PG&E Downgraded by Wells Fargo, BMO as California Wildfire Reform Falters

Wells Fargo and BMO Capital Markets downgraded shares of PG&E Corp. (PCG), citing the failure of California lawmakers to deliver meaningful reforms to the state's wildfire liability framework. The lack of legislative protection leaves the utility exposed to potentially open-ended costs from future fires, increasing long-term uncertainty for investors.

Analyst Actions

Two major investment banks lowered their ratings and price targets for the California utility, directly linking the move to the legislative outcome.

• Wells Fargo cut its rating on PG&E to Equal Weight from Overweight and lowered its price target to $24 from $25.
• BMO Capital Markets downgraded the stock to Market Perform from Outperform and reduced its price target more sharply to $21 from $28.

Both firms noted that the recently proposed bill, SB492, failed to provide the investor protections they had anticipated. Analysts highlighted that the legislation did not include a per-event liability cap, a mechanism to replenish the state's Wildfire Fund, or a bar on insurer subrogation.

Quantifying the Risk

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The legislative shortfall makes it difficult for investors to accurately assess PG&E's long-term financial exposure to wildfires. The recent Eaton Fire has already raised questions among analysts about the durability of the existing liability framework.

BMO stated it now assumes uncapped wildfire liabilities for PG&E beyond 2030. The firm increased its estimated liability drag on the company's valuation to $10 per share, up from a previous estimate of $6. BMO's analysis presents a wide range of potential outcomes, with a base-case valuation of $21, an adverse scenario at just $3 per share, and a constructive reform scenario at $35.

Outlook and Capital Allocation

Despite the downgrade, BMO's adjusted earnings per share estimates for PG&E remain unchanged, indicating the ratings change is driven primarily by increased risk rather than weaker operational forecasts. Analysts now expect PG&E's management to adjust its capital allocation strategy in response to the heightened uncertainty.

Wells Fargo suggested the company could moderate its rate-base growth to fund a share repurchase program of approximately $3 billion through 2030. BMO, however, sees an increased dividend as a more likely path, projecting a potential dividend of about $0.50 per share in 2027.