Texas’ Historic Snowstorm Not Only Wreaked Havoc on Their Power Grid, But on Power Companies As Well
Winter 2021 dumped snow and ice across the nation. Uri is one storm that will go down in history as one of the most devastating natural disasters in history. However, what kind of storm has the power to disable the Lone Star state and bankrupt at least three energy suppliers? The details behind the fallout may surprise the public.
The Calm Before the Storm
Despite meteorological evidence, there was truly no way to predict the ultimate energy demand that Uri would create. Hindsight points to a lack of preparation and undue strain on already weakened grid systems. Historical data simply did not support a need for preparation across every energy system.
Never before did a seasonal weather event affect natural gas, electricity, and renewable energy sources, in addition to other utilities, quite like the recent storm. Families affected by the freezing temperatures could not remember any other time that the weather was so harsh for so long. Likewise, there was no indication that the extended outages would become uncontrollable amid completely unyielding weather conditions.
Multiple communities and an untold number of families were affected by the resonating effects of the harsh and unrelenting winter this year. Pipelines across Texas and much of the Southwest were frozen, stalling the delivery of crude oil and natural gas. One by one, power grids dimmed and finally fell completely dark.
Unable to cope with the crushing blow, energy companies began to assess their financial options. Even with all equipment thawed and working, energy resource reserves were dangerously low. Refineries, wind farms, and suppliers reviewed their losses in terms of long-term impact. Many conducted internal audits and sought external appraisal services.
Industry Giants Surrender
Seven Electric Reliability Council of Texas (ERCOT) board members resigned amid the chaos. The CEO of the regulatory agency was terminated and top executives provided deposition statements about that state of affairs.
Unable to meet financial obligations while waiting for subsidiary payments, Griddy, Just Energy, and Brazos Electric sought relief through public announcements. Unfortunate circumstances surrounding the perfect storm forced one of the oldest and largest power producers in Texas into bankruptcy. In a press release filed by Brazos Electric Cooperative on March 1st, managing members outlined a plan for financial reconstruction.
The initial plan is to prevent further losses and protect members of the cooperative. Understanding the mounting costs and unavoidable pass through to retail customers, the established energy mogul has prioritized action measures. Representatives will assist with ongoing review and investigative resources.
Planning Next Steps
For more than three decades, Appraisal Economics has offered expert appraisals and valuation services specific to the power plant and electric power generation industry. Our leading experts in the field can decipher relevant data and help our clients reach the best outcomes for unique circumstances. Further, Appraisal Economics has extensive experience performing reliable appraisals in connection with complex bankruptcy proceedings.
The major storm in February 2020 ravaged the land from Northern Mexico all the way to Canada. Aside from blizzard conditions, traffic accidents, and loss of business revenue, a much greater fallout occurred. The Texas power crisis proved to be among the worst industry upsets in history. Damage done in less than one week will take years to fully unravel.
More than a decade has passed since the inception of cryptocurrency. Skepticism came in many forms and from many different avenues, but the investment platform remains strong and even continues to expand.
The curious entry of new, non-retail investors opting for crypto now has some financial theorists wondering if cryptocurrency could be on the verge of replacing the gold reserve.
The Rise and Rise of Cryptocurrency
Within the first few weeks of 2021, Bitcoin effectively broke every record high for crypto trading. These unprecedented activity levels created mixed reviews with investors. Analysts were surprised by some of the newcomers on the scene, including hedge funds and Tesla.
Even savvy investors felt a bit of uncertainty surrounding the latest trends and what they could mean for the future of crypto. Would traditional retail investors be pushed out of the market? Is the current bull market an anomaly? A bubble? A sign of what the future may hold? Most importantly, cautious investors want to know when enough is enough.
Measuring a Phantom
Establishing reliable data on the crypto market has not been an easy task for even the most seasoned advisors and analysts. Not only are the underlying investments difficult to accurately follow, but the investors are also temperamental. Determining the valuation with so many variables in play requires expertise that far exceeds industry standards.
Coupled with an extremely volatile trading history, the crypto market faces a litany of speculation from new and current investors. Skittish investors and day traders inflate gains and losses, making it far more difficult to gauge long term outcomes. A current behavioral risk stems from investor activity as the COVID-19 pandemic abates.
If non-retail investors continue to rapidly enter the crypto market just as retail investors pull back, the trend could see a quick upset in the balance of stakeholder volume.
Beyond the Bull
What this means for the bull market, earnings, and future activity depends on your perspective. Tax implications and volatility continue to sway investors toward or away from cryptocurrency. Traders have specific reasons for joining a particular niche or market, and that sometimes includes selling at a loss. Investor activity can be difficult to predict, but general trends develop over time and provide relatively reliable market indicators.
New investors are on the scene, and new currencies are also emerging. Several other currencies have joined the ranks and these newer options are splitting investor loyalties. Stock valuations, by nature, can be particularly detailed. Add in specialty data like that found in hedge funds or cryptocurrencies and you realize the depths required to create an accurate appraisal.
When it comes to decrypting the cryptocurrency market and associated trends, a valuation must be comprehensive and unbiased. Traditional statistics and behaviors must be proportionately compared to irregular factors introduced by stimulus packages and unexpected investors. If you need solid conclusions and trustworthy crypto valuations, trust the experts at Appraisal Economics.
A number of new trading platforms have emerged in an effort to engage new retail investors. The resulting push toward individual wealth management birthed a generation of active day traders. What this group lacks in value they more than make up for in volume.
Financial analysts and economists could not have predicted that this community would engage in battle with hedge funds in a volatile market.
Short Squeeze Recovery
Headlines exacerbate the volatility of high trading days. This generally serves to create more of the same behaviors that sparked the originating activity. The sharp rise in stock prices due to excessive short sells steeply inflate both market activity and demand for a particular stock.
Recent events related to top retail outlets bring light to a new trend of short squeeze activity. Pooled hedge fund investments depend on high trading volumes and turnover to increase returns. Risk management within this investment vehicle requires leverage and impeccable timing.
Worth the Risk?
Short selling is a major strategy for hedge funds. Experienced fund managers are quite familiar with short squeeze tactics and factor in the additional risk when contemplating investment options. The most recent scenarios have some hedge fund risk analysts skittish.
The unprecedented growth of new investors driven by the global pandemic has created a new risk factor that fund managers must now consider. The lure of the return is now balanced with the uncertainty of the outcome. Hedge funds face investment challenges today that simply could not have existed even a decade ago.
Bubbles, bankruptcies, and bailouts are part of the natural investment cycle in a free market economy. Navigating through those circumstances requires a solid understanding of the impact and a plan to circumvent potential disasters. Unfortunately, inexperienced investors make it more difficult for other investors to accurately gauge their own best moves. What retail traders lack in monetary value, they make up for in group numbers and trading volume.
There is no easy answer to the short squeeze dilemma. The potential for fast and steep gains is simply too hard to resist for some investors. Hedge fund managers must be able to effectively delineate between the wants and needs of their investor base.
Appraisal Economics provides exceptional valuation services for hedge funds and private equity firms. Our expert services range from valuations of portfolio companies to complex securities. For over 30 years, we have helped fund managers navigate the challenges surrounding complex valuations.
Promissory notes are issued for a number of different situations. They represent a promise by one party to pay another party a specific amount of money at a future date. Guidelines surrounding the instrument can be vague when it comes to the legalities of an issuance. There are a few ways to confirm if a promissory note is quite literally worth the paper it is written on.
Parties to a Promissory Note
A promissory note is similar to many other business contracts. The issuer, or the borrower, is promising to pay a predetermined amount under specific terms. The holder of the promissory note, also called the payee, agrees to the undersigned terms and conditions of the note.
Both parties are held to the specifications of the agreement. This may include the payment amount, repayment time period, interest rate, and stipulations for nonpayment. Some details, such as the payment date and acceptable methods of payment, may be negotiable and subject to change. Other factors, such as required security instruments and default conditions, are firmly built into the conditions of a promissory note.
Intrinsic Value of a Promissory Note
Similar to other debt instruments, promissory notes offer a level of inherent value. Depending on whether the contract is secured or not, the owner may be able to leverage the value of a promissory note. Sole proprietorships, small businesses, and large corporations all have the capacity to carry line items in their financial records that reference promissory notes.
Simply holding the rights to a debt instrument does not guarantee a steady stream of income. Users are entitled to the funds, but may have to resort to collection activity in order to recoup missed payments. The true valuation of a promissory encompasses both obvious and unseen dynamics. In order to truly understand the full scope of benefits and consequences of a promissory note obligation, a valuation must be performed.
Comprehensive Valuation Processes
Certified valuation experts have the innate ability to analyze promissory notes based on valuation criteria. A comprehensive appraisal process considers a multi-pronged approach to valuing promissory notes. High-net-worth families are often faced with settling an estate that includes one or more promissory notes. Corporations also typically manage a myriad of debt instruments.
Appraisal Economics has decades of experience valuing a wide range of debt securities from simple promissory notes to exotic instruments with complex terms. We have valued unsecured promissory notes due from individuals, illiquid auction rate municipal securities held by publicly traded companies, and credit facilities with complex embedded derivatives. After a thorough analysis, we will provide a complete USPAP compliant appraisal report that clearly details credit risk, intrinsic value, and potential future gain or loss. Please contact us if we can be of assistance.
Entrepreneurs put a lot of thought into their business plan and painstakingly establish each step of the process to ensure success and longevity. Before they open their doors for the first time, business owners typically have a good understanding of their overhead costs, payroll expenses, and expected profit margin. Unfortunately, few owners are as well prepared when it comes time to sell their business and have little understanding of how to truly value their business.
Determining Fair Market Value
Your brand is priceless. Likewise, the physical, mental, and emotional work that built your business cannot be bought. Still, these intangible factors should be considered during the business valuation process.
Before you find yourself too far down the path to selling your business, realize that help is available. Experts in the specialized area of your industry can provide insight and help you through the process and help ensure a successful transaction.
Have you considered how your customers influence the market value of your business? The years spent managing relationships and building a loyal customer base have intrinsic value that should be accurately reflected in your asking price.
With a proper upfront contract, your customers will continue to patronize the business regardless of the new owner. The value is clear, and must be outlined for the potential buyer.
Just as customers create and identify with your brand, employees also lay the foundation for the net worth of your business. Salary and total compensation packages might be eligible for consideration in your business valuation. Even if the current employees will not be transitioning to the new company structure, the training investments and payroll expenses can be factored into the overall value of the company.
Physical inventory is an important part of a business valuation. Vendor relationships and assumed discounts can easily be overlooked. Leverage the trade agreements you have accumulated and founded over the years by including their value in your bottom line. A thorough valuation will ensure that tangible assets, accounts receivable, and other items of value are considered when determining the fair market value of your business.
In just these three simple examples, you can see how the value of your business is heavily impacted by relationships. For more than three decades, Appraisal Economics has assisted businesses just like yours. We are here to help.
Despite ongoing political turmoil, President Joe Biden has maintained his commitment to major green initiatives such as environmentalism and climate change. The effects of his combined leadership and intentionality are poised to quite literally change the world.
Climate Change Awareness
Joe Biden continually and effectively raises awareness of the detrimental threats resulting from climate change. He coined a Clean Energy Revolution, which quickly gained momentum and outlined a plan to address major issues with a greater sense of urgency. The bold and influential address covers everything from individual health to national security as they are impacted by climate change.
Clean Energy Initiatives
Countries around the global have focused on finding solutions to the reliance on rapidly depleting fossil fuels. Large corporations and individual families alike are becoming increasingly aware of their carbon footprint. Several enterprising and lasting approaches to energy conservation have resulted from the education regarding and the pivot towards clean energy.
Solar and wind power are the most popular and easily attainable sources of sustainable energy. Developing nations and rural communities often struggle with some of the worst effects of pollution and climate change. At the same time, they are usually powerless to make positive changes because they lack resources to implement necessary improvements. Solar panels and wind turbines are inexpensive and dependable solutions for many of these at-risk communities.
Planning for Change
While it is certainly a lofty goal for the United States to host a carbon free power sector by 2035, Biden has planned for success. With more than $3 trillion allocated for climate change programs, the overall push for zero net emissions within the next three decades does seem plausible.
The initial implementation phases are an investment in the future, but these initiatives are not always met with applause. Detractors and corporate entities that want to move forward but are still tentative require education and understanding to make the best decisions. As the European Union and United States take the lead on wind and solar energy campaigns, the trickle down effect comes into play.
Incentives and Valuations
Incentives inspired by existing programs like the Paris agreement have sparked growing interest on a corporate level. Consumers are demanding that their favorite brands source and produce products with sustainable intentions and a solid dedication to positive or neutral environmental impact.
The push to end climate change comes with fiscal challenges for utility companies, government agencies, and private organizations. New systems may be required to capture cost savings, qualify for tax incentives, and accurately report data. Specific valuations for wind power and solar power are necessary to fully understand and assess the long term cost savings and other important information.
Appraisal Economics provides full service valuations of wind and solar facilities across the world. From the initial site inspection to the final report, our staff brings unparalleled engineering and valuation expertise. Trust Appraisal Economics for your next renewable energy appraisal.
Estate planning is often complicated by rather hefty state and federal restrictions placed on the transferring of financial assets and real property. You must perform your due diligence and explore options to protect your assets before laws change again.
Advance planning tools like family trusts and freeze partnerships can help safeguard wealth for the efficient hand over to future generations. These insightful strategies offset tax liability and protect generational wealth for an extended period.
Although there are a variety of trusts available for large estate planning, preferred partnerships are often overlooked by the majority of estate attorneys. The aptly named Freeze Partnership offers a hybrid mix of benefits and can significantly impact tax liability for owners and heirs.
The first benefit of a freeze partnership is that it offers more flexibility than some stringent trust accounts provide. The Grantor Retained Annuity Trust (GRAT), for example, offers a safe haven for financial assets, but requires excessive maintenance. The grantor directs assets into an irrevocable trust at a tax discount, but is limited in the annual payments permitted.
A Freeze Partnership is an active agreement that provides more fluidity than most trusts. Grantors can schedule the involvement of active or non-controlling stakeholders. By indicating different levels of partnership, such as a preferred class and common class, estate planners can further divide assets and maximize efforts to reduce tax liability.
As with most limited partnership agreements, freeze partnerships share both the benefits and the liability among its members. Proactively monitoring and freezing assets at current prices offers the potential to significantly discount the standard tax valuation. Although there are still many unknown factors, setting a limit on the value of assets provides protection against unjustly high tax rates for future generations.
Investors and estate planners have been working for decades to limit taxable income and reduce inheritance taxes. Over time, there have been trusts and loopholes that practically eliminated heir tax liability.
Formatting these estate planning resources is similar to creating an investment portfolio. The underlying investments will drive the performance of the overall holdings. Some assets may not belong in a trust or limited partnership, but could be gifted in other ways. Charitable donations and other tax deductible offerings should be planned in advance and in conjunction with overarching estate planning. This foresight will eliminate unexpected needs for cash on hand and limit the estate maintenance required.
Assets such as real estate, which are expected to naturally appreciate over time, are perfect candidates for inclusion in a freeze partnership. Stocks and other, more liquid, asset forms also have a natural place in established freeze partnerships.
The creation of complex or irrevocable estate planning resources requires careful thought and planning. These tools are certainly beneficial and open the door to a plethora of discounts and tax benefits, but the process should not be taken lightly. Unintended consequences could result from lack of understanding or poor execution.
Your legacy represents your hard work, reputation, and diligent consideration for future generations. These values belong in the hands of capable, trusted professionals. Our team at Appraisal Economics can assist you with all your estate and trust planning needs.
Political election processes can be a mixed bag of emotions. Anxiety and apprehension are intermingled with both anticipation and excitement. Considering the already tumultuous global conditions, the 2020 election has produced even more turmoil than could have been expected. Below, we take a look at how this year’s election will impact estate planning.
Implications of the 2020 Election
Taxes are a typical point of contention for presidential debates and the subsequent election period. Throughout 2020, a number of new and unprecedented issues arose. While the pandemic and economic status were major headlines, proposed changes to estate planning laws quickly rose to the surface.
The potential fallout extends well into the estate and tax planning arena and has left individuals, couples, and businesses reevaluating their estate planning theories. Recent tax reform legislation known as the Tax Cuts and Jobs Act was enacted in 2017 but was anything but uniform. Revisiting this Act is one of many tax law changes that could be on the table.
Exemption Level Changes
One of two main effects on estate planning is the exemption level for married couples in relation to gifting. The current maximum exemption is $11,580,000 for an individual and just over $23,000,000 for married couples.
If proposed guidelines are accepted as proposed by the Democratic party, this generous exemption would significantly change. Under new tax guidelines, the tax exemption for married couples could be restricted to about $7,500,000. The remaining gap would be severely detrimental if not resolved in a timely manner.
The timing of these changes will essentially negate any previous attempts to extend favorable tax laws beyond the 2026 scheduled end. The Trump campaign hoped to enforce an extension for existing trust and estate planning guidelines. That no longer seems likely to materialize. Individuals who have already finalized their estate planning may be forced to revisit their financial plans according to new guidelines.
Increased Tax Liability
Another major tax consequence for individuals of high net worth is the proposed changes to gift tax rate guidelines. Current inheritance or gift tax rates for any assets over the exemption amount is a hefty 40 percent, but that would increase under the new proposal set forth by Democratic legislative committees.
Raising the gift tax rate presents an immense and unanticipated burden for the high net worth population. Individuals and families who have already performed the due diligence associated with estate planning are now taxed with revisiting their current strategy. The hard work of revisiting well laid plans creates undue emotional and mental stress, and may have to be rushed in cases of individuals with a terminal illness.
Other Proposed Challenges
To conclude these changes in an unparalleled approach to tax reform, the Biden administration has proposed an elimination of the base adjustments of asset appreciation for heirs. The current plan allows beneficiaries of an estate to bypass capital gains taxes by adjusting assets to market value upon death of the owner taxpayer. This break allows heirs to liquidate assets without realizing the subsequent capital gains tax. Under the new plan, there is no relief through basis adjustment, and capital gains tax would be due immediately with no recourse.
Although the effects of the 2020 election are prohibitive, there is relief in knowledge. Estate and trust planning experts like Appraisal Economics can help you plan or amend an existing plan to make the most of an unpleasant situation. Contact us today to get started.
The far-reaching impacts of COVID-19 continue to unfold. As the year draws to a close, we have not only seen the pandemic’s immediate effects on various sectors, but how these sectors will be changed even once the pandemic begins to subside.
We know that COVID-19 has left no industry untouched. We have written about how the pandemic has impacted REITs, sports franchise valuations, and M&A transactions, but this blog will focus on how COVID-19 has uprooted litigation activity and how the rebound time for the legal industry is projected to lag behind many other industries.
Cases Stalled Due to COVID-19
The most obvious impact of the global pandemic on the legal system is the government mandated shut down of non-essential business activity. Although the judicial system is largely considered essential, the only areas that truly remained open at full capacity were detention facilities.
Court records from available quarters in 2020 indicate no slow down or reduction of cases filed in local, state, and federal courts. While general filings remained at or near peak averages, the functionality of the Court was fairly stagnant in most areas. Some courts stubbornly refused to make concessions for legal professionals to prepare for litigation activity in light of social upheaval.
Litigation attempts continued to pour in, while administrative judges and court clerks had to reposition quickly to remain in control. Video conferences, written and recorded affidavits, and other virtual records have been admitted into evidence or Court record in an attempt to stay abreast of litigation activity during the pandemic.
Litigation Involving COVID-19
Another major impact of COVID-19 on litigation activity is the number of cases involving the virus itself. While most subcategories of litigation cases remained near par, the number of product liability nearly quadrupled in number.
While the large majority of these cases are still active, it is not too speculative to consider some causes of this drastic rise in litigation in the area of product liability. Personal protective equipment standards fluctuated greatly during the height of the pandemic. Frequent supply chain hiccups and government redirection of some items to healthcare facilities led to several product shortages.
Coupled with the lack of consistent and thorough oversight, these situations led to lawsuits in a number of different industries. Employees individually and en masse filed suit against employers for failing to provide required safety precautions in the workplace. Individuals and organizations across all fields filed suit against vendors, manufacturers, and even professional affiliations for various product violations.
Even civil suits increased as a result of COVID-19. As with any major health risk situation, the valid circumstances are largely contingent on personal perception. Individuals filed suit either for themselves, or on behalf of others, claiming to be carelessly and neglectfully placed at risk of exposure.
Not surprisingly, frivolous lawsuits are placing increased strain on the legal system. Most of these cases are speculative at best, but even moving forward to the point of dismissal requires a number of resources that are painfully thin in virtually every jurisdiction. Related wrongful death suits are already on the rise and will likely continue over the next several years.
What will 2021 bring with regard to litigation activity? Likely more of the same. Extended deadlines are now looming, but are in direct competition with newly filed cases. The number of active cases in some jurisdictions threatens to reach an all time high, with no viable relief in sight. However, one positive outcome could be the creation of at least contractual employment opportunities. There is almost certainly no reasonably effective way of clearing the current and mounting backlog utilizing only existing human and technological resources.
As litigation becomes more nuanced, it is important to work with experts who understand how to successfully navigate the sector as it is being transformed by the global pandemic. If you need litigation support in connection with a valuation dispute, contact our team at Appraisal Economics.
The commercial real estate market is one area that has consistently and continuously outpaced other investment vehicles. Virtually every city and even the most rural areas experience periodic construction booms.
New shopping centers, self-storage facilities, and mixed-use development areas are popping up everywhere. But the onset of COVID-19 brought countless proposed projects to a screeching halt. New construction and existing facilities, including many properties contained in REITs, have been heavily impacted.
Commercial Real Estate Investments
Real Estate Investment Trusts (REITs) have historically been attractive to investors as an interesting way to diversify their portfolios. Properties owned by the trust are effective investment vehicles for individual investors who would not otherwise have the opportunity to own or invest in commercial real estate. Managing a REIT requires a knowledgeable executive team and a hands-on approach to investing within specific communities. As demographic conditions change, investment opportunities could also be impacted.
COVID-19 Impacts Business and Investments
As the stock market teetered and plummeted due to pandemic conditions, economists began making predictions about businesses of all sizes across many industry sectors. Commercial property management companies took a hit as businesses were forced to close their doors.
Social distancing guidelines, loss of revenue, and multiple unknown factors drove investors to make radical changes. REITs were among the many investments to face scrutiny and uncertainty. The valuation process for REITs is a vital component for any potential investor to understand. These funds are thoughtfully compiled and actively managed to ensure viability. Specialized valuation firms like Appraisal Economics can help you understand the most important factors of any Real Estate Investment Trust before you make the decision to invest.
Short vs. Long-Term Projections
Financial reporting requirements vary based on specific investments and the relevant regulatory agencies. Only specialized valuation firms can accurately assess the foundation and financial stability of a REIT. The underlying value of a REIT is based on a number of unique and variable factors. REIT executives need the support and expertise of valuation firms to help balance the potential for risk and return before choosing an investment. Professional, comprehensive reports clearly outline all options and pertinent information that is necessary for competent consideration.
There are opportunities for long term financial gain from REITs, and it is important to understand the true potential given the current COVID-19 impact. Closures and loss of consumer disposable income contribute to lower-income projections in the short-term reporting period. However, the possibility for long-term growth is also great due to unfortunate changes brought on by the pandemic. Construction for vital structures such as grocery chains, residential developments, and institutional mixed-use facilities continue even during the economic downturn. These projects are creating jobs in the immediate economy and promising huge lease revenue potential over the next several decades. Short and long-term goals and results must be weighed against the current financial condition of the potential investors.
There is no way to deny the sudden and ongoing impact that COVID-19 pummeled on the economy. Commercial real estate has not been exempt from the effects of the pandemic, but they still have great potential for lucrative earnings. The only way to know for sure is to implement the findings of a comprehensive valuation report.