Case Study - Utility Company
Our client, an international utility company, was performing renovations in New York City. Unfortunately, a new sports facility sustained damages, which were quite material for the sports facility, during the renovation process. Both parties agreed that the damages were a direct result of the renovations performed. Unfortunately, the utility company was not able to address the financial ramifications or complete the renovations in an ideal manner. To further alienate the sports facility – communication between all parties was limited and litigious.
To complicate the valuation / economic loss determination – the sports facility was a recent “start-up” in that it was in operation less than one year and therefore, historical information was nonexistent. Also, the facility provided very unique services to a niche clientele.
Lakelet Financial Forensics Group (LFFG) was brought in by the utility company to determine an equitable damage calculation and provide documentation of the calculation determination process. Timing was key – the final report and an agreed upon amount for the economic loss had to be completed within 30 days.
Historical information was non-existent, and many of the documents and information used to support the sports facility’s claim were vague, incomplete or missing. These included:
- Bank deposits;
- 2014 tax returns and financial statements;
- Monthly revenue statements from September to March (2015);
- Detailed invoices for all repairs claimed:
- Agreement regarding events scheduled during the “down” time that required a change in venue or cancellation;
- A copy of the sports facility’s business plan to investors and the banks previously utilized for financing, to confirm trends and financial expectations; and
- Because claims were also made that the severity of the damage curtailed the next phase of expansions, a copy of the building permit for the loss associated with the company’s inability to construct a second building.
Based upon a visitation to the sports facility site, meeting with all parties, and obtaining the aforementioned documents - it became clear to LFFG that there was a major discrepancy in what the utility company was liable for. And the validity of the documents was suspect. The amount requested by the sports facility for remediation was approximately 100% over what the utility company believed was reasonable. Accordingly, LFFG requested additional information to facilitate the loss determination.
To cease the adversarial litigious processes, both parties agreed to have LFFG mediate the results of their findings and amounts. The dispute was not over the incident or its resulting impact on the company’s business, but to the monetary value of the economic loss as it related to the incident.
This valuation engagement included:
A conversation with both the utility company and the sports facility’s representatives;
- A representative from LFFG visited the site, taking photographs and video;
- Gathering and analyzing the company’s prior tax information, financial information and profitability, as well as relevant documents and other sources of information provided by or related to the company;
- Gathering and analyzing industry, market, and economic data, along with other empirical information;
- Evaluating the reasonableness of the costs incurred as a result of the incident;
- Timing to have the damages repaired; and
- Exploring a valuation table for sports complexes.
Recognizing at the outset that no two entities are alike and the damages associated with each may generate different financial results, LFFG calculated an amount for the economic losses.
There were several unique aspects that went into this determination, including:
The start-up company had very limited historical information and trends;
- The overall industry analysis was of no material use given the start-up status of the company and its loss position;
- While the company was most helpful, there was limited information available; and
- It was assumed that all information provided was accurate.
Our goal was to ensure that the sports facility was economically whole as a result of the incident. This included accounting for the physical damages, loss of business, and reasonable charges for attorneys, valuators, and accountants. It was LFFG’s professional opinion, based upon the results of the work performed above, that the amounts cited by the company for the economic losses were materially overstated. Rather, the total economic loss associated with this claim was approximately half the cost of the original claim.
After reviewing our analysis with all parties in detail, the owners of the sports facility agreed to accept our results assuming the utility company paid the amount within 10 business days.