Case Studies

Physical Commodity Risk Management

M&A Due Diligence Support for Senior Management Team!

A physical commodity holding company was actively investing its private equity sponsors capital by acquiring targets in the United States. The management team needed support running multiple processes executing the strategy.

Solution: We were hired to support the management team in their M&A efforts. We interacted with a wide variety of stakeholders helping to manage the M&A process. Our role, included developing scenario based investment models, creating “pro-forma” capital tables, negotiating credit facilities and interpreting the contractual provisions to the various stakeholders on both the client and target’s behalf. By managing the details of the various transactions our client and his staff were able to devote more of their time to identifying targets and negotiating the transactions more effectively.

Unexplained Performance Shortfalls and Cash Flow Issues

A private equity backed agricultural business was experiencing significant shortfalls in both its operating performance and cash flow. The shortfalls were threatening to put the company into bankruptcy and wipe-out the investment of the private equity owner.

Solution: The private equity owner requested that we work with the management team to establish an updated operating plan and budget for the business. Once that was completed we built a rolling 13 week cash forecast. At the same time we completed a “3 Factor” model to forecast EBITDA, the Balance Sheet and the Cash Flow statements on a monthly basis for 3 years.

Creation of Upstream Hedging Strategy

Our client, an investor in an oil and gas exploration, operated in unique geography and desired higher returns. The entity sold the majority of their production at pooling points and their well-head with incremental hedging at significant markers such as Brent. Equity investors wanted to add marketing unit to enhance margin netback values.

Solution: We conducted a fit for purpose review of the client’s physical commodity portfolio and identifying opportunities for expansion of the business’ direct marketing and trading activity. We developed new hedging strategies including incremental pipeline transportation investments versus investment required to start a new marketing and trading organization. Our work included organizational design, development of a basis trading strategy, assistance with risk management system selection and defining working capital requirements for the business.

Development of Green Power Mandate for Fortune 500 Business

Fortune 500 company with sustainable procurement mandate looking to acquire green power for its corporate needs. Company has wide national footprint but uneven demand profile that created complexity in program design and pricing.

Solution: Portfolio analysis of load forecasting, mapping against established power provider pools and wind-solar developments. Designed program to procure power, natural gas, renewable energy credits and green power initiatives through customized requires for proposals and joint venture type supply agreements.

Risk Management of Long Dated and Illiquid Commodity

Private equity fund with multiple investors owns an energy-centered portfolio of upstream oil field service investments as direct investment. Their position contained a concentration risk of long-dated and illiquid physical commodity hedges.

Solution: We designed a commodity hedge strategy for their portfolio company to guard against price collapses or basis risk volatility in alignment with underlying company strategies to avoid over-hedging. They benefited from an improved risk-adjusted return for the portfolio.

Cross Commodity Hedging Strategy

A downstream US Gulf coast petrochemical complex with multiple assets and risk related commodity price volatility in ethane and natural gas liquids was concerned about the risk affecting their earnings and reduced investor returns.

Solution: We developed a procurement strategy with committed assets, storage, and transportation. We identified a compound hedging strategy with a combination of liquid financial hedging instruments and physical forward contracts possessing flexible volumetric features that fit the production facilities operational model.

Physical Contracts with Embedded Options

An oil products pipeline and transportation business targeted a supplier of heating oil in the northeastern United States. The target owned a portfolio of end user customers and executed many wholesale physical forward contracts to supply their customers. The target also included complex embedded options into its forward purchase contracts.

Solution: We accompanied the client’s due diligence team to their target’s office to complete the project. Our responsibility was to review and value the physical derivative contracts valuations of the target and perform a high level review and assessment of the target’s marketing and trading staff. During the review we identified the presence of the embedded options in the physical contracts allowing our client to negotiate a more favorable purchase price of the target after considering the presence of these embedded options.

PNL Explained Attribution Report

A global investment bank was implementing a large scale trading risk management system and desired to create a PNL Explained Report. A current report did not exist within the system they were implementing.

Solution: One of our professionals worked with the development team of the bank to develop, test and implement a PNL Explained Report for the businesses linear and option portfolio of contracts.

Enterprise Risk Management

Investor Owned Utility

Inability to start the ERM project which included performing an initial assessment, designing the program and developing the implementation plan.

Solution: Developed a structured approach for defining risk framework as well as its risk • Formalized ERM program charter, work plan, and milestones for interim results and long term improvements. • Compiled key risk register based on multiple risk assessments conducted within the company. • Developed a common risk language across the organization. • Prepared risk scorecards across various business units. • Analyzed linkage between client’s risks to its strategic objectives.

Federal Power Authority

Unclear on Performing Enterprise Risk Assessment The client needed project team specialists to perform an Enterprise Risk Assessment. Areas of needed support included individual assessment of the power transacting line of business, transmission line of business as well as broad based management training on risk management framework, concepts and definitions.

Solution: Designed custom implementation plan Our recommendations outlined an implementation plan to build a sustainable ERM function consistent with the agency’s mission and objectives. Suggestions included alternative risk management programs consistent with the proposed ERM framework and function. A customized risk management curriculum was prepared for the agency’s management team to effectuate solid risk knowledge transfer.

North American Public Utility

Business Unit ERM program divergent from Corporate ERM program

Solution: Our project team specialists evaluated both the Corporate and Business Unit ERM programs. Both programs showed differences in methodology, approach and risk categories. Our team performed multiple variations of assessment to align under one broader ERM program. Assessments covered on-line interviews, in person interviews with senior personnel and subject matter specialists to aggregate views using MARCI (Mitigation, Assurance, Redeployment, and Cumulative Impact) approach to graphically report risk information.

North American Power & Natural Gas Company

Unclear ERM Capabilities

Solution: Perform comprehensive ERM assessment Assessed the client’s “as is” capabilities, as well as those envisioned for the future. Performed detailed gap analysis of existing capabilities to our understanding of ERM leading practices from energy and financial services firms. Identified potential improvement areas including cost savings opportunities.

US Based Mining Company

Lacked ERM program The client was familiar with ERM however, lacked the internal resources and experience to bring concept to reality. The client lacked a formal ERM program and needed assistance in designing, developing and implementing.

Solution: Provided team of ERM specialists to design ERM program which included initial risk assessments across the company, with identification of key group risks. The team also developed a formal risk mitigation plan that was reviewed and approved by Executive Management and Board.

US Based Coal Mining Company

Client had basic risk qualification measures and desired quantitative approaches Risk management activities spanned an array of risk types and all business units. Operational risks were difficult-to-quantify and manage in addition to other risk types. Risk exposures were measured separately and not collectively. Isolated results not taken into consideration of broader ERM impact.

Solution: Development of an enterprise-wide risk measure to enable the company to quantify the complete spectrum of risk types (e.g., financial, operational, strategic, and external) to allow for the integration and aggregation of risks into a single risk profile.

Data Analytics and Quantitative Solutions

Commodity Business in Transition to Improved Risk System

A global trading organization was in transition to an improved risk management system and needed interim support to manage its risk management and PNL reporting.

Solution: We provided subject matter expertise to facilitate the transition by determining requirements for models such as options and natural gas storage. After determining the requirements we assisted the client in implementing the processes and solutions within their new risk management software.

Client Experiencing Operational Risks in Daily Risk Processes

A natural gas and oil trading business was frequently experiencing failures in its daily risk management processes (marking forward price curves, reporting PNL)

Solution: We designed processes with fail-safe protocols and attributions to significantly improve the daily processes and help restore credibility of the risk management and trading organization.

Multiple Systems and Spreadsheets Created Operational Risk

A multi-commodity trading business has messy data from many sources, managed on multiple spreadsheets, resulting in redundant and sometime contradictory analyses across different desks.

Solution: Centralize data collection, quality control, and storage procedures; develop a standardized toolkit and procedural guidelines for statistical analysis; and create custom dashboards via common set of BI tools.

VaR Calculation

An international oil company with significant trading and marketing operations in the United States wanted to develop a stand-alone VaR calculation for its US trading subsidiary. The subsidiary was calculating and reporting its VaR according to a methodology designed by its parent, however the calculation did not represent the specific risks of the subsidiary’s trading and marketing activity.

Solution: Utilizing our deep understanding of the industry and its VaR framework, we assisted the client with the development of it’s stand-alone VaR model. The calculation was developed, implemented and reported on a daily basis providing better analytical reporting to both local trading management and to senior risk managers in the subsidiary’s home country.

Retail Electric Load Forecasting

A retail electric provider needs to manage its purchases of wholesale power, based on expected customer demand.

Solution: Analyze customer data for trends and patterns - such as demand by weather, day of week, customer zip code. Apply predictive analytics to forecasted customer base to understand demand, optimize forward purchases.

Forecasting Natural Gas Pipeline Capacity

A natural gas midstream services company needs to forecast the impact of new pipeline capacity in its market area

Solution: Develop a network flow model that assimilates pipeline data, weather, market prices, and other factors. Create simulations of flow changes with the new capacity under a wide range of weather and market conditions.

Independent Power Producer's Potential Future Credit Exposure (PFCE)

An independent power producer was expanding their service area into a newly competitive power market in the United States. As part of this expansion they were purchasing increasing amounts of wholesales volumes of electricity and natural gas. Their credit exposure calculations did not include potential future credit exposure.

Solution: We identified this gap and helped the client develop a better understanding of its counterparty credit risk. As part of that work we constructed a framework to calculate and report potential future credit exposure on a regular basis. Our work also included developing improved internal credit ratings and a standard set of reports to be used by sales and marketing personnel.

Accounting

Private Equity Investor Required KPI Reporting

A private equity owner of a commodity business required reporting of KPIs that historically the company was not reporting. The KPI reports were not readily available from the clients financial reporting system

Solution: We worked with the client’s staff to determine the availability of the data required to meet the requirements of the owner and began processing the reporting on a regular basis. We eventually moved the reporting to a business intelligence platform making the KPIs broadly available to senior management and the owners of the business.

Post Merger Accounting System Integration

Subsequent to a group of mergers a client was struggling with integrating the accounting and reporting systems of its targets.

Solution: We used our experience in commodity businesses and accounting to provide expertise to the CFO and her staff in integration of the financial accounting records. Our support extended through the end of the first year’s financial statement audit.

M&A Due Diligence for Private Equity Owned Commodity Business

An oil products pipeline and transportation business targeted a supplier of heating oil in the northeastern United States. The target owned a portfolio of end user customers and executed many wholesale physical forward contracts to supply their customers. The target also included complex embedded options into its forward purchase contracts.

Solution: We accompanied the client’s due diligence team to their target’s office to complete the project. Our responsibility was to review and value the physical derivative contracts valuations of the target and perform a high level review and assessment of the target’s marketing and trading staff. During the review we identified the presence of the embedded options in the physical contracts allowing our client to negotiate a more favorable purchase price of the target after considering the presence of these embedded options.

Global Bank Unable to Attribute Their PNL

A global investment bank was implementing a large scale trading risk management system and desired to create a PNL Explained Report. A current report did not exist within the system they were implementing.

Solution: One of our professionals worked with the development team of the bank to develop, test and implement a PNL Explained Report for the business’ linear and option portfolio of contracts.

Valuation

Natural Gas Storage Valuation

A commodity business needed support creating a natural gas storage valuation model for their portfolio of storage assets.

Solution: We used our deep expertise in natural gas storage trading and quantitative analytics to develop the model, implement and test the valuation code within the client’s trading system and develop the appropriate risk measures to manage and report the risks related to the portfolio on a go-forward basis.

Client Needed Assistance Valuing Contingent Consideration

Subsequent to an acquisition our client required assistance valuing an EBITDA based contingent consideration agreement.

Solution: We developed a Monte Carlo simulation to forecast the businesses’ EBITDA and related value of the contingent consideration agreement. Our work saved the client significant money and provided an accurate and timely estimate of their financial liability in accordance with valuation best practices accepted by large auditing firms.
Vine Advisors