CTRM Value Survey and Anaysis

CTRM Value Survey and Analysis

In Cooperation with

November, 2013

Allegro Development

Commodity Technology Advisory LLC

19901 Southwest Freeway, Suite 140 Sugar Land, TX 77479 281-207-5412 www.comtechadvisory.com

CTRM Value Survey and Analysis

Report Background and Overview The environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex, marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny and evolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty as to future price movements. In order to react to these changes quickly and appropriately, participants in these markets must increasingly rely on a sophisticated infrastructure of software and technologies to ensure a complete view of their trading positions and external market conditions that can quickly and severely impact their values. The core component of these now requisite trading and marketing technologies are energy and commodity trading and risk management (CTRM) systems.

As market complexity has increased and multi-commodity trading has become more common, CTRM solutions have had to become more sophisticated and provide a greater depth of capability in order to capture and value the unique characteristics of the multitude of physical commodities being transacted along the physical supply chain, from source to market. Given the capabilities of these CTRM systems, they do represent a significant investment for any trading or marketing organization, generally trailing only the large scale ERP solutions, like SAP, in terms of costs to purchase and implement.

Allegro Development, one of the world’s largest CTRM solutions providers, engaged Commodity Technology Advisory to conduct a survey of a number of their clients to determine their views as to the value of their investment and the operational and financial impacts of deploying Allegro’s CTRM solution.

This report summarizes the results of that survey and discusses the key considerations for any company seeking to develop their own assessment of the value of their CTRM technology investment via a Return on Investment (ROI) calculation.

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CTRM Value Survey and Analysis

SUMMARY - PERCEIVED VALUE The survey respondents provided a current estimate of the value received from their software investment (ranked very positive thru very negative). Given the investment required to implement and integrate an enterprise scale CTRM solution, it is expected that companies who have had the system in production for a very short period of time will not have yet recouped that initial investment.

Only one of the respondents indicated they had calculated a Return on Investment (ROI) value relative to their CTRM purchase and implementation.

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CTRM Value Survey and Analysis

RESEARCH DEMOGRAPHICS Commodity Technology Advisory interviewed individuals at 20 Allegro customers over a several week period in the second quarter of 2013.

The companies and individuals participating in this project were initially contacted by Allegro to seek their participation.

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CTRM Value Survey and Analysis

IMPROVING ACCESS TO INFORMATION One of the primary goals of all purchasers of a CTRM system is to improve the availability of information to all users, particularly those whose performance will have the greatest impact on the bottom line.

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REDUCING COSTS AND INCREASING EFFICIENCIES Realizing positive value for a CTRM system is in large part dependent upon improving operational efficiencies while containing costs

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Containing Costs

Improving Efficiencies

CTRM Value Survey and Analysis

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CTRM Value Survey and Analysis

IMPROVING CONTROLS WHILE MAINTAINING USER SATISFACTION Research has consistently shown most users will prefer spreadsheets for managing their individual business responsibilities; reducing the plethora of risk exposures associated with spreadsheets while maintaining high user satisfaction is clearly a positive net benefit

RESPONDING TO CHANGES IN BUSINESS AND MARKETS CTRM systems should facilitate growth, including growth of current business and expansion into new markets and commodities

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CTRM Value Survey and Analysis

RESPONDING TO CHANGES IN BUSINESS AND MARKETS (CONT’D) The scalability provided by structured CTRM solutions, like Allegro, enables business to grow their market reach and capabilities without substantial incremental increases to their technology spend.

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CTRM Value Survey and Analysis

Determining Return on Investment (ROI) Determining the return on investment (ROI) for a CTRM software acquisition can be challenging as one of, if not the, primary drivers of such a purchase is risk reduction - including price, credit, regulatory, operational and execution risks.

Deploying a modern CTRM solution, like that from Allegro, will when compared to a spreadsheet or manual process, reduce the risk exposures in virtually all areas of your business while simultaneously improving information visibility and enabling better and more profitable decision making. Precisely valuing an avoided event is not possible, but utilizing your company’s past experiences can inform the value you may or may not place on reduced risks and can be an important determinate in valuing your software investments.

Other benefits can be more readily measured and are based on your company’s past and current experience in utilizing software to capture deals, manage positions and risks, account for your business, and analyze and report activities.

Whether your most recent experience prior to implementing a new CTRM solution was the use of spreadsheets, a custom developed solution or another vendor product, many of the changes in terms of costs and benefits can be reasonably measured and used to calculate an ROI for your latest software investment.

Return on Investment = (Benefits - Costs) / Costs

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CTRM Value Survey and Analysis

Benefits and Costs to be Considered When Calculating ROI BENEFITS Value of reduced headcount costs across business process or possibly switch from direct full-time internal staff costs to variable, on-demand external headcount costs via use of third party consultants Reduced operational risked via saved penalties and fees as a result of reduced errors in areas such as scheduling, Invoicing and payments Reduced cost of credit and credit facilities due to better management of both cash and credit – this is on both sides in offering and receiving optimal collateral to support actual trading needs Reduced FX costs due to better management of FX and reduced need for FX conversion Ability to optimize trading data costs – i.e. consolidate and reduce Bloomberg, Reuters, and other data feed requirements?

Improved Market Risk Management – improved hedge performance, improved decision making, etc., yielding improvements in P/L, MtM, and cash management and reduced exposure to negative credit events such as margin calls.

Improved counterparty relationships as a result of more timely confirmation and settlement – improved market reputation will reduce costs of finding and negotiating agreements with counterparties Reduced technical and business maintenance and workaround costs vs. replaced system Improved identification of trading opportunities resulting in better results Improved visibility into current performance reduces management and external (banks, shareholders) anxiety which in turn has an impact on capital requirements and staffing.

Improved ability to forecast business performance potentially reducing capital requirements and improving stock performance Improved auditability and controls reduces chance of compliance issues and decreases costs of an audit.

Improved tracking of payment terms and slow payments resulting in faster cash collection or trading decisions – i.e. no trade, buy only etc.

Marginal ability to attract better quality staff

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COSTS Initial license fees or incremental ongoing service or rental fees vs. the similar costs of replaced system License fees for add-on modules or ancillary software such as database solutions Support & Maintenance costs – incremental vendor S&M contract cost and internal staff vs. similar costs of replaced system Additional fees – escrow for source code etc., if higher than replaced system Estimated procurement costs (cost of personnel, facilities and equipment involved in the identification, testing, and contracting of the software) Implementation costs including both internal and external costs related to human and technical resources for data conversion, training, integration, and testing Costs associated with parallel testing/usage during UAT. Periodic upgrade project costs Internal hardware costs including maintenance – live, test and other environments Operational issue costs as a result of software deficiencies – if any Work around costs (man hours, software, custom development) – if any Cost of on-going or periodic training

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CTRM Value Survey and Analysis

About Commodity Technology Advisory llc Commodity Technology Advisory is the leading analyst organization covering the Energy and Commodity Trading and Risk Management (E/CTRM) technology markets. We provide invaluable insights, backed by primary research and years of experience, into the issues and trends affecting both the users and providers of the applications and services that are crucial for success in markets constantly roiled by globalization, regulation and innovation. The company is led by Co-Managing Directors Patrick Reames (USA) and Dr. Gary M. Vasey (Europe), who collectively have more than 60-years of experience in the energy and commodities industry.

Commodity Technology Advisory 19901 Southwest Freeway, Suite 140 Sugar Land TX 77479 +1 281 207 5412 (USA) +420 775 718 112 (Europe) www.comtechadvisory.com

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CTRM Value Survey and Analysis

About Allegro Development Allegro is a global leader in energy trading and risk management solutions for power and gas utilities, refiners, producers, traders and commodity consumers. With more than 29 years of deep industry expertise, Allegro’s enterprise platform drives profitability and efficiency across front, middle and back offices, while managing the complex supply chain associated with physical commodities.

Allegro provides customers with agile solutions to manage risk across natural gas, power, coal, crude oil, petroleum products, emissions and other commodity markets, allowing decision makers to hedge and execute with confidence.

Headquartered in Dallas, Texas, Allegro has offices in Calgary, Houston, London, Singapore, Sydney and Zurich, along with a global network of partners. www.allegrodev.com

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