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Corporate Finance Webinar Energy Finance 2015 Tom Sanzillo, Director of Finance March 5, 2015.

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Presentation on theme: "Corporate Finance Webinar Energy Finance 2015 Tom Sanzillo, Director of Finance March 5, 2015."— Presentation transcript:

1 Corporate Finance Webinar Energy Finance 2015 Tom Sanzillo, Director of Finance March 5, 2015

2 Overview Economic Analysis Financial Analysis Corporate and Project Analysis and Risk Risks from Public Opposition Purpose of IEEFA Finance 2015

3 “BIG” PICTURE – WORLD, NATION, MARKETS, REGION Economics

4 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 –Between coal & other energy sources

5 CountrySize 2013 GDP (trillions) 2013 % GDP Growth Australia$1.62.5% Bangladesh$ % Canada$1.82.0% China$9.27.7% India$1.95.0% Indonesia$0.95.8% Italy$ % Japan$4.91.6% Mozambique$ % Philippines$ % Poland$ % South Africa$ % Thailand$0.41.8% Turkey$0.84.1% United Kingdom$2.71.7% United States$ % Vietnam$ %

6 Adani’s Corporate Structure

7 Example of Corporate Presentation Mining Company: Cloud Peak Link to presentation:

8 “LITTLE” PICTURE INDUSTRY, COMPANY, PROJECT Finance

9 Income Statement: The Business/Production Process Revenues 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 Expenses Money Out: Cost of Production: What does it cost to make a sale happen? Labor Fuel Chemicals Electricity Machines Facility Maintenance Reclamation Corporate Administration Operating Profit or Loss Is the company or project a going concern? Worthy of Investment? Earnings Before Interest, Taxes, Depreciation, Administration (EBITDA)

10 Income Statement 10 Item of Expense Description InterestInterest on Short & Long Term Debt TaxesFederal, State, Local RoyaltiesUsually Extraction Related DepreciationAnnual depletion of property, plant, materials Corporate Administration Front Office Net Income/LossComprehensive Income or Loss

11 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)

12 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.

13 CORPORATE AND PROJECT ANALYSIS

14 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

15 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

16 THE RISK OF PUBLIC OPPOSITION: REPUTATIONS CORPORATE/ PROJECT SUCCESS

17 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

18 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

19 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

20 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

21 “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, TransCanada,2011 Lead Sponsor of Keystone Pipeline Risk of Public Opposition

22 APPENDIX

23 CountryAgency U.S.Securities and Exchange Commission Australia Australian Securities and Investments Commission Bangladesh Bangladesh Securities and Exchange Commission Canada 13 Provincial Securities Regulators Ontario Securities Commission Alberta Securities Commission China China Securities Regulatory Commission (EN): (CH): Indonesia Indonesian Capital Market Supervisory Agency IndiaSecurities and Exchange Board of India Appendix

24 CountryAgency Japan Financial Services Agency (JPN): (EN): Mozambique Limited Disclosure: Summary of Accessible information  minority-investors/ minority-investors/   Philippines Securities and Exchange Commission Republic of the Philippines PolandMinistry of Justice Poland (Polish version access to company info) South AfricaFinancial Services Board of South Africa https://www.fsb.co.za/Pages/Home.aspxhttps://www.fsb.co.za/Pages/Home.aspx Thailand Securities and Exchange Commission (TH): (EN): Turkey Capital Markets Board of Turkey SermayeP iyasa Kurulu United Kingdom Companies House https://www.gov.uk/government/organisations/companies- house/about/about-our-serviceshttps://www.gov.uk/government/organisations/companies- house/about/about-our-services VietnamState Securities Commission of Vietnamwww.ssc.gov.vnwww.ssc.gov.vn Links to Securities and Financial Regulators   https://www.nrd.ca/nrd/userguide/english/helpful_info/securities_administrators.ht m https://www.nrd.ca/nrd/userguide/english/helpful_info/securities_administrators.ht m


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