Energy Business Tips – February 2009

Bruce's Energy Business Tips

February 2009

Integrity and the Energy Patch

    Memories of the Enron fiasco that rocked the energy sector in the early 2000s, other financial scandals and current economic and political events probably cause us to pause and wonder, "What went wrong?" And more importantly, "How can we prevent the same thing from happening in our own organizations?"

    While the answers to these questions are complex, an understanding of psychological tendencies of individuals and groups can help to shed some light on the vulnerabilities we all have as human beings. For an excellent and easy book to read on this topic, I highly recommend Influence, The Psychology of Persuasion by Robert B. Cialdini, Ph. D. The book is readily and cheaply accessible from internet booksellers.

    I believe that without understanding human psychological tendencies and providing specific policies and training to combat them, business organizations can easily fail in meeting their obligations to shareholders and to other interested stakeholder groups, such as to important regulators (the SEC and FERC).

    The AICPA, the Institute of Internal Auditors and the Association of Certified Fraud Examiners and recently jointly issued a new publication to help organizations manage the business risks of fraud. The publication is called, "Managing the Business Risk of Fraud: A Practical Guide" The publication assists organizations to evaluate their own risk of experiencing fraud and helps in establishing relevant policies, detection measures and prevention strategies in this important area. See the following link to access your own copy of this guide: http://www.acfe.com/documents/managing-business-risk.pdf

Modeling Energy Projects for Success

    Energy projects are complex, long-lived business endeavors that involve a host of risk factors that are evaluated during the processes of project development, construction and financing. Many organizations do not have comprehensive models to confront these challenges. Additionally, they may not have personnel fully trained to model and evaluate their projects.

For example, does your company know what its cost of capital is, and how that cost of capital varies across different types of energy projects? (Projects should not be pursued if they may earn less than the firm's cost of capital.) How does your company decide which projects to pursue?

Do you have quality control procedures in place to ensure quality in your modeling efforts, such as reviewing the reasonableness of key input assumptions and approaching modeling in a standardized, documented fashion?

Do your models robustly include the elements of a comprehensive project business plan? Do they incorporate the theory of examining the firm's real options, or alternatives to the contemplated projects? Do you evaluate alternatives for negotiated, market-based and regulated pricing and implementation strategies? Do you consider how each project will impact your company's overall financing strategy?

Do the models contain complete pro forma financial schedules, such as rate base, cost of service, balance sheets, income statements and cash flow statements? Do the cash flow calculations contain the impacts on cash flows of special income tax provisions and other energy incentives? Do your models evaluate a range of outcomes that may be experienced for the financial strategy you have selected, such as by using a range of inputs and displaying the results with tornado diagrams?

    I recommend the following text book for materials that may help with improving your modeling efforts: Corporate Financial Management, Third Edition, by Emery, Finnerty and Stowe, published by Prentice Hall in 2007.

Transition Help for Office 2007

    Here is a link I found that will help smooth your transition to Microsoft Office 2007. The get started tabs for Excel, Word and PowerPoint provide a number of resources to help unlock the power of the software. http://office.microsoft.com/en-us/help/HA102146851033.aspx