Energy

Credit Management Case Study

Client Case Study Overview

Our gas client is one of the largest energy utilities in the US, with over $10B in annual revenue and over $30B in assets. They deliver electricity and natural gas to over 14 million residential, commercial and industrial customers. Most of their revenue comes from regulated business lines with fixed margins; however, a select few have the opportunity to optimize their return on assets and improve shareholder return. One such business line is their gas transmission group, which continually strives to optimize the revenue and services of its pipeline assets.

Client Business Challenges

Providing gas transmission services requires our client to manage $150M a month in credit exposure to ensure that the company does not overexpose themselves to credit risk. The process for knowing a customers current exposure, however, was manual, incomplete and time-consuming, Scope of Blackstone Services meaning it was prone to error and not very responsive to End to End Project Management the real-time requirements of the energy industry. Energy Industry Expertise and Finding a solution required balancing a number of Consulting competing requirements. The customer service Requirements Gathering and Analysis Custom Application Design and representatives (Traders) needed to be able to make Development deals quickly to respond to rapidly changing customer Data Integration demands. They needed accurate, real-time available Quality Assurance Support credit estimates to balance the risk of turning down a User Training and Rollout deal versus triggering a credit violation. The credit Production Support department needed to make sure that no deals left the company overexposed to a single customer and that overall, their entire risk exposure portfolio was known and managed in an appropriate and timely fashion. Auditors needed the ability to quickly analyze transactions to ensure that the procedures in place governing reporting and approval were followed. Balancing these requirements offered several unique challenges. A customers credit exposure changes constantly as fluctuations in the energy market drive the customer to modify their portfolio of services throughout the day. Consequently a customers credit profile needs constant updating and notifications need to be sent to appropriate individuals to take action if the changing landscape begins to exhaust the counterpartys approved exposure limit. Since most services are contracted over a length of time, the system also had to produce estimates of future exposure, often taking into account projections on commodity price trends, to predict when a customer might exhaust their credit at a future date and thereby allowing the client to plan for it. These challenges resulted in a targeted set of directives for the project: 1) Systemize the Approval Process through the automation and improvement of Trader credit analysis tools and controls 2) Provide dynamic credit analysis to incorporate changing customer and market data 3) Integrate auditing processes to facilitate post-transaction analysis 4) Reduce Credit Risk by providing more accurate and timely data

150 California Street, 9th Floor, San Francisco CA 94111

(415) 837-1400

energy@bstonetech.com

Energy

Credit Management Case Study

Blackstone Solution
Using the clients established change management process that Blackstone helped create, the Blackstone team guided the project from conception through implementation. Working with a multi-disciplinary team consisting of Customer Service Representatives, Credit Managers and Risk Control Auditors the project began by identifying the shortcomings of current auditing controls, the inaccuracies in the exposure model, and the misplaced responsibilities within the existing credit exposure management and auditing processes. Once finalized, a detailed plan was developed proposing changes to both systems and processes to provide improved, real-time exposure data, richer analysis tools and tighter auditing controls to credit managers and auditors. Specifically, it was recognized that the credit exposure calculations needed to be more accurate, timely and forward looking. Additionally, the procedure for estimating available credit needed to be systemized to remove the Traders responsibility for them and to facilitate more transactions. More detail regarding the makeup of the credit exposure was required as well so that a Trader or analyst could understand whether a customers exposure was driven by, for example, their current net lending position or the future value of their contracts. System performance was also recognized as a high priority so as to not hinder the deal making process. To address the issue of accuracy, the Blackstone team used their deep understanding of gas transmission products and services to derive credit calculations appropriate for all possible exposures. These calculations were formally verified and approved by the larger team and the clients risk management division.

Solution Facts
Standardized and systemized counterparty credit analyses for Traders, Auditors and Credit Managers. Eliminated data input and hand calculations and associated errors. Earlier identification of counterparty credit issues via more accurate and complete credit analyses and controls. Automatic notification to credit managers and auditors. Full integration with deal capture, credit management and audit processes.

Recognizing that a comprehensive solution required better data integration, Blackstone eliminated all of the manual data gathering and related calculations and integrated all relevant data into the existing deal capture and gas nomination system. The integration of credit and accounting data, deal capture data and transactional data was the key to providing accurate and real-time credit analysis for the traders. Many other benefits naturally resulted from this approach such as the ability to completely audit the Trader actions and automatically notify appropriate parties of credit limit violations. During the effort, Blackstone established a trusted business consulting and technology partner relationship with our client. The new systems, processes and controls have been so successful that they are being considered for adaptation by the clients electric and procurement business units as well. The solution also positioned our client to handle the sharp increase in potential credit problems due to the sharp increase in the price curves during 2005 without reducing their overall transaction volume.

Net Result of the Credit Analysis project:

1. 2. 3. 4. Increased accuracy, breadth and timeliness of credit information Instant analysis of changing price curves and their effect on customer credit Improved audit processing time by over 17% Potential credit problems identified months in advance instead of at transaction time

150 California Street, 9th Floor, San Francisco CA 94111

(415) 837-1400

energy@bstonetech.com

Energy

Credit Management Case Study

Our Offer for You

We feel this case study demonstrates Blackstones overall business, technology and project management skills to help you plan and execute a successful project to improve your credit analysis and management process. We can apply our experience to assessing and improving existing integration solutions or to designing and implementing new projects. We can offer a free, no obligation Blackstone consultation with the key decision makers in your organization to discuss your existing credit analysis process and how Blackstone may be able to help. Please contact our representative below for more details.

150 California Street, 9th Floor, San Francisco CA 94111

(415) 837-1400

energy@bstonetech.com