Course
Materials By Week For Corporate Finance I
Northeast
Utilities
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In each of the
sections listed below, I have placed the materials that we will cover that
week. The articles and problems involve the topic from the previous week. Lecture notes on a new topic are also placed
under the week in which I will present them. Some additional materials that you
may find useful appear at the top of this page.
CLASS SYLLABUS
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WEEK 1 INTRODUCTION
TO MARKETS, INTEREST RATES, ETC.
Introduction
Lecture
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WEEK 2 TIME
VALUE OF MONEY BASICS
Time Value Lecture
Introduction
Problems
Introduction
Problems Answers
Short Discussion Articles on Markets,
Interest Rates Etc.
The False Fed
Savior
- What does the title of the
article refer to?
- What is a liquidity trap and
why is it a problem?
- What does the article see as
the main U.S. economic problem?
Unraveling
Reagan
- Why is it likely that we will
see over the coming years more government regulations throughout the U.S.
economy?
- Why do people hold up the
Federal Reserve as a reason that they support more government intervention
in the economy (Obama may propose a Healthcare Fed), and why is this a
potent problem?
- What is likely to happen to
innovation in the economy if government regulations are strengthened? Use
your own observations at NU to help answer this question?
A Soft Landing or Hard?
- How does Duke Energy use economic
information to test and select their business strategy?
- What are the pros and cons of
Duke’s strategy of being an energy merchant with half of its revenue
generated from trading and marketing energy?
- How successful was Duke’s
approach in 2002 and how well do you think it is working in the current
economic downturn?
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WEEK 3 MEASURING
RISK (and Bond Ratings)
Risk Lecture
Standard and
Poor’s Bond Rating - Notching
Standard and
Poor’s Bond Rating - Matrix
Standard and Poor’s
Bond Rating - NU
Time Value
Problems
Time Value
Problems Answers
Group Problem on Time Value
Short Discussion Articles on Time Value
Lightening
the Load
- How do some federal and
municipal government policies involve time value to encourage homeowners
to invest in solar power systems?
- How do some companies that
make solar equipment use time value to encourage homeowners to invest in
solar power systems?
- What is the advantage of companies’
methods to encourage investment in solar power systems compared to
government policies?
- How might a sharp increase in
solar power systems in the northeast affect NU and what profitable
policies or strategies could NU adopt in response?
Credits for
Cutbacks
- How does the Connecticut
efficiency market work?
- Why do you think the state
chose the particular financing mechanism for the household market but not
for the commercial market?
- Why are some worried about
the effects on the market of NU and other utilities?
Nine Cities –
Nine Ideas
- If it costs Chicago $50,000 to build a garden on a
city building and the city can borrow at a 5 percent interest rate, are
gardens a good investment?
- If Aspen can borrow at 5 percent, is their
investment of $1.1 million in the recreation center for reduced power use
a good investment?
- In Thane, India,
they offer a 10 percent discount in property taxes to building owners who
install solar water heaters. How might this policy cause inefficient
incentives, e.g., which buildings are more likely to benefit?
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WEEK 4 VALUING
STOCKS AND BONDS (Case
on Bond Ratings)
Valuation
Lecture
Risk Problems
Risk Problems
Answers
Group Problem on Risk
Short Discussion Articles on Risk
Semgroup Works to Turn It Around
- What caused Semgroup's financial problems and what additional problems has that brought about?
- How has Semgroup
changed its risk management to avoid such problems in the future?
- How can changing Semgroup’s corporate structure help it compete?
Indonesia
- What type of risk must Indonesia’s state-owned utility plan for
that most utilities in the U.S.
do not, and how is the utility responding to the risk?
- What type of risk must Indonesia’s businesses plan for that most
utilities in the U.S.
do not, and how are they responding to the risk?
- Suppose that U.S. regulators adopted policies similar to
Indonesia’s,
what would you recommend that NU do in response?
Nuclear Power
is Headed for a Fight.
- What are the regulatory risks
associated with nuclear power plants?
- Why is the risk growing in
the northeast, and what implications does it have for NU?
- Most claim that nuclear power
is cheap, but what costly risk is not captured in the price of nuclear
power?
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WEEK 5 CASE
ON STOCK VALUATION
Valuation
Problems
Valuation
Problems Answers
Group Problem on Valuing Stocks and Bonds
Short Discussion Articles on Valuation of Stocks and
Bonds
Heard on the
Street
- According to the article,
which utilities are most undervalued and why?
- What is enterprise value and
how is it used in the article to determine value?
- Why might the claim that
utility stocks are undervalue be wrong?
Power Investing
- How should you decide if oil
and gas producers are good investments?
- How should you decide if
utilities and nuclear companies are good investments?
- How should you decide if
alternative energy companies like wind and solar are good investments?
Industry
Splits Over Power Play
- How will Illinois plan to re-regulate wholesale
and retail electricity prices affect utility company stock prices?
- Why is there a split between
the two largest Illinois
utilities over whether they will support re-regulation, and do they have
much choice?
- Given the off-on-off-on
pattern of regulation, what strategy would you recommend that would best
serve the utilities shareholders’ interests?
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WEEK 6 CAPITAL
STRUCTURE AND DIVIDEND POLICY
Hand in Take Home Quiz
on Material from Weeks 1, 2, 3
Capital
Structure and Dividend Lecture
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WEEK 7 BREAK
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WEEK 8 COST
OF CAPITAL
Cost of Capital
Lecture
Capital
Structure and Dividends Problems
Capital
Structure and Dividends Problems Answers
Group Problem on Capital Structure/Dividends
Short Discussion Articles on Capital Structure and
Dividend Policy
Buffet
Rescues Power Firm
- Why did Constellation need an
infusion of cash and how did the infusion affect its capital structure
(i.e. which source of financing increased)?
- How could Constellation have
changed its capital structure one year earlier and have avoided some of
the problems it faced?
- How did Sempra Energy avoid
Constellation’s problem?
Entergy’s Nuclear Spinoff.
- How would Entergy’s spinoff
affect its capital structure?
- How has the capital structure
of utilities with nuclear plants changed over the last year or two?
- Would shareholders benefit or
suffer if the spinoff occurs? Why? How about consumers?
Utility
Merger
- What does the first article
say is the motivation for the NU-NStar merger?
- What does the second article
say is the motivation for the NU-NStar merger?
- How might the merger affect
NU’s capital structure?
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WEEK 9 CASE
ON COST OF CAPITAL and CASE ON DIVIDEND POLICY
Cost of Capital
Problems
Cost of Capital
Problems Answers
Group Problem on Cost of Capital
Short Discussion Articles on Cost of Capital
Money on the
Lines
- Why are utilities investing
more in transmission lines?
- Consider NU’s experience in Connecticut. If
state utility regulators set the allowed returns for transmission line
investments, would you expect more or less investment?
- How is the
investment typically financed?
The
Bottom Line
- How do regulators propose to
create an incentive for utilities to reduce demand for electricity?
- How might the proposal affect
a utility’s cost of capital?
- What are the possible risks
to the utility that you see with the proposal, and could it create
unintended incentives?
Duke and
Progress Agree
- How might the merger affect Duke’s
cost of capital?
- What does the development of
new nuclear plants depend on?
- Normally a merger is
motivated by cost cutting after the merger. How might the Duke merger
differ?
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WEEK 10 BASIC
CAPITAL BUDGETING
Basic Capital
Budgeting Lecture
Hand in Take Home
Quiz on Material from Weeks 4, 5, 6, 7, 8, 9
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WEEK 11 CALCULATING
CASH FLOWS AND NPVs
Cash Flow NPV Lecture
Basic Capital
Budgeting Problems
Basic Capital
Budgeting Answers
Short Discussion Articles on Basic Capital Budgeting
In Search of
Lower Sales
- How should Subway decide
whether to invest in new ovens and remove old ovens that still work?
- Was the investment by hog
farmers in fluorescent bulbs a good one?
- How did the energy management
system for Budweiser work and essentially pay for itself in electricity
savings?
Long Road
- Of the new technologies
listed, which one looks like the best investment? Why?
- What would make an electric
car a good investment?
- What drives many new energy
technology investment decisions that is not part
of most other technology investment decisions?
Business
on an Energy Diet
- What is the payback period
for Wal-Mart’s investments in lighting and air-conditioning replacements?
- Why have some companies been
slow to make more energy efficiency investments? Give examples from
different industries.
- How can a corporation’s organizational
structure thwart energy efficiency investments, and how could a utility
like NU help solve the problem and benefit at the same time?
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WEEK 12 Case
on NPV
Cash Flows and NPV
Problems
Cash Flows and NPV
Problems Answers
Group Problem on Capital Budgeting
Short Discussion Articles on Cash Flows and NPV
Consumers in the
Dark
- Consider the rate structure
of Georgia Power. How can a consumer in Atlanta decide whether to replace an old
air conditioner that uses half the electricity of their current one?
- Georgia Power says it does
not provide consumers pricing information because it was not asked to do
so. Why don’t they do it on their own, like the telephone companies do?
- How could utility companies
decide whether to invest in advanced usage meters for residential
consumers?
Producers
Turning Away from Coal
- How has the cost of pollution
control equipment affected electric generation investments?
- How has the recession
affected electric generation investment decisions?
- What does Duke's experience
with new technology imply for the utility's investment decisions?
California
Utilities Amp Up
- How would you assess the
efficiency and success of PG&E’s new light bulb strategy for
conserving electricity?
- How would you assess the long
term value of investments such as the light bulb subsidy, that is, how
secure are the incentive payments?
- Why might subsidizing
efficient air conditioning be a better investment and why did PG&E
adopt the light bulb strategy instead?
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WEEK 13 BREAK
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WEEK 14 FINANCIAL
ANALYSIS AMD PLANNING
Financial
Analysis and Planning Lecture
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WEEK 15 WORKING
CAPITAL MANAGEMENT
Working Capital
Lecture
Financial
Analysis and Planning Problems
Financial
Analysis and Planning Problems Answers
Short Discussion Articles on Financial Analysis and
Planning
You Can’t
Get There from Here
- How should the expected
growth in wind and solar generation affect NU’s transmission equipment
investment plans?
- Why should plans to expand
the grid start early?
- What hurdles do utilities
face when proposing to build new transmission lines?
Con Edison
Upgrade
- Why is Con Ed upgrading its
grid in Manhattan?
- Why are utilities
“notoriously cautious about new technology”?
- Could NU find superconducting
cable useful for some of its territory?
What
Utilities Learned from Smart Meters
- How would you figure out
whether smart meters are good investments for NU?
- What seems to be the best
strategy, and what problems must be solved to get consumers to accept
smart meters?
- Assume all consumers have
smart meters, how might they affect NU's financial planning?
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WEEK 16 CASE
ON WORKING CAPITAL and ANALYSIS OF CFO SURVEY DATA
Quiz on Material
from Weeks 10, 11, 12, 13, 14, 15
Short Discussion Articles on Working Capital
Management
More
Utility Bills Go Unpaid
- With more delinquent bills,
how should NU change its working capital strategy?
- How can NU estimate an
expected number of delinquent bills for its service areas?
- How is NU trying to deal with
delinquent bills and how can it take advantage of government programs that
assist low income customers?
Falling Behind
Heating Bills
- Why are there likely to be
more delinquent bills during the winter in the Northeast?
- How should NU adjust its
working capital borrowing to account for the seasonal problem that is
exacerbated by economic conditions?
- What variables can NU use to
predict the amount of delinquent bills during the winter?
Fast Cash
- Why are some firms drawing
down revolving loans, even if they don’t need all of the cash?
- How would you recommend that
NU manage its revolving loans?
- Is there a better alternative
financing tool than revolving loans to handle the cash flow uncertainty?
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