ability to reform inverse condemnation laws, according to a Wells Fargo analyst — and he's not hopeful. 

The Analyst

Wells Fargo analyst Neil Kalton reiterated a Market Perform rating and $65 price target for Edison International EIX.

Kalton also reiterated a Market Perform rating and $20 target for PG&E Corporation PCG.

The Thesis

California utility investors hoping for a comprehensive inverse condemnation solution from the state in 2019 will likely be disappointed, Kalton said in a Sunday note. 

The best solution would likely be switching standards from strict liability to a negligence standard, and any solution that falls short of that standard will leave the utilities exposed to a dangerous amount of risk, the analyst said. 

The state could potentially meaningfully change wildfire liability laws in the coming months, but the chances of a legally binding resolution that get Edison and PG&E out of the woods appear slim, Kalton said. 

“While we are encouraged by comments made by Governor Newsom that we think indicate a willingness to meaningfully address IC, we are not aware of any legislative momentum for a substantial fix." 

In the meantime, both Edison and PG&E will continue to take large charges relating to wildfire liability.

Kalton’s EPS estimates for Edison and PG&E assume $4 billion and $10 billion in additional wildfire liabilities, respectively.

Wells Fargo is calling for EPS of $4.60 from Edison in fiscal 2019 and EPS of $3.80 from PG&E.

Price Action

Edison shares were down 0.3 percent at the time of publication Monday and PG&E was up 0.34 percent following the latest commentary from Wells Fargo. 

Related Links:

Citi Upgrades PG&E, Raises Price Target By 200%

Well Fargo Downgrades Edison International On Liability Legislation Pessimism