The energy market is going through a period of huge upheaval, making it harder than ever for companies to plan ahead.
Thanks to constantly increasing wholesale gas prices and a growing reliance on imports, the market is increasingly uncertain, creating an unsustainable trading environment. It’s no wonder, then, that many smaller energy companies are feeling the pressure more than ever before.
But as ever, help is at hand. If your utility company is facing financial difficulty, read on for our expert utility company insolvency advice and to discover 5 ways to rescue your utility company from the brink.
So, what’s going on in the energy market?
There are a number of factors contributing to the current surge in energy prices, such as increased demand from businesses and households, adverse conditions in the US affecting exports to Europe, and reduced gas supplies from Russia due to the Ukraine invasion.
We know what you’re thinking: surely increased demand and decreased competition is a good thing? Well, in a way it is. However, the reality is that there are huge financial and operational challenges for utility companies in today’s market.
For example, rules surrounding the Supplier of Last Resort are impacting those providers who are taking on customers of now defunct providers, sometimes resulting in them providing energy at lower rates than the wholesale price of gas.
So far, such additional costs have been passed onto the customers by increasing daily standing charges - however, with the cost-of-living crisis continuing to roll on, there’s only so much that can be absorbed by customers before they start defaulting on bills and cash flows become affected.
Plus, with competing demands from consumers, shareholders, regulators, and the government to ensure gas and electricity is supplied at a fair price, whilst also allowing for environmental responsibilities, maintenance and improvement of infrastructure, and ensuring an uninterrupted supply despite the uncertainties, it’s no wonder the pressure is on.
5 ways to rescue your utility company
1. Look out for the warning signs
Without a doubt, one of the most important things you can do in this current market is to keep an eye out for the warning signs of insolvency and take action as soon as possible.
After all, if your utility company is struggling, the sooner you face up to the problem, the more options you will have available - and the bigger chance you will have of turning things around.
Early signs to look out for that suggest there could be trouble ahead include cash flow problems, defaulting on bills, high interest payments on loans or facilities, and falling margins.
So, if you spot any of these warning signs, it’s important to seek advice from an insolvency practitioner as soon as possible.
2. Put together a plan
When you reach out to an insolvency practitioner, one of the first things they will do is assess if your business has a viable future - and if so, they will then put together a business rescue plan to steer your business back to profitability, as well as a contingency plan to ensure it can be robust against potential threats in the future, too.
Your IP will look at every aspect of your business and put together a thorough plan whilst taking advantage of insolvency laws to protect your business and give you a chance to recover. It’s basically a chance to review, regroup, change strategies, and ultimately approach your problems from a fresh a new angle.
Your business recovering plan should accurately reflect the standing of the company and cover key issues including the basic operating budget, cost cutting strategies, the minimum financing needed, and what is needed to keep your business afloat.
3. Get your finances in order
Once you’ve got a plan in place, it’s time to get your finances in order. Review your accounts to see who owes you how much, and carefully review your balance sheets to see what efficiencies could be made. For example, what expenses aren’t essential? By getting to grips with the bigger picture, you can then zoom in on problem areas and begin to cut costs.
Once you know what’s going on with your finances, you need to keep a close eye on your cash flow whilst also seeking alternative avenues of funding and refinancing to drive innovation and boost working capital. Some refinancing options to consider include:
Bank overdraft
If your cash flow problems are short lived, you could ask your bank to temporarily increase your overdraft. You’ll need to prove that the problem is solvable, so make sure you’ve got all the necessary information and evidence to hand. However, beware that you might be asked to provide additional security such as personal guarantees secured against your home.
Factoring and invoice discounting
Invoice discounting is a process where a company raises money against invoices through a financial institution, and factoring is where a company sells its invoices to a funder or bank. Both are very powerful business tools that enable you to raise money from your debtor ledger. The finance company will set up a new bank account in your company’s name to collect customer payments and you will then be allowed to ‘draw down’ those funds when they have cleared.
Stock and asset refinance
Business assets can form collateral for lenders to secure themselves against. These assets can include property, machinery or stock, and used in conjunction with other methods such as factoring, this method can provide a package of new finance to overcome distress.
Director's loan
It may also be possible for directors to raise funds privately and then loan those funds to the business. However, bear in mind that if your business becomes insolvent, repaying your loans in advance of your creditors could create a potential preference (as per Section 239 of the Insolvency Act) if you put money into an insolvent company and then pay yourself back
4. Consider a company voluntary arrangement
If your utility company is facing more serious financial problems that jeopardise the future of the business, a company voluntary arrangement (CVA) is a powerful legislation that enables you to ring-fence your business, giving you the breathing space you need to find a solution.
A CVA is a formal arrangement between a company and its creditors which highlights that although you can’t currently pay your debts, you will be able to in the future. A CVA basically works by enabling you to avoid liquidation and instead focus on paying your creditors as much as you can afford out of your future profits.
It essentially gives you the chance to trade out of debt by paying towards your business debts for an agreed period - and once that period is completed, your remaining debts will be written off.
5. Start over with a pre-pack administration
Alternatively, for larger utility companies that are struggling to pay their debts but would be viable if they could be re-started, a pre-pack administration could be a solution. Pre-pack administration is a legal insolvency procedure that enables you to restructure a struggling company by packaging and selling it to a new company that is often controlled by the same directors.
With a pre-pack administration, a liquidator will be appointed to wind up the existing company and a new company will be set up who can then buy the assets and business. Doing so enables you to minimise the loss of assets and staff jobs.
Once sold, you can restart without your debts. Your business can carry on trading throughout the pre-pack administration process, too.
How McAlister & Co can help
If your utility company is facing financial uncertainty, it’s essential to act quickly. Financial difficulty doesn’t always have to mean the end of your business - and by working with licensed insolvency practitioners, you can find the best outcome for your business as quickly as possible.
At McAlister & Co, we are business rescue experts - so for further utility company insolvency advice, contact our expert team today to discuss your next steps.
