Successful and long-lasting businesses are all about capturing and creating value. Value creation or value added can broadly be defined as taking an action where the benefits of the action exceed the costs of the action. For example, value creation can manifest itself through increased quantity and improved quality. Value capture has to do with retaining a portion of value in a transaction with the consumer and is typically achieved through pricing. When looking at environmental products or services, the role of creating and/or capturing value may not be readily apparent. Continue reading
This is Part 2 of a 2 part blog post on utility financial risk. Part 1 focuses on utility revenue risk, and Part 2 focuses on utility debt risk.
In our first blog post on utility financial risk, we discussed how debt risk in addition to revenue risk were significant contributing factors in the Energy Future Holdings bankruptcy, the largest bankruptcy of a leveraged buyout on record. While it is relatively rare for utilities to declare bankruptcy, it is not unusual for utilities to carry high levels of debt. In fact, utilities often have capital structures with high amounts of debt combined with highly rated credit quality, signaling that they have a strong ability to repay that large debt. Typically as debt levels increase, the risk and cost of bankruptcy increases, and credit quality decreases. The degree to which bankruptcy risk increases as debt increases varies between companies and industries. For most companies, there is a certain optimum level of debt where the company balances out the benefit of a tax shield and the risk/cost of bankruptcy. Determining this optimal capital structure is difficult for all companies, not just utilities.
This is Part 1 of a 2 part blog post on utility financial risk. Part 1 focuses on utility revenue risk and Part 2 focuses on utility debt risk.
On April 29, 2014, the Texas-based utility Energy Future Holdings Corp. filed for Chapter 11 bankruptcy, ending the largest leveraged buyout on record. Utility bankruptcies in general are rare, but even outside of the utility realm, a bankruptcy of more than $40 billion in an asset-based industry is unheard of. So naturally many of us are left asking questions – what went wrong and are other utilities at risk of going bankrupt? Continue reading