6. What QFAS is not…………………
It is not Accounting,
It is not Business Valuation,
It is not Investment Banking,
It is not theoretical, it is scientific, and
Above all, it is NOT a cure for poor management, fraud, and/or weak leadership.
Quantitaive Finance must be coupled with qualitative, right-brain
thinking to be most effective.
8. Typical Advisory Services
• Earnings and cash flow sensitivity and volatility analysis,
• Cash flow forecasting and optimization,
• Market risk assessments,
• Pricing reviews and optimization studies,
• Client profitability optimization and segmentation,
• Quantitatively-driven operational transformation projects,
• Hedging strategies,
• Model validation,
• Curve construction,
• Limits setting, testing, & consulting,
• Model risk assessment, and
• Structuring & valuation of exotic derivative instruments.
9. Sample Applications
Fourier Analysis
Navigant can assist Clients to develop mathematical methods to decompose
data into specific frequency elements. This technique can be used to analyze
and price daily, weekly, and monthly variations in electric power demand, for
example.
Laplace Transform/Moment Analysis
Navigant can assist Clients to develop an appropriate mathematical method,
and model, to decompose data into its statistical moments, such as
distribution, kurtosis, and skewness. This capability allows for superior risk
models that go well beyond traditional VaR, CFaR, or mVaR; and advance the
ball towards a better grasp of “Black Swan” events, which are the most
devastating events of all.
10. Sample Applications cont’d
Differential Equations & Multivariate Regression Analysis
Navigant can assist Clients with solutions for equations that have first, second,
and higher order derivative relationships across multiple variables. This can
be essential in determining how various drivers impact outputs. For example,
this is the best way to properly model wholesale refining margins.
Factor Analysis
This is a statistical method that can be used to determine key unobserved
and/or underlying correlations between several variables. For example, for a
retail electric provider, Factor Analysis can be used to do a more accurate job
of quantifying customer profitability analysis.
11. Sample Applications cont’d
Error Propagation
Navigant can assist Clients with the development of uncertainty propagation
models, in order to determine the specific impact of variable variances,
correlations, and volatilities. This is useful in doing more sophisticated
EBTIDAX or cash flow volatility analysis based on the uncertainty of drivers
in the upstream oil & gas business.
Integer Optimization
This is an optimization technique that uses discrete constraints. It is easier to
optimize continuous parameters, but discrete constraints (like volume or
capacity) complicates optimization models and makes them slow to run. Plant
optimization and discrete market simulation (as in power markets) are two
examples of when this technique can be effective.
12. Sample Applications cont’d
Stochastic Probability Matrices
In simple terms, this service means that we help Clients to list and then map
out every possible event that might occur. Then, we work to assign a
probability to each of them. This work is coupled with expected valuations
per event, and is very useful in the analysis of commodity markets, cross-
correlation analysis for bank liquidity, as well as working capital optimization.
Stochastic Processes & Monte Carlo Simulation
Using software, or coding in Excel, Navigant can build simulation models
using random variables to determine their impact on important financial and
operational metrics. Specifically, hedging and trading strategies are well
suited to this approach.
14. Stochastic Market Analysis
How It Works
• Using SQL Server, we build as detailed a market model as possible of all
market inputs, which impact the Client’s operations (Midstream Crude Oil,
Polyethylene, ERCOT, etc.),
• Also using SQL Server, we prepare an output data file to store all market
data outputs,
• MCS is used to run simulations of various market strategies,
pulling/pushing on data in the SQL data bases, and then
• XLS is used to prepare summary output tables and metrics for leadership
discussions.
Applications
• Test M&A deals and their market impact,
• Test pricing strategies,
• Shock the market, and
• Quantify strategy and test its valuation impact.
17. Technical Competencies
Fixed-income products
• Fixed and floating rate instruments, bonds, swaps, caps and floors, FRAs and other delta
products.
• Yield, duration and convexity calculations.
• Bootstrapping to build up the yield curve from trading bonds and swaps.
• Curve stripping - Using reference rates & basis spreads, OIS discounting and dual-curve
stripping, cross-currency basis curves, and calculating the cost of funds.
• Interpolation methods, including piece wise constant forwards, piece wise linear, cubic
splines, smart quadratics, quartics, and monontone convex splines.
• Stochastic interest rate models, one and two factors.
• Model Calibration - Fitting the yield curve in simple models.
• Data analysis - Examining interest rate and yield curve data to find the best model.
18. Technical Competencies cont’d
Probabilistic methods for interest rates
• Using the Heath, Jarrow and Morton model, & modeling the yield curve.
• Determining risk factors of yield curve evolution and optimal volatility structure.
• Pricing interest rate derivatives by Monte Carlo Simulation.
• The Libor Market Model, calibrating the reference volatility structure by fitting to caplet or
swaption data.
• The SABR Model - Managing volatility risks, smiles, local volatility models, using the
SABR model and hedging stability.
• The Arbitrage Free SABR model - Reduction to the effective forward equation, arbitrage
free boundary conditions, comparison with historical data and hedging with the SABR
model.
19. Technical Competencies cont’d
Credit risk and credit derivatives
• Structural and Intensity models used for credit risk.
• CDS pricing, market approaches, and implied default probability, recovery rates, & default
time modeling.
• Synthetic CDO pricing, using the default probability distribution, default correlation,
tranche sensitivity, & pricing spreads.
• CDO/copula modeling using XLS spreadsheets.
• Correlation and state dependence analysis.
• Credit Valuation Adjustment (“CVA”): CVA exposure, modeling exposure, collateral,
wrong way risk & right way risk.
• Risk of default - The hazard rate, the implied hazard rate, the stochastic hazard rate and
credit rating, & capital structure arbitrage.
• Copulas - Pricing basket credit instruments by simulation.
• Statistical methods in estimating default probability - Ratings migration, transition
matrices, and Markov processes.
20. Technical Competencies cont’d
Stochastic volatility and jump diffusion
• Modeling and empirical evidence, pricing and hedging, mean-variance analysis, the
Merton model, jump distributions, expectations and worst case analysis.
• Non-probabilistic models - Uncertainty in parameter values versus randomness in
variables, & nonlinear equations.
• Static hedging - Hedging exotic target contracts with exchange-traded vanilla contracts,
optimal static hedging.
• Advanced Monte Carlo techniques - Low-discrepancy series for numerical quadrature.
Used for option pricing, speculation, and scenario analysis.
21. Technical Competencies cont’d
Energy derivatives
• Speculation using energy derivatives and risk management in energy derivatives.
• Cointegration - Modeling long term relationships, and statistical arbitrage using mean
reversion.
• Dynamic Asset Allocation - Convexity management, stochastic control, multi-period
projections, utility maximization, and the impact of transaction costs.
• Forecasting by using option prices - Volatility forecasting using historical asset prices and
current option prices.
• Inserting option prices into ARCH models, & typical ARCH results.
• Density forecasting - Criteria for good forecasts, estimating risk-neutral densities from
option prices, & risk-neutral to real-world densities.
23. Navigant Consulting, Inc.
Business Description
Navigant Consulting, Inc. is a
specialized, independent
advisory firm that supports
companies, lenders,
institutional investors, legal
counsel, and government
agencies. The company focuses
on entities and industries
facing the challenges of
uncertainty, risk, distress and
significant change, and on the
issues driving these
transformations.
Ticker NCI (NYSE)
2014 Revenue $859.6 million
Professionals 3,600+
Headquarters Chicago, IL
Senior Management
■ Julie Howard, CEO and
Chairman, Navigant
■ Cindy Baier, CFO and EVP
■ Richard D. Hitt, Managing
Director, Head of Navigant’s
Corporate Finance Practice
Navigant Consulting, Inc. (“Navigant”)
NCI’s 2,500+ professionals maintain a presence in 45 cities internationally
throughout North America, Europe and Asia, including a significant concentration of
resources in Chicago, Houston, London, New York, and Washington DC.
24. Comprehensive Energy Complex Coverage
Commodity Hedge Funds
Energy Services
Energy Trading & Marketing
LNG
Oil and Gas - Upstream
Oil and Gas – Midstream
Power Generation, Transmission, & Distribution
Refined Products
Renewable Energy
25. Our Strengths
Broad and deep expertise across the Energy Complex
We have consulting, banking, and corporate experience in diverse financial and commodity
markets, in addition to valuation & financial reporting technical capabilities. Our experienced
team includes MBAs, CPAs, CFAs, CBAs, ASAs, CAIAs, and MAI’s.
We are a one-stop shop, as we do complex commodity derivatives valuations alongside our
business and corporate valuation work.
Collaborative process
While our opinions are independent, you are involved throughout our process, because you
know your investments better than anyone. We want to understand your thinking, and we want
you to understand ours.
Thoroughness and accuracy
We give you more than just the conclusions. We give you thoroughly supported, accurate
valuation reports.
Integrity
We are only interested in getting to the right answer, employing generally accepted valuation
principles.
“Trusted Advisor” to our clients
Our clients view us as business partners, working together to establish best practices in valuation
and transaction work as competitive advantages for their firms.
What makes Navigant unique?
26. Accepted in the Marketplace
Our work has supported KPMG, PwC, Deloitte, E&Y, BDO, GT, and other
audit firms’ technical & audit staffs, undergoing detailed review of our fair
value analyses for financial reporting and tax purposes.
Our work has been reviewed and accepted by the SEC in numerous filings.
We have extensive experience defending our valuations before the IRS
(including Tax Court) and other tax and regulatory bodies.
Our senior professionals have performed technical reviews during their
tenure at the major accounting firms. We maintain continuing professional
relationships with current reviewers at these firms.
Our methodologies and findings have been presented to, and accepted by
numerous rating agencies, qualified institutional buyers and certified
investors.
Our professionals have published and spoken extensively on valuation
topics as they pertain to the investment community.
27. Trusted Advisor
Service
A combination of…..
… resulting in a “Trusted Advisor” relationship creating
valuation as a competitive advantage.
Flexibility
Collaboration
Accuracy
Thoroughness
Timeliness
Integrity
Expertise
28. “Excellent communication”
“Very responsive from a process and analysis standpoint”
“Exceeds expectations in response time “
“Investors have reached out to Navigant on methods and assumptions and have only
provided positive feedback”
“Meets all schedules and deadlines”
“Provides creative ideas and suggestions”
References available upon request
What our clients say about us….
29. Navigant vs. Big 4
• We have a diverse skill set; not just CPAs,
• We have corporate industry experience, they do not,
• QF is a discipline based on Applied Math, Economics
and Finance, not on Accounting, and
• We are not limited by rules-based thinking and
checklists.
30. Navigant vs. Wall Street
• We do not have trading and marketing desks, so we
can be more objective,
• We understand regulatory and statutory valuation,
bankers sometimes do not, and
• We understand all of the accounting and tax rules
that are unique to the Energy Complex.
31. Navigant vs. Boutique Firms
• Our balance sheet and brand stand behind our work,
• We can deploy a wide variety of resources globally,
• We do not have to outsource or sub-contract
anything, we are a one-stop shop,
• Small firms cannot be counted on to be there with
you through all of your regulatory challenges, and
• Energy boutiques do not possess the quantitative
finance horsepower needed to be effective.
33. Thomas J. McNulty
Director
Navigant Consulting
909 Fannin St. Suite 1900
Houston, TX 7010
Tel: 713.646.5078
Cell: 832.472.3717
thomas.mcnulty@navigant.com
Professional History
Navigant Consulting, Inc.
Sirius Solutions LLP
Plains All American
Duke Energy
Enron International
US Foreign Service
Brown Brothers Harriman
Education
M.B.A. (Accounting & Finance),
Kellogg, Northwestern University
B.A. (History), Yale University
Tom McNulty is a Director in the Valuation & Financial Risk Management practice of Navigant Consulting,
Inc. His specialties are transaction and commercial analytics, valuation, and risk management. Specifically, his
practice offers clients a unique combination of strategic, financial, and transactional advisory services. Mr.
McNulty is based out of the Houston office, and he has more than 20 years of financial advisory and related
experience work.
As a consultant, Mr. McNulty has advised clients drawing on his valuation, transactions, risk management,
treasury and international credentials. Specifically, he has assisted with the valuation of securities, business
units, acquisition targets, derivatives, and equity incentive plans. In industry, and as an advisor, he has
worked on more than $38 billion in MD&A deals and has valued more than $8.5 billion notional in futures,
options, and other derivatives.
In his current role at Navigant Consulting, Mr. McNulty directs engagements governing acquisitions and
divestitures throughout the energy complex, including upstream oil & gas, midstream, merchant power,
renewable energy, energy services, trading and marketing, as well as LNG. He also performs valuation work
for clients with complex equity, fixed income, and commodity derivative instruments.
Recent assignments Mr. McNulty has led include:
• Provided ASC 815 assistance to several energy companies related to their derivatives portfolios.
• Rendered a comfort opinion to a energy hedge offering a new midstream oil & gas fund.
• Rendered an opinion to an oilfield services company for a related party transaction.
• Directed ASC 805 project for the reverse merger of two private drilling companies.
• Provided ASC 718 valuation assistance to a publicly traded oilfield services company for its restricted stock
units and stock options.
• Delivered ASC 718 valuation assistance to a privately held upstream oil & gas company for its equity
incentive plan.
• Led the valuation work on the GP interest in a privately-held midstream company for a large litigation
engagement.
Resumes