The collapse of Enron produced a perfect storm when it became clear that many of the largest energy and financial services companies couldn’t accurately determine counterparty credit positions. We know that Enron collapsed in a chaos of complex contracts, thousands of counterparties and their collateral demands, and (lack of) cash. We’ve heard less about how lack of accurate data among its counterparties fueled a storm that rocked the company’s business partners and caused a few of them to capsize.  Back then—only a few years ago, but truly another era—managing credit risk and financial liquidity with comprehensive, enterprise-wide technology systems was a fairly uncommon business practice.Today, the energy industry is more aware than ever of the volatility that can occur when a company lets down its guard and doesn’t manage risk, and the industry is embracing technology that can protect it. It is also evident that too much concentration with any one counterparty is dangerous; that keeping track of transactions and understanding complex contractual relationships is essential to survival; and that a laser focus on financial liquidity (cash) requirements (including potential requirements) is crucial. As a result, comprehensive risk management systems have emerged as not only a key component of managing risk but a part of standard operating procedure for energy companies worldwide.

PERSPECTIVE OF RISK IS PARAMOUNT
Having an accurate view of a company’s credit risk is crucial. Investing in a comprehensive risk management and liquidity software solution has been the answer for many companies.This “vision from within” allows a company visibility into consistent reporting.System functionality stretches enterprise-wide to provide companies with the timely data they need, which matters not only for stability, but for survival. Whether by counterparty or by contract, comprehensive software solutions help companies manage their operations and position them to minimize the risk of, and even to take advantage of, market swings—sudden developments that are key to profitability in today’s volatile environment. Energy enterprises of all sizes have been thrown into a virtual pressure cooker by ratings agencies, as reflected by Standard & Poor’s new liquidity survey. Now these agencies (as well as, compliance with Sarbanes-Oxley and Basel II) and others like them require companies to report exactly what they owe and who owes them, and how that might change with significant market events.

MORE MARKET VOLATILITY
In considering a market that is inherently volatile it simply makes sense to take steps to manage that volatility and its associated risks. That’s why more companies are turning to technology. Risk management solutions created specifically for the industry allow companies to track all pieces of a business, including crude oil, natural gas and financial derivatives activities, as well as manage liquidity for a clear view of a company’s inner financial workings. With the right technology, a market participant can delve into the business of energy contracts, giving management immediate awareness of credit and liquidity risks that could potentially leak millions of dollars from the company, as well as expose non-compliance with regulatory or legislative requirements. What’s more, companies operating with technology on their side can manage all key counterparties and contracts while sharing that information across other company systems, like ERP, logistics or trading. Everyone’s informed, and everyone’s on the same page in the same book. That’s key, especially in light of Sarbanes-Oxley. Chief executive officers are now personally on the hook for the accuracy of their companies’ financial reports.With its increased reporting requirements and financial controls for companies in virtually every industry, the legislation is forcing companies to rethink strategy. If a company can’t comply with quarterly financial reporting requirements weeks after the fact, how can it create the information needed to manage the company dynamically in a volatile market? Having weathered the storm, companies now know what to expect, how to avoid hazardous waters and how to minimize risk. Some of the most respected companies have decided to utilize technology to help them gain a better perspective on their risk scenarios. These leaders have taken the long view because they are taking advantage of risk management technology. As a result, they: gain significant efficiency in reporting of exposure and available credit; can easily resolve margin disputes; can meet S&P liquidity reporting requirements; are discovering unassigned overpayments; have the ability to call for collateral on contracts where they haven’t been able to provide timely and accurate contract-based calculations in the past; can minimize the capital consumed by credit risk; and can minimize the potential for financial liquidity crises from volatile market events. One might call it a lesson in perfect forecasting, with a view in which storm clouds never gather.