Many US power and utility companies are facing a possible downgrade in asset values for the first time in years. While the SEC accepts revaluations are not an exact science, the best advice is to act early.
Time to reassess the value of your assets?
Valuations of US P&U companies are being hit by significant developments in the sector: the potential retirement of about 20% of the country's coal capacity by 2020 – coal still provides almost half of the US's power – and decreased natural gas prices and sliding debt-rating trends. Market volatility also exists, with many local economies challenged and the introduction of a carbon tax more certain.
Together these challenges mean the industry faces a potential downgrade in debt ratings and lower asset valuations. Power and utilities companies considering an assessment impairment process must act early.
Under US GAAP, the accounting standard codification (ASC) 360-10, Property, Plant and Equipment is most relevant to most power companies. The code is a three-step process that considers whether asset value is impaired, whether the impairment can be recovered and what recovery will cost.
The Securities and Exchange Commission concedes that this is not an exact science and that "significant judgment" is required. However, a consistent and rigorous approach based on strong industry knowledge will produce reliable conclusions, backed by evidence communicated clearly well before year-end.
Most importantly, companies must take an integrated approach to asset valuation, incorporating the process they use to determine their value into core business planning and budget processes.
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Local advice key to reaping rewards in Brazil
A thriving economy and government incentives make Brazil increasingly attractive to foreign investors. Private equity investors ready to do thorough due diligence, deal with local partners and show patience will reap the rewards.
According to many economists, Brazil is now the world's sixth largest economy. It is rich in natural resources, with enormous oil and gas reserves. The unprecedented rise of its middle class is driving huge growth, especially in the food and drink and oil and gas industries, and, a stable government is focused on driving growth through investment incentives and tax cuts.
Brazil's banking system is one of its greatest advantages for attracting foreign investment. Sophisticated, with robust, transparent processes, its banks are, for the most part, shielded from Europe's sovereign debt crisis. Brazil's biggest bank – Brazilian National Development Bank – is government-owned and an important part of its plan to support investments by lowering credit costs.
With Brazil set to host the World Cup in 2014 and the Olympics in 2016, infrastructure is an investment priority. Much work is needed to bring power, oil and gas, transport, sanitation and telecoms up to the standard of more mature economies. Opportunities abound, although the infrastructure limitations should be considered when planning projects.
Brazil's financial profile makes it a good long-term strategy: investors wanting quick returns should look elsewhere. Engage local advisors and be prepared for longer timeframes when closing deals. For many companies, a merger or acquisition may be the best way to enter a market, to gain better access to government tax incentives.
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Shale gas may face new legislative requirements
A new US Government report recommends measures to reduce the environmental impact of shale gas and reassure the public about safety. If enacted, these could have significant implications for the US shale gas industry.
New drilling and development techniques have made shale gas easier and cheaper to access. In 2011, rapid growth in unconventional gas production prompted President Obama to order the formation of a subcommittee of the Secretary of Energy Advisory Board, to recommend steps to improve the safety and environmental performance of fracturing.
In August 2011, it issued its first 90-day report, detailing 20 recommendations and, in late 2011, a second report focused on implementation.
The latest report divides the 20 recommendations into three categories: those ready for implementation by federal agencies; those ready for implementation by state agencies; and those that require more work before implementation.
Half the recommendations are considered ready for implementation at a federal level, including a requirement for companies to disclose the composition of their fracturing fluid, reduce their use of diesel and increase efforts to reduce air emissions.
State-level recommendations focus on managing water quality and will include introducing processes to measure and report the composition of water stocks and flow throughout the fracturing and clean-up process. Five of the 20 recommendations, focusing mainly on best practices, are not ready to be implemented at this point
The report highlights pressure on government to manage safety and environmental concerns as the shale gas industry continues to grow. If these recommendations are introduced into legislation, they may have significant implications for the industry's operational activities. It will be necessary to monitor the recommendations, especially as drilling technologies continue to evolve.
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