U.S. Markets open in 6 hrs 14 mins

PG&E’s Bankruptcy Filing Drags on Utilities ETFs

This article was originally published on ETFTrends.com.

Utilities sector exchange traded funds were among the worst performers Monday after PG&E (PCG) prepares its bankruptcy filing in response to the devastating liabilities incurred during the widespread wildfires across California.

On Monday, the Invesco S&P 500 Equal Weight Utilities ETF (RYU) fell 3.0%, First Trust Utilities AlphaDEX Fund (FXU) dropped 2.7% and Utilities Select Sector SPDR (XLU) decreased 2.4%, with the utilities sector-related ETFs briefly testing their long-term support at the 200-day simple moving average.

PG&E said it is preparing to file for Chapter 11 bankruptcy for all its businesses due to the liabilities linked to the wildfires in 2017 and 2018, Reuters reports.

“A Chapter 11 reorganization for both the utility and PG&E Corporation represents the only viable option to address the company’s responsibilities to its stakeholders,” PG&E’s Chairman Richard Kelly said.

PCG shares plunged 51.6% on the announcement. PCG makes up 2.6% of RYU's underlying portfolio, 2.7% of FXU and 1.3% of XLU.

PG&E will have to tackle litigation, government investigations and liabilities that could potentially hit $30 billion due to damages from the fires last year and in 2017.

Further dragging on company shares and fueling uncertainty, the utilities provider said its chief executive was leaving and was being replaced by General Counsel John Simon on an interim basis.

The utilities company has incurred huge costs associated to the November Camp fire that blazed across the California mountain community of Paradise, the deadliest and most destructive wildfire in the state's history. PG&E had previously stated it faced "significant liability” in excess of its insurance coverage if its equipment was found to be the cause of the Camp fire.

Under California law, utilities are liable for wildfires regardless of negligence.

However, investors have been betting that California lawmakers and regulators could take action to limit the utility's wildfire liability or protect it from bankruptcy.

“The state is going to likely need to be involved in a solution, but how shareholders are treated in that is really, frankly, very unclear,” Stephen Byrd, equity analyst at Morgan Stanley, told the Wall Street Journal. “Just because the state is involved does not necessarily mean that that is a very positive shareholder outcome.”

For more information on the utilities sector, visit our utilities category.