Jack Yeager GEMI Conference

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Jack YeagerGEMI Conference
CRA Capital Management in Commercial Optimization
January 21, 2005
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Capital Management Capital Adequacy in Context
The challenge for every company is to both ensure
adequate capital to sustain the business while
delivering returns that grow capital
Grow
Sustain

• More Capital vs Risk could
• Reduce cash flows and earnings surprises
• Reduce amount of self-insured risks
• Increase Cost of Risk
• Reduce availability of new investments with
  acceptable risk/return characteristics
• Reduce ability to introduce new products to
  market
• Reduce value of equity
• Reduce strategic flexibility
• Increase Strategic Risk

• Taking on too much risk could
• Increase profitability from investments /
  transactions
• Increase amount of self-insured risks
• Reduce quality of credit
• Increase WACC
• Reduce availability of investments that satisfy
  hurdle
• Reduce availability of counterparties willing to
  do business
• Reduce strategic flexibility
• Increase Strategic Risk

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Capital Management - The Competitive Landscape
Energy Trading Marketing Businesses are feeling
increasing competitive pressure from I-Banks
Private Equity to manage capital more effectively
Capital Management Strategy

• Private Equity
• Good deals seek capital
• Deal level Transparency
• Competition breed discipline

• Investment Banks
• Capital seeks good deals
• Regulatory Assurance
• Compliance breeds discipline

Divest of Assets

• Energy TM
• Business model seeks capital
• SEC Financial Performance
• Ambiguity breeds complacency

Transparent Capital Discipline
Regulated Capital Requirements
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Capital Management - Down Dirty
The primary competitive advantage of Energy
Trading Marketing companies is their
experience in employing a variety of complex
commercial optimization strategies in delivering
valuebut this advantage is only temporary

• Hedging
• hedge everything from 18 months to 6 months 50,
  6 months in up to 90
• hedge is part of portfolio strategy is put on
  based on positions rules
• hedge is economic, but distinct from speculative
  trading, cost of collateral is considered
• hedge expected production plus 10, rather be
  over than under hedged

• Balancing
• if you balance early, you balance twice
• never carry more supply than your expected
  demand into the delivery month
• turn on swing within 2 of economic price, you
  can turn it off if you dont need it
• never carry an imbalance into the on-the-day
  market
• never signal your true needs to the market until
  the afternoon

• Speculation
• the entire group trades a single point-of-view
• each trader has the right to trade their own
  point-of-view
• we primarily take large positions on bets
  greater than 150 RAROC
• we diversify, lots of small bets, lots of
  locations tenors, on RAROC of 50 or more
• we are looking for the bid-ask spread, the goal
  is to close positions in 1 to 2 days

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Capital Management - Down Dirty
The challenge for energy companies is to learn
how to effectively incorporate capital management
discipline into their commercial optimization
decisions
S1 represents a speculative strategy with 150
RAROC thresholds, while S2 represents a strategy
with 30 RAROC thresholds
While S1 represents virtually no risk of capital
lost, S2 provides the greater expected return to
capital
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Capital Management - Down Dirty
As availability and cost of capital changes, so
does the expected value of each strategy, so that
commercial strategy and capital management become
inter-related in optimizing portfolio value
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Jack YeagerGEMI Conference
CRA Capital Management in Commercial Optimization
January 21, 2005