Liquidation Scenario
I'm looking at a company that sells 5 year fixed price natural gas and electricity contracts to residential and commercial customers. They make their money by taking the margin between the price they charge customers and the price they pay to hedge those contracts.
As of the latest quarterly statement, the company says they have $2.1B in "embedded margin". Basically, if they shut down and let their contracts run their course over the next few years, they would take home $2.1B in margins.
Now let's say the company is forced to liquidate today. Would the liquidation value of the company be their assets - liabilities plus the present value of the after-tax future "margins" over the next few years? I am not experienced with liquidations, so I'm not even sure if the company would even be able to collect for the next 5 years after going bankrupt.
Keep in mind each year about ~10% of contracts will be lost due to attrition (people move, can't pay etc.).
How would you determine the liquidation value of this company?
Bankruptcy provides for assigning contracts, so these contracts should be able to be assigned to a buyer. I don't know that the hedge instruments can be assigned though -- not sure how that is structured (fwd, future, etc). Obviously, you need to sort that out to determine if they are able to assign both sides of this deal to a potential acquiror.
This asset would not likely sell very well at auction. I would say that you PV the margins. Discount rate based on some sort of set of downstream oil/gas companies, emphasizing companies that are more consumer facing. Then use a historical rate of attrition and discount the PV further by that.
At first glance, it seems like the only way this company could get into a situation where they need to liquidate is is if the position moved so far against them so quickly that they were not able to rehedge their position as the hedges expire. Am I wrong?
Talked to a buddy -- commodity based future/forwards are the subject of heavy litigation recently. You need to get some clarity on the specifics of your situation before you can put anything together with any certainty.
Long story short, the BR code provides exemption from the automatic stay for commodity based contracts. It is likely that, in BR, consumers would be released from their contracts and the hedge counterparties would be released as well. In that case, the value is pretty close to assets - liabilities.
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