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Going Global: The Top 10 Risks
before doing business overseas.
or Mercosur trade bloc, including neighboring Brazil, Chile, Paraguay, and Uruguay.
Still, outside of the United States, the regions that have grown the fastest over the past few decades tend to continue to grow the fastest. "We have three main regional targets overseas-Europe, Latin America, and Asia-Pacific-where we see liberalizing gas and power markets, and where we think the market economies and political conditions are conducive to the kinds of businesses we want to build," says Morrisseu.
Apart from economic threats to the ability to operate an asset in a given country, the physical operation of the unit can sometimes be a challenge. Securing expensive imported spare parts can at times require a special understanding with local customs officials. And gas supplies suddenly can be diverted to domestically owned customers rather than a utility, for example.
5) Credit Risk
Customer and supplier risk can be crucial, even when a seemingly secure fuel or power purchase agreement is in hand, stamped and approved. When a supplier or customer-particularly a government-is unable to supply or to pay, the legal recourse may provide little comfort to a utility with tough lender covenants. "If I lock in a price on natural gas, but it goes up, whether I benefit or not depends on the credit quality of the supplier. Enron had a lot of these contracts, but now if they go into Chapter 11, the value of those contracts is brought into question," says Stibolt.
Similar to credit risk, collections risk is an issue for companies involved in distribution, particularly in countries where theft of service is a standard deviation, one executive says. In the slums of Rio de Janeiro, for example, gangs that control some of the poorest neighborhoods have in the recent past threatened the lives of linesmen who make calls to correct illegal connections.
6) Interest Rate Risk
When a utility seeks to develop a project, it normally borrows a hefty portion of the price from private lenders, banks, insurers or other financial service entities. Depending on the perceived risk of the developing company, the cost of borrowing may go up or down hundreds of basis points-or thousandths of one percent, regardless of country risk. "If you look at what are classified as utilities, an average rating might be A3, but if you look at developers, it might be Baa3," estimates Abbott. "They want to leverage as much money as possible to do as many projects as they can," she explains. Thus while a company might be able to use balance sheet financing for a project, liquidity positions may necessitate increased borrowing. Apart from cash needed to move a project through construction completion, ongoing operating expenses may also necessitate interest rate hedges. "We hedge against interest rates over a longer term, so we're not taking advantage of some of the lower rates now; but 15 years rates haven't come down that much," one utility executive says.
7) Commodity Pricing Risk
Energy trading companies are as important to a utility as their generation facilities. The pricing of fuel sources, electricity rates, and other factors