Trading Book Valuation


A mid-size Northeast retail power and gas company had the opportunity, as part of their organizational strategic portfolio growth plan, to bid on two books of business that were up for auction. Books included power and gas, residential and commercial contracts, and fixed and variable price volumes. The client wanted to determine whether they should bid on either, or both, books of business, what they should bid for each book, and to better understand the effect these purchases would have on their business from operational, financial and risk perspectives.


MidDel’s consultant built a detailed investment model designed as a vehicle for investors to gauge return on equity and financial key ratios associated with the acquisition assessing many assumption variations. Financing assumptions, contribution margin assumptions to assess the various revenue/margin scenarios for determining NPV given acquisition price, confidence intervals, skewness, income statement, balance sheet, and cash flow statement were incorporated into the discounted cash flow model. Model assumptions and results were summarized in a presentation presented to the client COO.


Using the model results, the client chose to bid on the larger of the two books. The bid was accepted and the book was integrated into the client’s portfolio within 60 days of acceptance.

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