Navigant qfas april 2015

Quantitative FinanceAdvisory Services

April 2015

Table of Contents

Section 1 QFAS

Section 2 Advisory Services

Section 3 Technical Competencies

Section 4 Why Navigant ?

Section 5 Practice Leadership

Section 1QFAS

What is Quantitative Finance ?

• Mathematics meets Finance

• Probability & Statistics

• Linear Algebra

• Stochastic Differential Equations

• Numerical Methods

• Programming + computing power and speed =

• Linear & Non-Linear equations

• Interpolation & Optimization

• Binomial & Trinomial models

• Power Laws

• Finite Difference methods

• Monte Carlo Simulation (“MCS”)

Applications

• Corporate finance

• Derivatives pricing

• Financial regulation compliance

• Portfolio management

• Risk management

• Structured products

• Trading

• Valuation of options

• Hedging

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.

Section 2Advisory Services

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.

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.

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.


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.


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.

Stochastic Market Analysis

XLS

SQL DATA

MCS

SQL OUTPUT

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.

Section 3 Technical Competencies

Software Competencies

Excel +VBA Python R C++ MATLAB Mathematica Crystal Ball @RISK

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.

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.


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.


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.


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.

Section 4Why Navigant ?

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 4,000+

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 internationallythroughout North America, Europe and Asia, including a significant concentration of

resources in Chicago, Houston, London, New York, and Washington DC.

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

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 experiencedteam includes MBAs, CPAs, CFAs, CBAs, ASAs, CAIAs, and MAI’s.

We are a one-stop shop, as we do complex commodity derivatives valuations alongside ourbusiness 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 wantyou 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?

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.

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

“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….

Navigant vs. Big 4

• We have a diverse skill set; not just CPAs,

• We have corporate industry experience, they do not, and

• We are not limited by rules-based thinking and checklists.

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.

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.

Section 5Practice Leadership

Resumes

Richard D. Hitt, Jr.Managing DirectorNational Practice Leader

Navigant Consulting30 South Wacker DriveSuite 3100Chicago, IL 60606Cell: 312.953.7197Tel: 312.583.2621

[email protected]

Professional History


BearingPoint, Inc.

KPMG, LLP

Education

M.S.A., Eastern Michigan University

B.S., University of Michigan

Licenses & Certifications

Certified Public Accountant

Richard Hitt is a Managing Director and the Practice Leader for the Valuation & Financial Risk Management practice of Navigant Consulting, Inc., based out of the Chicago office. He has more than 25 years of valuation and financial advisory experience working with financial institutions and energy companies of all sizes.

In his current role at Navigant Consulting, Mr. Hitt oversees engagements governing acquisitions and sales of banks and thrifts and is a leader in the firm’s efforts to develop and employ effective valuation and due diligence techniques. His clients include some of the largest and best known financial service and energy corporations in America, including Deutsche Bank, Bank of America, Bank of Montreal, KeyCorp, Charles Schwab, First Republic Bank, E*Trade Financial Corp., NRG, LS Power, Primary Energy and Aquila.

Formerly a Managing Director of BearingPoint Inc’s Valuation and Financial Services Advisory practice, Rick led the development of a multi-faceted practice that focused on banks, thrifts, specialty finance and energy companies. His experience includes financial advisory to community and regional banks, including due diligence, fairness opinions, shareholder value analyses, merger and acquisition transactions as well as capital raising and investment strategies. Prior to BearingPoint, Mr. Hitt was a partner in KPMG’s Valuation Services Practice.

Recent assignments Mr. Hitt has directed include:

• Valued individually all the domestic and international electric generating facilities of a $5 billion utility for asset-backed funding purposes. The project included separate valuations of the power contracts and merchant plants.

• Valued the domestic and international electric generating, electric and gas transmission and distributionassets of a $4 billion utility for asset-backed funding purposes. The project also included valuing complex electricity and natural gas derivatives.

• Performed financial analyses for the domestic operations of a $10 billion utility for debt restructuring purposes.

• Rendered a fairness opinion to a Midwest life company as part of establishing a mutual holding company.

• Rendered a fairness opinion to a retail self insurance fund related to an investment in a workers compensation insurance company.

• Provided SFAS 141 and 142 valuation assistance in the merger of two $150 billion US banks.

mailto:[email protected]

Thomas J. McNultyDirector

Navigant Consulting909 Fannin St. Suite 1900Houston, TX 7010Tel: 713.646.5078Cell: 832.472.3717

[email protected]



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


Tom HoulihanDirector

Navigant Consulting1180 Peachtree Street N.E.Suite 1900Atlanta, GA 30309Tel: 404.602.5038Cell: 404.849.1243

[email protected]



Intercontinental Exchange

Mirant Corporation

JC Bradford & Co

Associations and Licenses

FINRA Series 7 & 63

Candidate Member, American Society of Appraisers

Education

MBA, Finance, Vanderbilt

BSBA Finance, Creighton

Thomas Houlihan is a Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc.

Mr. Houlihan’s principal focus is on valuation and advisory engagements related to the energy sector. In this role, has provided clients with valuation consulting services for purposes including transaction due diligence, fairness opinions, capital raising & investment strategy as well as litigation, tax and regulatory purposes. With more than 16 years of valuation and financial advisory experience, Tom has provided valuation and transaction assistance for client engagements involving some of the world’s largest energy companies and utilities, as well as mid‐sized companies, energy start‐ups and private investment funds.

Prior to joining Navigant Consulting, Tom held various roles in investment banking and corporate finance, including senior positions in the debt capital markets division of JC Bradford & Co (now UBS Capital Markets) and more recently in corporate development and asset management positions with Mirant Corp (Southern Energy) and as Director of Finance and Strategy for Intercontinental Exchange (ICE).

Recent assignments Mr. Houlihan has directed include:

• Fair Market Value of multiple nuclear power plants - Retained by a large investor owned utility to assist with evaluating options with respect to the early buyout or termination of lease financings secured by the company’s interest in several nuclear power plants.

• Valuation of a municipal waste-to-energy generation facilities to assist a client with evaluating lease repurchase and financing options;

• Acted as primary valuation advisor to support a client’s effort to finance the $210 million purchase of 680 MW North American peaking facility. NCI provided the client with additional valuation services to support the company with allocation of purchase price for financial reporting.

• Performed the valuation of North American gas distribution system serving approximately 426 active meters through approximately 11 miles of gas distribution mains. NCI provided an estimate of the fair market value of the business to assist the client’s effort to secure just compensation for the assets, which were taken through condemnation proceedings.

• Retained by a major investment bank to provide an estimate of the prospective fair market value of a of 1,161MW CCGT. The estimate of value was necessary for financial reporting purposes, including disclosures related to residual value guarantees stipulated in lease finance transactions for the plant.

Resumes


Neeli Souli KohanAssociate Director

Navigant Consulting90 Park Avenue, 10th FloorNew York, NY 10016Tel: 646-227-4654Cell: 646-232-8855

[email protected]



Deloitte Financial Advisory Services LLP

Overseas Shipholding Group

Education

M.B.A., Finance, Pace University

B.S., Accounting, Yeshiva University

Accreditation

Chartered Financial Analyst (CFA), CFA Institute

Certified Public Accountant (CPA), NY and NJ

Candidate, ASA

Neeli Kohan is an Associate Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc. Ms. Kohan is based out of the New York office.

Ms. Kohan has more than 16 years of experience in the valuation of public and private businesses, securities, and intangible/tangible assets. She has performed valuations for purposes of financial reporting (including Business Combinations, Goodwill and Long Lived Asset Impairment Testing for US GAAP and IFRS), Federal tax, project financing, sale/leaseback transactions, M&A due diligence, and management information purposes. Industries served include power generation, gas, electric, water and wastewater utilities, alternative energy providers, private equity, media and entertainment, shipping and transportation.

Ms. Kohan is a Certified Public Accountant, a Chartered Financial Analyst and a candidate of the American Society of Appraisers. She has a B.S. from Yeshiva University in Accounting and an M.B.A. from Pace University in Finance. Prior to joining Navigant Consulting, Ms. Kohan was with the Valuation practice of Deloitte Financial Advisory Services, LLP.

Resumes
