Corporate Finance Webinar Energy Finance 2015 Tom Sanzillo
Corporate Finance Webinar Energy Finance 2015 Tom Sanzillo, Director of Finance March 5, 2015
Overview • Economic Analysis • Financial Analysis • Corporate and Project Analysis and Risk • Risks from Public Opposition • Purpose of IEEFA Finance 2015
Economics “BIG” PICTURE – WORLD, NATION, MARKETS, REGION
Economic Measures What is economy? • GDP “Gross Domestic Product”: How economy/ countries/ markets/ regions work – Types & size of sector: agriculture, energy, manufacturing, mining, energy, retail Most important for economy: Growth • Market profitability – Project Profits: mines, plants, ports, & rail – Corporate Profits: “pure play, ” integrated companies, diversified Critical role of extractive industries • Coal/oil economics: Reserves, supply/demand (tons, barrels, cubic feet), location • Price of coal/oil/natural gas/power from plants/electricity – Cheap power – household budgets and business • Competition – Within coal
Country Australia Size 2013 GDP (trillions) 2013 % GDP Growth $1. 6 2. 5% $0. 15 6. 0% Canada $1. 8 2. 0% China $9. 2 7. 7% India $1. 9 5. 0% Indonesia $0. 9 5. 8% Italy $2. 1 -1. 9% Japan $4. 9 1. 6% Mozambique $0. 02 7. 4% Philippines $0. 27 7. 2% Poland $0. 52 1. 7% South Africa $0. 35 1. 9% Thailand $0. 4 1. 8% Turkey $0. 8 4. 1% United Kingdom $2. 7 1. 7% United States $16. 8 2. 2% Vietnam $0. 17 5. 4% Bangladesh
Adani’s Corporate Structure
Example of Corporate Presentation Mining Company: Cloud Peak Link to presentation: http: //tinyurl. com/qzfd 5 gp
Finance “LITTLE” PICTURE INDUSTRY, COMPANY, PROJECT
Revenues Expenses Income Statement: The Business/Production Process Money In: How much buying and selling? Coal = $ Per ton Power = Currency/Megawatt Hour (MWh) Ports = Fees Oil/Liquefied natural gas (LNG) = $barrel(bbl); Gas $/cubic foot (cf); Shipping miles per ton Money Out: Labor Fuel Chemicals Electricity Machines Facility Maintenance Reclamation Corporate Administration Cost of Production: What does it cost to make a sale happen? Operating Is the company Earnings Before Interest, Taxes, or project a Depreciation, Administration (EBITDA) Profit or going concern? Loss Worthy of
Income Statement Item of Expense Interest Taxes Royalties Depreciation Corporate Administration Description Interest on Short & Long Term Debt Federal, State, Local Usually Extraction Related Annual depletion of property, plant, materials Front Office Net Income/Loss Comprehensive Income or Loss 10
Income Statement: Understanding Debt • Why Important? – Extraction, Power – rely heavily on debt. • What is function of debt? Raises money to build plants/mines/ports -- assets. Assets produce revenue/pay back debt and profit. Or not. • How much is too much debt, overleverage? When operating profit cannot cover interest. (taxes, depreciation and other expenses)
Income Statement: Where Does Debt Come From • Borrowing: Debt and Equity – Private Investment Banks – Bonds, Private Equity, Project Related Financing – JP Morgan, Morgan Stanley, Citi, UBS. – Public Banks – “Development Banks” International Financial Institutions (“IFI”) – multiple countries provide capital to spur development – Company Equity: Stock, Cash, Assets – Borrow from Shareholders – Combination of all three is not unusual in energy.
CORPORATE AND PROJECT ANALYSIS
Corporate and Project Analysis • Public/Private Corporations drive project development – Similarity – Growth – Differences of enterprise wide missions – Profit versus, Development Policy • Project Finance is a piece of broader corporate strategy and finance – Corporate parents and subsidiaries – Business and Capital Markets – Policy and Development Goals of Country
Companies and Projects Require Investment: All investments have risks • Profit: Investment + time and effort must return revenue - cover costs, spur more investment – Risks to Successful Projects • Economic – GDP Health, Markets, Demand/Supply, Price – Business Leadership, Vision, Policy, CEO and Board • Finance – Asset Allocation - Revenue/Expense/Profit/Loss – Good Management: Board/Managers Setting Policy/Execution • Legal & Regulatory – Good Citizen, Good Partner, Good Neighbor • Traditional Concepts of Political Risk – Good Negotiator, Knows How To Get Things Done – Cumulative Risk: Key Financial Concept
THE RISK OF PUBLIC OPPOSITION: REPUTATIONS CORPORATE/ PROJECT SUCCESS
Risk of Public Opposition • Dynamic of Reputational Politics – Government/Business – Corporate/government actions have symbolic importance – to corporate employees, governments, market stakeholders, public – “Sending Signals” – Actions – policy, program, investments, taxes, law/regulation, budgets, sanctions, fines, delays. – Civil society attaches positive and negative connotations to these actions. • Part of the Brand, part of the profile • Instant Communication – instant profile – All Forms of Corporate/Government Success build reputation – All Forms of Corporate/Government Failure hurt reputation
Risk of Public Opposition • Benefits of Good Reputation – Company Growth – High Salaries for Corporate Leaders – Elections for Government Leaders • Power Positions of Ministers – Public Opinion and Editorial Support • Creates space for consumer relations and public benefits – Access to Public and Private Benefits: Profit Enhancement • New Laws, Regulations, Budgets, Contracts, Cash • Approval of Investors (Banks, Shareholders) • Favorable Regulatory Outcomes and Financing • Political Protection: Markets, Oversight, Leverage over competition and opposition
Risk of Public Opposition • What Undermines Corporate Reputations? – Financial Losses – Stock decline, dividend cuts, delayed or canceled projects, closing facilities, shrinkage • Changing perception in business world – rating agencies, analysts. Upgrades and Downgrades • Project Delays, Hearings, Investigations, Reviews – Something is Wrong – Improves accountability – new forums for issues – Costly to project – cuts into profits – Violations of Law – Exposes - Media – Loss of Allies – business, professional, political, editorial, regulatory – Breaking Public Promises (Polls) – price to consumers, commitments to communities, environmental agreements, legal/contract/labor disputes go to management and integrity. – Unfair Advantage – political contributions tied directly to bad activity
Risk of Public Opposition • What Undermines Government Reputations? – Unmanageable government finances – Tax increases, expenditure cuts, weak economy, credit downgrades. – Program failure: delayed or canceled projects, closing facilities, shrinkage • Changing perception in business world – rating agencies, audits, oversight studies. • Cost Overruns: Something is Wrong – Exposes – Media – Loss of Allies – business, professional, political, editorial, regulatory – Breaking Public Promises – price to consumers, commitments to communities, environmental agreements, legal/contract/labor disputes go to management and integrity. – Leadership Crisis – polls, scandals, elections, policy/political fights – Unfair – political contributions tied directly to bad activity
Risk of Public Opposition “There is no way we could have ever predicted that we would become the lightning rod for a debate around fossil fuels and the development of the Canadian oil sands. ” • Russ Girling, CEO, Trans. Canada, 2011 • Lead Sponsor of Keystone Pipeline
USING FINANCE TO CHANGE CORPORATE/GOVERNMENT
Financial Analysis and Social Change IEEFA Energy Finance 2015 Conference • • Purpose of conference is to better understand energy finance issues. (Some professionals/experts do not agree with us. Listen because they do not agree). – Not words, numbers or academic debate – finance work suggests new levers, new targets, new ways of surfacing the issues, isolating targets and winning. All projects and companies have particular corporate financial plan. – Markets for coal, oil, natural gas, power and transport services are made of markets, industries, companies and government regulation • History, mission and culture – industry structure – We engage companies/governments at particular points in organizational history, mission development, business, electoral and strategic cycles. – Our job is to develop analysis that heightens risk portfolio of government, company or project • Finance work must be done along with broader campaigns with efforts to show environmental and climate weaknesses – Analysis must have legs.
APPENDIX
Appendix Country Agency U. S. Securities and Exchange Commission www. sec. gov Australian Securities and Investments Commission http: //asic. gov. au/about-asic/ Bangladesh Securities and Exchange Commission http: //www. sec. gov. bd/ 13 Provincial Securities Regulators http: //www. osc. gov. on. ca/en/home. htm Ontario Securities Commission http: //www. osc. gov. on. ca/en/home. htm Alberta Securities Commission http: //www. albertasecurities. com/Pages/home. aspx Canada China Securities Regulatory Commission (EN): http: //www. csrc. gov. cn/pub/csrc_en/ (CH): http: //www. csrc. gov. cn/pub/newsite/ Indonesian Capital Market Supervisory Agency http: //www. bapepam. go. id/ Securities and Exchange Board of India http: //www. sebi. gov. in/sebiweb/ India
Country Japan Agency Financial Services Agency (JPN): http: //www. fsa. go. jp/ Mozambique Limited Disclosure: Summary of Accessible information http: //www. doingbusiness. org/data/exploreeconomies/mozambique/prot ecting-minority-investors/ http: //www. mic. gov. mz/ http: //www. cpi. co. mz/index. php/en/2012 -03 -14 -03 -21 -37/useful-links Philippines Securities and Exchange Commission Republic of the Philippines http: //www. sec. gov. ph/ Ministry of Justice Poland (Polish version access to company info) http: //ms. gov. pl/pl/ Financial Services Board of South Africa https: //www. fsb. co. za/Pages/Home. aspx Securities and Exchange Commission (TH): http: //www. sec. or. th/TH/Pages/home. aspx (EN): http: //www. sec. or. th/EN/Pages/Home. aspx Poland South Africa Thailand (EN): http: //www. fsa. go. jp/en/index. html Turkey Capital Markets Board of Turkey http: //www. cmb. gov. tr/ Sermaye. P iyasa Kurulu http: //www. spk. gov. tr/ United Kingdom Companies House https: //www. gov. uk/government/organisations/companies -house/about-our-services Vietnam State Securities Commission of Vietnamwww. ssc. gov. vn Links to Securities and Financial Regulators http: //www. world-stock-exchanges. net/regulators. html https: //www. nrd. ca/nrd/userguide/english/helpful_info/securities_administ rators. htm
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