Fortnightly
$20 Billion or Bust
October 15, 1999
By Diane Borska
The minimum stake that marketers must bring to the table.
Conventional wisdom says any commodity marketer requires scale and scope in order to succeed. But what constitutes scale and scope? Some specifics follow.
* Size. Balance sheet of sufficient size and strength to withstand the volatility of commodity prices. Minimum total asset base of $20 billion.
* Flexibility. Balance sheet with inherent flexibility, meaning the company's finance and accounting practices are not subject to much more than standard Securities and Exchange Commission or Financial Accounting Standards Board requirements. Flexibility in this context means the ability to quickly monetize or acquire assets, as well as the ability to extract both quality income and earnings growth from related company business units beyond the marketing entity.
* Asset Diversity. Established ownership of a critical mass of assets, including both physical commodity transportation assets (pipelines, transmission lines) and commodity production assets.
* Access. Ability to gain contractual access to or control of additional production and delivery assets, leveraging established asset base.
* Skill. Sophisticated risk management abilities. That refers to the ability to use and refine sophisticated quantitative tools and systems, and to have strong organizational and corporate oversight, clear risk management policies and the ability to create, buy and sell structured financial products in addition to physical commodities.
* Fuel Diversity. Trading in multiple fuels - power, natural gas, NGL, coal, crude oil - with different demand characteristics and with an ability to develop a quantitative understanding of how demand for one fuel correlates to demand for another.
* Geographic Scope. Trading commodities in multiple geographic regions and power pools with different peak demand characteristics.
Diane Borska is vice president and director of the utilities practice at Fuld & Co.
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