DEVELOP RISK ANALYTICS REPORTING FOR EUROPEAN BANK
A major European bank sought to increase market share in the US natural gas and electric markets. To accomplish this goal, risk analytic tools were required in real time. The bank desired engaged a real time approach to assess market risk and ensure that the analytic trading tool would meet the corporate independent risk standards.
The daily flow of communication initially was largely dependent on systems development of Open Link Financial ("OLF") software platform. Changes to OLF book structures, curves, any new versions or additions to OLF, changes to forward curves, and other support group requirements were monitored to ensure the success of the project.
A project for US natural gas and electricity was initiated to implement a solution to provide traders with daily Value at Risk ("VAR") data and the ability to analyze potential changes affecting their VAR trading limits
The project involved daily liaison with the front office for:
- One Monitoring of daily positions.
- Daily updates of curves & volatility.
- Confirmation that individual portfolios are mapped accordingly with the organizational structure of the group.
- Definitions of representative VAR curves by region.
- Interpretation of VAR risk results.
- Analysis of VAR risk results.
The project initially presented multiple risk analytic views (Monte Carlo and Parametric) that were proven comparable to provide the ability to run Parametric VAR intraday in the OLF production environment to determine potential exposure against an overnight VAR trading limit.
Time series studies were conducted to determine the amount of tenor risk consistent with energy commodity standards.
The final product resulted in data supplied from overseas overnight batch processes to provide reporting Microsoft SharePoint to for all levels of VAR exposure, delegated portfolios, portfolio mappings and statistics.
DEFINING THE RISK EXPOSURE FOR AN ENERGY PRODUCER AND MARKETING COMPANY
A subsidiary of a public Norwegian oil company hedges their North American production and owns a natural gas marketing company. The company required a risk evaluation to determine the need for an incremental capital expenditure for a trading system, and assistance in the strategic direction of the marketing company. This prompted an internal control review of the marketing company and assistance in the quantitative analysis of the hedging strategies for financial reporting.
Labhart Risk Advisors performed an audit to determine the internal controls of the marketing company. The review comprised the examination of the trading systems in four separate offices, the coordination of operational and risk data between the offices, overall risk reporting, and trading strategies. A risk review was conducted for the FAS 133 reporting of the production subsidiary to ascertain the quantitative methodologies and prepare an independent valuation.
The final outcome was a 75% reduction in the risk profile of the marketing company and the initiation of new weekly risk reporting to the corporate head office. In conjunction with the risk reduction, Labhart Risk Advisors conducted training with the North American head office on natural gas trading and risk management. An independent valuation was completed to address the market prices, interest rates, and cash flow of the marketing company for year-end reporting. Recommendations were made to increase the internal controls, refine exposure limits, and implement a new trading system to ensure that incremental risk is not generated beyond a level of a defined risk tolerance.
Labhart Risk Advisors provided an independent quantitative analysis to identify the hedging risks and hedge effectiveness testing of the natural gas production. This required calculation of all remaining hedged months for the quarter end period and recalculation from the date of the execution of the original hedges. A quantitative analysis utilizing correlation coefficients was conducted to contrast the current methodology of regression testing.
DEVELOPING STRATEGIC DIRECTION FOR PUBLIC ENERGY COMPANY SUBSIDIARY
A subsidiary of a public energy firm with electric generation assets from the Post-Enron era, and needed to determine the strategic direction for the following year. The company had downsized over the prior five years, with no capital commitment to maintain the infrastructure to compete in the energy markets. The company required a strategic risk overview to assess the systems and informational requirements to remain competitive, and develop a risk profile to determine the options available as a going concern, potential merger, or sale of assets.
Labhart Risk Advisors performed a strategic review of the informational structure provided from an outsourcing arrangement of a Fortune 100 system firm. This required the development of processes and standards (including the maintaining of a strategy map and scorecard) to facilitate the goals to align with the company's strategic objectives. Enterprise-wide growth initiatives were defined to assess complexities of the underlying risk and the interdependent valuation of the assets. This required the identification of the critical path risk on projects and initiatives to ensure the consistency of measures and metrics used in both tactical and strategic goal development and goal tracking across departments.
The 12 month project resulting in the negotiation of sales of assets combined with a transition agreement in excess of $450 MM.
Labhart Risk Advisors was retained thereafter to lead the transition arrangement between buyer and seller to ensure all project requirements by the new buyer were consistent and in accordance with the negotiated agreement. These requirements included but were not limited to the systems, processes, valuation, personnel, and transfer of intellectual property as required.
ENERGY COMPANY ASSESSES LOSSES DUE TO ENRON BANKRUPTCY
When Enron Corp. declared bankruptcy in December 2001, many of Enron's trading counterparties found themselves with significant financial exposure. The combination of extreme market volatility and this bankruptcy required firms to assess their actual and potential exposure to Enron.
To do this, each company would need to conduct a thorough assessment of its risk by comparing contract language to the systems' data used on a day-to-day basis to calculate this exposure, as well asvalidate all outstanding trades.
Labhart Risk Advisors prepared the Enron bankruptcy settlement claim for a large US based power generator and trading company. The project required an analysis of 15 global trading entities with outstanding notional values of $871 million, and included AR/AP, liquidated damages and forward mark-to-market valuation of claims. Labhart Risk Advisors designed systems to value all commodities and provide documentation on approximately 2,500 transactions for litigation support. In addition, the firm designed strategic scenarios from legal precedence and based on advice from counsel.
DEVELOPING STRATEGIC SOLUTIONS FOR ENERGY PRODUCER
A majority stake of an independent natural gas and oil producer's equity was owned by an energy investment legal entity of a Fortune 500 company. The Fortune 500 Company faced liquidity issues due to events triggered by the default covenants on the credit facility. The company initiated an aggressive divestiture program to raise cash which threatened the progress of the energy producer's developmental drilling program. This prompted the review of strategic options available to the energy producer to continue the successful developmental drilling program.
Labhart Risk Advisors performed an audit to determine the most effective means of developing strategic options. The independent review of petroleum production reserves, lease operating expenses, working interest and operating agreements provided an overall platform of economics to assess future cash flows and develop scenarios for the raising of equity capital to continue the developmental drilling program.
The final outcome was the successful bid of the Fortune 500 energy investment legal entity by the energy producer to gain control of all energy production, developed and unproven reserves. Once the bid was secured, the energy producer was successful in liquidating the non-core properties and securing a $70 MM 100% financed pre-production lending agreement. The energy producer in today's market now is debt free and evaluating new prospects for future growth.
PHARMACEUTICAL COMPANY FACES RISING ENERGY COSTS
A Fortune 100 pharmaceutical company with worldwide energy expenditures of $180 million faced significant rising energy costs. Within the global procurement division there were numerous energy rates, purchase contracts and suppliers in place with no emphasis on competitiveness or adherence to optimal terms. Some decentralized price risk management existed, and efforts to centralize these activities were inhibited by a lack of resources and the absence of a process linking hedging activities to physical commodity purchases.
Labhart Energy Advisors developed a risk management performance measurement system to evaluate the company's global energy procurement costs, with an emphasis on identifying the overall tolerance level of risk associated with the estimated $180 million in energy expenditures. Over a four- month period, daily risk tolerance was reduced by $23 million to less than 0.8% of the total spending requirement.
Once risk levels were established, Labhart Risk Advisors initiated a price-triggers based approach which takes into consideration pricing for the daily supply of natural gas, as well as future price discovery derived from regulated futures markets and information on cash market forward prices. Policies were reviewed and rewritten to communicate appropriate levels of risk management based on the approved risk tolerance levels.
MORTGAGE FORECLOSURES DEFINING NEW MARKETS
A real estate auction company that processes 1500 foreclosed properties monthly, sought to enter the real estate market as a merchant. The merchant role would provide liquidity to banks, mortgage lending institutions, and hedge funds by providing cash for properties instead of the typical auction funding/closing period of 60 days. The change from a profitable service based auction operation to a merchant market based focus of commodity risk, required risk definition, implementation of quantitative modeling, and defined processes to execute the new strategy.
Labhart Risk Advisors performed a strategic review of the informational structure to determine if the necessary data was available to value real estate pools from outside third parties. The data required procurement of accurate information of historical residential foreclosures and the incorporation of market data from the emerging derivatives and futures market. Valuation processes were mapped and documented.
Labhart Risk Advisors provided an independent quantitative analysis of the company's logistical regression internal model and made recommendations to include the incorporation of time series and more advanced correlation modeling.