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Commodity & Energy Risk Management

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Commodity & Energy Risk Management Commodity & Energy Risk Management Introduction Organisations exposed to energy, metal, and agricultural commodity raw materials are increasingly challenged by competitive economies, volatile markets, and onerous regulatory and accounting obligations. While many businesses are prepared to take action, rapid change requires additional emphasis on risk strategy, analytics, reporting, systems, and governance. As global commodity markets experience sustained volatility, organisations have aggressively sought methods to identify and respond to market risks, credit risks, and operational risks. At the same time, organisations are developing strategies and innovative solutions to integrate disparate systems, increase automation, improve reporting, enhance analytical capabilities, and reduce costs. Whether your most pressing issue involves hedging strategies; governance; supply chain issues; data management; or accounting, tax, and regulatory issues, KPMG is ready to help you cut through the complexity. 2 | Commodity and Energy Risk Management Service Offering Overview KPMG’s Commodity and Energy Risk Management (CERM) service is designed to help corporate and public sector CFOs, treasurers, controllers, risk managers, commercial and business development managers, and tax directors achieve tactical and strategic goals. The CERM service applies to companies of all sizes and complexities. In particular, organisations with significant commodity market and credit risk, operational and modelling challenges, and integration or cost-reduction initiatives will find the CERM service a good fit. Each service represented below is based on KPMG’s CERM methodology and industry accepted practices. KPMG recognises that each company is unique, and as such, each service is tailored to address distinct client size, complexity, development stage, and business objectives. While each service may be delivered as a stand-alone initiative, combined activities accelerate organisations towards improved risk integration and coordination. Hedging & Risk Strategy Model Forensics & Development, Investigations Validation & Remediation TRATEG S Y Operations Internal Audit N O Commodity & I T Risk Reporting C A Energy Risk O & Management T N N Management Tax E Information C E M P Systems E T L P M I Credit & Accounting Collections Governance, Regulatory Roles & Policies Commodity and Energy Risk Management | 3 Hedging & Risk Strategy KPMG Service Activities Hedging & Risk Identification • Identify and measure commodity exposures across business Forensics Risk Model Strategy Development, & Validation & and Measurement lines and/or commodities based on defined qualitative and Investigations Remediation quantitative metrics AT TR EGY • Identify, aggregate, and summarise existing commodity Internal S Operations Audit contracts, explicit and implied financial risks (e.g. optionality), N credit exposures, and operational exposures O Commodity & I T Risk Reporting C A Energy Risk O • Identify and model commodity financial exposures using & Management T N N Management Tax E Information C industry applied ”at-risk” indicators (e.g. Value-at-Risk (Var), E M Systems P E T L P Conditional Value-at-Risk (CVaR), Cash-flow-at-Risk (CFaR)) M I Credit & Accounting • Define risk measurement data and systems requirements Collections • Measure the impact of stressed market prices on realised and Governance, Roles & unrealised profit and loss Regulatory Policies Risk Strategy and • Assist to define management’s financial and operational risk Tolerance tolerance(s) based on internal metrics, peer practices, and external expectations and hedge objectives Organisations today are • Identify and evaluate methods to protect against commodity increasingly exposed to volatile price risks including the following risk mitigation strategies: commodities and increasing – Derivative based hedging (exchange traded; Over-the- stakeholder demands for earnings counter (OTC) bilateral, cleared) stability and growth. Effective – Physical procurement/sales management commodity risk management • Assist to define key hedge strategy components, including: requires an understanding of – Hedge instruments, volumes, timing, frequency, duration, the underlying risk, alternative entry and exit points hedge strategies, instruments and • Perform peer and competitor benchmark analysis to assess marketplaces, as well as the use client positioning against industry participants of effective and comprehensive valuation and risk reporting tools. Risk Aggregation • Define internal and external commodity risk reporting and Reporting requirements KPMG can assist to address the • Define and develop integrated risk reports risk management requirements • Identify and develop alternative risk reporting formats and needed to successfully address templates/dashboards commodity risk exposures. • Identify data and infrastructure requirements supporting the Specifically, KPMG assists clients preferred risk monitoring and reporting framework to identify, measure, control, and report risks associated with Governance and • Design and document policies and procedures governing physical and financial energy, Compliance commodity risk management metals, and agricultural markets. • Design and document a governance framework consistent with regulatory standards and industry practices 4 | Commodity and Energy Risk Management Model Development, Validation, & Remediation KPMG Service Activities Hedging & Model • Assist model design and development for risk measurement Forensics Risk Strategy Model Development, Development (e.g., value-at-risk, cash flow-at-risk, earnings-at-risk, credit & Validation & value-at-risk) Investigations Remediation AT • Assist mark to market and capital allocation model design and TR EGY Internal S Operations development – valuation models for commodity and energy Audit products, instruments, and contracts N O I Commodity & T Risk Reporting C A Energy Risk O & Management T N N Management Tax E Model Risk and • Identify inventory and rank key financial, risk, and decision Information C E M Systems P E T L Control support models P M I • Review and improve model policy documentation (purpose, Credit & Accounting applicability, development, ownership, access, and oversight) Collections Governance, • Assess key risk sources associated with each model Roles & Regulatory Policies Model • Assess model calibration standards Functionality • Assess model limitations (i.e., restrictions and conditions) Model Integrity and • Review, validate, and design model parameters including: Models have become an Validation – Model input (e.g., forward price curves, volatility increasingly important tool assumptions, correlation matrices) in evaluating, analysing, – Model processing and analytics (e.g., model algorithms) and reporting key business information. Whether intended – Model output (e.g., variance results) for risk management, financial – Model governance (e.g., risk policy, limits) accounting, or business – Model controls (e.g., model management) decision making, the increased – Model reporting use and complexity of these • Review assumption applicability and robustness models have led to increased • Identify and design data linkages and controls model risk. Management has a vested interest to confirm the Model Comparison • Compare and assess alternative models (e.g., third-party vs. assumptions, theories and data internally developed models) used by models, as well as the • Compare and assess alternative data sources processing, output and reporting. Leading companies seek external Model Testing • Estimate implementation risk through value testing (extreme assistance to address these values, limiting cases, code review) concerns for both existing and • Observe errors attributable to all error sources (back testing) contemplated models. Commodity and Energy Risk Management | 5 Operations KPMG Service Activities Hedging & Supply Chain • Assist clients to assess their operations and supply chain Forensics Risk Strategy Model Development, & Validation & and Operations performance, as well as to develop improvement strategies, Investigations Remediation Strategy transition plans and the supporting financial business case for change AT TR EGY Internal S Operations Audit • Assist clients to improve working capital management and N reduce their level of inventory investment while improving O Commodity & I T Risk Reporting C customer service A Energy Risk O & Management T N N Management Tax E Information C • Assess strategic benefits of outsourcing elements of supply E M Systems P E T L P chain operations, such as service centre, logistics, and contract M I manufacturing Credit & Accounting Collections • Benchmark operations to industry and leading practices Governance, Roles & Regulatory Policies Sourcing and • Assist management to define procurement strategies Procurement considering risk, security, and supply diversification Enhancements • Identify and evaluate opportunities to consolidate vendors, suppliers, and contracts in an effort to help minimise costs and improve performance Organisations are challenged to • Assist clients to improve performance and effectiveness of evaluate alternative strategies for direct and indirect sourcing and procurement processes operational improvements due to • Assess strategic supply acquisition to help minimise logistics a variety of economic pressures. cost and increase operational flexibility and price awareness KPMG can offer assistance with Inventory • Assist to evaluate client effectiveness
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