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Wells Fargo Still Cautious On California Utilities

Wayne Duggan

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 (NYSE: EIX).

Kalton also reiterated a Market Perform rating and $20 target for PG&E Corporation (NYSE: 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

Latest Ratings for EIX

Date Firm Action From To
Mar 2019 Bank of America Upgrades Underperform Neutral
Feb 2019 Morgan Stanley Maintains Equal-Weight Equal-Weight
Feb 2019 Wells Fargo Downgrades Outperform Market Perform

View More Analyst Ratings for EIX
View the Latest Analyst Ratings

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