Utilities have always been one of the safest investments around. A few weeks ago, PG&E one of the largest electric and gas utilities in the US, filed for bankruptcy protection because of $30 billion in liability for wildfires in 2017 and 2018 in northern California.
The impact will be wide-reaching for not only consumers whose electricity and gas rates will likely increase but also for suppliers as long-term agreements to sell power to PG&E could be nullified.
Once again, we see an example of hidden risks bringing down a business that everyone thought was immune to financial disaster. If the largest utility has hidden risks that can bankrupt it, what hidden risks do you face in your business?
Black Swans
My recent article Are You Protected From “Black Swans”? describes large exposures that rarely happen but cause catastrophic damage when they do. These are called “Black Swans”. Unless we’ve had something happen to us, we assume it won’t happen in the future. The PB&E bankruptcy is certainly a Black Swan event for many suppliers.
Did any supplier to PG&E realistically think that they could be at risk because a wildfire would force their customer into bankruptcy? Probably not and yet here we are.
We all have hidden risks
No matter what we do to avoid risk, it’s always there. I have a client who tells his own story of doing everything possible to protect his company but something completely unpredictable and beyond his control happened. Both customers filed bankruptcy for non-financial reasons.
His point is that even after doing everything possible to protect his business, there was still unforeseen risk. Here’s him telling his story in a short 2 minute video.
Hidden risks are never isolated
When PG&E went bankrupt, it affected suppliers and started a wave that will ripple throughout the energy sector.
Energy utilities pre-purchase power from solar and wind farms under long-term power purchase agreements (PPA’s). PPA’s are often 10 year agreements had costs per megawatt hour that are 3 to 5 times higher than current prices ($140 per megawatt hour vs. $32 now).
Now, it’s possible that the older PPA’s could be set aside. This could force suppliers into bankruptcy since they depend on the cash flow from PG&E. The point is that there are risks that often aren’t predicted. In every transaction between buyer and seller this is likely to be true.
As a result, PG&E’s bankruptcy may not only cause their suppliers to face cash flow interruptions but will also force the suppliers to the suppliers to face payment defaults.
25% of commercial bankruptcies caused by unpaid invoices. The risk isn’t always with your customer, but your customer’s customer.
What can be done?
Have an honest talk about the hidden risks you face. Don’t assume you’re immune. Take steps to protect your business.
We saw in the “great recession” that financial risk exceeded physical risk in business. Financial risk for most means receivables not being paid.
There are increasing signs of the next recession coming soon. To learn how to protect yourself from hidden risks, email me at tate@tateparker.com or visit https://www.tateparker.com/ and let’s talk!
Recent Comments