PG&E Stock Drops as Wildfire Risk Sparks Downgrades

Key Moments

Analysts Cut Ratings After Disappointing Wildfire Legislation

Investing.com — PG&E Corp shares may face renewed selling pressure after Wells Fargo and BMO Capital Markets lowered their ratings on the utility. The changes follow the failure by California lawmakers to enact what investors had hoped would be more robust reforms to the state’s wildfire liability regime, leaving market participants exposed to potentially unlimited costs from future fires.

Wells Fargo downgraded PG&E to Equal Weight from Overweight and trimmed its price target to $24 from $25. BMO shifted its view to Market Perform from Outperform and reduced its target price to $21 from $28. Both institutions pointed to shortcomings in the recently proposed SB492, which they said did not deliver the liability protections the market had been expecting.

SB492 Seen Falling Short on Liability Protections

BMO highlighted several key gaps in SB492. According to the firm, the bill does not put in place any structure to replenish California’s Wildfire Fund after its current resources are used up. It also does not preserve a liability cap after the fund is exhausted, nor does it meaningfully curtail potential wildfire-related claims.

Wells Fargo made similar observations, noting that SB492 omitted a previously proposed $6 billion per-event liability cap, did not introduce a prohibition on insurer subrogation, and did not repeal the 2028 sunset for the continuation fund.

Long-Term Wildfire Exposure Becomes Harder to Price

The absence of more comprehensive reform is leaving investors with limited visibility on PG&E’s long-term wildfire exposure. Those concerns have intensified after the Eaton Fire, which analysts said has raised doubts about the resilience of the current framework.

BMO stated that it now assumes wildfire liabilities remain uncapped beyond 2030. On that basis, the firm increased its estimated liability drag on PG&E’s valuation to $10 per share from $6 per share previously.

Valuation, Price Targets, and Scenario Analysis

PG&E shares were trading at $16.60 as of Aug. 28, according to BMO. The firm suggested the stock could continue to trade at a steep discount, despite the company’s earnings profile and growth in rate base, as investors continue to factor in the risk of future wildfire liabilities and the possibility of pressure on PG&E’s credit ratings.

BMO’s valuation framework illustrates a wide potential range of outcomes. In an adverse scenario combining challenging wildfire and regulatory developments, the firm values PG&E at $3 per share. By contrast, under a scenario where constructive wildfire reform is achieved in 2027, BMO’s valuation rises to $35 per share. Its base-case target remains $21.

Earnings Outlook Intact, but Risk Premium Rises

Despite the downgrade, BMO did not alter its adjusted earnings per share projections for PG&E. The firm continues to forecast adjusted EPS of $1.65 in 2026, $1.82 in 2027, and $1.98 in 2028. BMO indicated that the rating change is driven primarily by higher assumed wildfire risk, not by any deterioration in operating expectations.

Capital Allocation Responses: Buybacks vs Dividends

Both analysts anticipate that PG&E’s management will revisit its capital allocation strategy in response to the changing risk and policy landscape.

Wells Fargo suggested that one possible approach would be to temper rate-base growth, which could free up capital for shareholder returns. Under this view, PG&E might be able to repurchase about $3 billion of stock through 2030, equivalent to approximately $700 million to $800 million per year.

BMO, by contrast, sees a higher dividend as the more likely priority. The firm envisions a potential dividend of about $0.50 per share in 2027, with remaining excess capital directed to share repurchases.

Sector Positioning: Sempra and Edison International

Alongside its revised view on PG&E, Wells Fargo reiterated its Overweight rating on Sempra and its Underweight rating on Edison International. The firm argued that Sempra’s more limited exposure to California and its expanding Texas transmission operations position it more favorably. In contrast, Wells Fargo noted that Edison’s investment case continues to be constrained by uncertainty linked to potential liability stemming from the Eaton Fire.