Managing & Accounting for Commodity Price Risk

Transcription

1 Managing & Accounting for Commodity Price Risk Timothy Johanson, Craig Haymaker, HedgeStar

2 Your Presenters Tim Johanson Craig Haymaker

3 Who are we? Hedging benefits Agenda Hedging program workflow Derivative accounting Q&A 3

4 Working with OUR DEDICATED TEAMS SERVE CUSTOMERS IN INVESTOR, METAL, ENERGY AND AGRICULTURE SECTORS. Innovating tailored solutions is at our core For over 20 years we have been committed to creating solutions to help our customers mitigate price risk. 20+ years 30 businesses Access to over 30 Cargill Businesses We work with Cargill businesses to deliver embedded solutions to our customers. Global perspective, local presence We serve customers in 60 countries, and have 17 international offices across the globe. 60 countries 70+ Number of global commodity, energy and FX markets where we provide risk management solutions 4

5 HedgeStar Overview CURRENCIES RATES COMMODITIES At a Glance Leading independent provider of hedge accounting and valuation services Founded in 2004 and headquartered in Minneapolis, Minnesota Proven Track Record Deliverables vetted and approved by the top audit firms. Exclusive partnership with Reval has resulted in a unique service offering. Offices in Fargo, North Dakota and New York City, New York Valuable front-end advice to promote hedge effectiveness. Impeccable record of on-time delivery. Corporate Energy Risk Management Consulting Sectors Solutions Hedge Accounting Financial Non-Profit Fair Value Government Valuations 5

6 Hedging Benefits 6

7 Hedging Benefits We listen to our customers and understand their business objectives, pricing needs and market views then tailor solutions which create suitability and mitigate risks by: Protect Margins Secure Budgets Minimize Volatility Stay Competitive Shield your profit margins from adverse market moves Cargill s Credit Rating S&P: Rated A Achieve your pricing goals through a more predictable and profitable approach Fiscal Year 2016 Revenues: $107.2 billion Moody s: Rated A2 Earnings: $1.6 billion Mitigate price swings Total Price Assets: near $57.5 or around billion and volatility Net the Worth: market $28.4 average billion to through a smoother be competitive path forward Enterprise Value 7

8 How We Partner: Energy Maria is a commodity risk manager at a large food company. She helps her business hedge heating oil to lock in prices/protect margins on the cost of shipping product. Liz is a risk manager at Cargill Risk Management. She works with Maria to understand her overall exposure to the market, budget goals and overall risk management program. Maria monitors performance of program and works with Liz to take additional action as needed. Liz helps Maria implement strategies to mitigate upward price risk and meet budget needs. 8

9 Our Solution Offerings Swaps or Options Similar to exchange products Range Family Capture opportunities in range bound market Accumulating Family Build positions at favorable levels Cap or Floor Family Firm protection for buyers and sellers Averaging Family Average approach to adverse market moves 9

10 Heating Oil (HO) Prompt Pricing A TIMELY GRAPH WILL BE PRESENTED AT THE PRESENTATION 10

11 Modified Capped Average (MCA) - HO A TIMELY GRAPH WILL BE PRESENTED AT THE PRESENTATION 11

12 Hedging Program Workflow 12

13 Hedging Program Workflow Identify Risk Exposure Assess Risk Exposure Risk Mitigation / Hedging Governance Type Currencies Commodities Interest Rates Variability Cash flows Value Amount and location Geographic Supply Chain Treasury Duration / time frame Hedge Objective and risk appetite Hedging Tools Derivatives Non-derivative Natural hedges Approval from Board of Directors or Risk Committee 13

14 Hedging Program Workflow (continued) Create Hedging Policy Implement Policy Valuation and Reporting Monitoring and Oversight What How Roles Risk limits Reporting Accounting Trade execution Documentation Collateral management Performance ASC 815 Hedge designation Effectiveness testing ASC 820 Fair value calculation Do results reflect objectives? Risk committee reporting Stress testing 14

15 Derivative Accounting 15

16 Derivative Accounting HEDGE ACCOUNTING (ASC 815) Risk exposure to variability of cash flows or values based on changes in currencies, commodities or interest rates Allows the company to take credit for its risk management activities and receive preferential accounting treatment Requires upfront documentation of strategy and objective o o o Fair value Hedges change in value (unlocks a fixed rate) Cash flow Hedges variable cash flow (locks in a fixed rate) Net investment Hedges net investment in foreign subsidiary 16

17 Derivative Accounting ACCOUNTING TREATMENT - DERIVATIVES Recognized at fair value on balance sheet Gain / loss changes recognized in PnL: Dr Derivative Gain/Loss 500,000 Cr Derivative Liability 500,000 17

18 Derivative Accounting ACCOUNTING TREATMENT - DERIVATIVES Recognized at fair value on balance sheet Gain / loss changes recognized in PnL: Dr Derivative Gain/Loss 500,000 Cr Derivative Liability 500,000 Fair value hedge accounting* Cash flow hedge accounting* Net investment hedge accounting* Derivative Gain / Loss PnL Equity Equity (Currency Translation Adj) * Accounting treatment per ASU (published August 28, 2017) 18

19 Derivative Accounting ACCOUNTING TREATMENT - DERIVATIVES Recognized at fair value on balance sheet Gain / loss changes recognized in PnL: Dr Derivative Gain/Loss 500,000 Cr Derivative Liability 500,000 Fair value hedge accounting* Cash flow hedge accounting* Net investment hedge accounting* Derivative Gain / Loss PnL Equity Equity (Currency Translation Adj) * Accounting treatment per ASU (published August 28, 2017) 19

20 Derivative Accounting Earnings Volatility No hedging Yr 1 Yr 2 Yr 3 Yr 4 Hedged item Earnings Volatility Derivative Accounting Yr 1 Yr 2 Yr 3 Yr 4 Gain (Loss) Hedged item Earnings Volatility Hedge Accounting Yr 1 Yr 2 Yr 3 Yr 4 Gain (Loss) Hedged item 20

21 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results 21

22 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results Hedge Memo Hedge Relationship Risk Management Objective Testing Methods Financial Statement Impact 22

23 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results Effectiveness Testing Prove the hedge has been and is expected to be highly effective Q: Always required? A: No, if the following is true o Critical terms are identical between hedge and hedged item Supplier PA Henry Hub NG $2.7/mmbtu Processing Distribution.. 30 Total Cost $3.5 x 23

24 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results Effectiveness Testing Prove the hedge has been and is expected to be highly effective Common types of tests: Regression Dollar Offset Other ΔX ΔY VaR Synthetic Rate 24

25 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results No hedge accounting: Account (000s) Year 1 Db (Cr) Year 2 Db (Cr) Year 3 Db (Cr) Derivative Liability (500) Other Gains/Losses Hedged Risk Earnings Volatility Derivative Accounting Yr 1 Yr 2 Yr 3 Yr 4 Hedge Gain (Loss) Hedged item 25

26 Derivative Accounting HEDGE ACCOUNTING WORKFLOW Design Hedge Program Hedge memo Effectiveness test Record results Cash Flow Hedge accounting applied: Account (000s) Year 1 Db (Cr) Year 2 Db (Cr) Year 3 Db (Cr) Derivative Liability (500) OCI (Equity) Hedged Risk Earnings Volatility Hedge Accounting Yr 1 Yr 2 Yr 3 Yr 4 Hedge Gain (Loss) Hedged item 26

27 What we ve learned Intro to Cargill Risk Management and HedgeStar Hedging benefits Hedging program workflow Derivative accounting 27

28 Questions? Tim Johanson Craig Haymaker

29 Currencies Rates Commodities Thank You!

30 DISCLAIMER These materials have been prepared by personnel in the Sales and Trading Departments of, a business unit of Cargill, Incorporated based on publicly available sources, and is not the product of any Research Department. These materials are not research reports and are not intended as such. These materials are for the general information of our customers and are a "solicitation" only as that term is used within CFTC Rules 1.71 and , as promulgated under the U.S. Commodity Exchange Act. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any swap, security or other financial instrument. These materials contain preliminary information that is subject to change and that is not intended to be complete or to constitute all of the information necessary to evaluate the consequences of entering into a swap transaction and/ or investing in any securities or other financial instruments described herein. These materials also include information obtained from sources believed to be reliable, but does not warrant their completeness or accuracy. In no event shall be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained in these materials and such information may not be relied upon by you in evaluating the merits of participating in any transaction. 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Note that the transaction that is the subject of these indicative prices does not have Cargill Risk Management credit approval. These materials are not intended as investment or other advice or as a recommendation that you, any of your affiliates or any other person participate in any transaction. Cargill Financial Services Europe Limited is authorized and regulated by the Financial Conduct Authority ( FCA ) in the United Kingdom. For the European Economic Area ( EEA ), this information is directed at clients (actual or potential) who meet the definition of a Professional Client or an Eligible Counterparty under the Markets in Financial Instruments Directive ( MiFID ), and any products or services described in this information which fall within the scope of MiFID are only available to such clients. Any research recommendations contained in this are deemed to be non-independent research. Accordingly, they have not been prepared in accordance with legal requirements designed to promote the independence of investment research. In addition, whilst we have internal dealing restrictions, this document is not subject to any prohibition on dealing ahead of the dissemination of investment research. This is a marketing communication within the meaning of MiFID. Cargill Australia Financial Services Pty Limited (ABN ) is a licensed entity, Australian Financial Services License number , supervised by the Australian Securities & Investments Commission ( ASIC ) in Australia. This information is directed at clients (actual or potential) who meet the definition of a Wholesale Client as defined in the Corporations Act 2001 (Cth). Cargill RSA Pty Ltd. is an authorized Financial Services Provider ( FSP ), license number 34023, under the Financial Services Board ( FSB ) in South Africa. 30

31 HedgeStar Disclaimer HedgeStar is not an accounting firm or an advisory service and does not provide accounting advice or comment on the suitability or appropriateness of transactions. HedgeStar is not engaged as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. None of the information contained on our website, in this report or in this correspondence should be considered advice to any state or local government or other borrower. HedgeStar obtains some or all of the data used for our analysis from outside sources and, although we believe such sources to be accurate, HedgeStar cannot and does not independently verify the accuracy of such data. Further HedgeStar cannot and does not represent that the values, prices or quotations found in this report represent the values, prices or quotations at which specific transactions would take place. The data which HedgeStar utilizes to provide value, price and quotation information is extremely time-and-market-sensitive and thus is subject to frequent change based on market conditions. Information found in this report is for use by the addressee and should not be considered advice to the addressee in making decisions about any of the transactions. Information contained in any of our reports, website pages, or presentations is for use by the person or entity that has contracted with us for services. When using information provided by HedgeStar you must use your own judgment and expertise to evaluate and assess the value of the information presented for its particular purpose. The report cannot be substituted for the proper exercise of independent business judgment and analysis. We encourage you to consult with any and all of your own internal and external legal, accounting, tax, financial and other advisors, as applicable, to the extent you deem appropriate before acting on any information or material provided to you by HedgeStar. 31