FROM CFO December 2008
Only last April, Michael Graff of Graff Trucking predicted catastrophe if diesel prices climbed higher. “I’m at the point where I’m questioning my ability to continue to operate,” he said. While the current respite may have dialed back such angst, volatility has not vanished. Nor has the contingent risk to cash flow posed by potential taxes and cap-and-trade quotas on greenhouse gases (GHGs). These lurking costs jostle market values every day.
To date, however, companies have lacked any precise, uniform means to evaluate and manage value-at-risk from energy volatility, future liability from GHG emissions, or other aspects of sustainability. It’s been a finger-to-the-wind exercise in which companies have set all manner of targets and deadlines, with no hint of uniformity. Tool manufacturer Black & Decker, for example, reported to the Carbon Disclosure Project (CDP) that it sets no corporate emissions reduction target; instead, its initiatives focus on energy-efficient lighting, improving the use of compressed air and steam, and using high-efficiency electric motors.
To improve its energy profile, airplane maker Boeing seeks a 25 percent improvement in greenhouse-gas emissions intensity (on a revenue-adjusted basis) at major manufacturing facilities by 2012. Wal-Mart has described lofty long-term goals — to rely completely on renewable energy, to create zero waste, and to sell products that sustain global resources and the environment — all aimed at lowering a $2.5 billion bill for fuel and electricity.
This welter of goals, ambitions, and good intentions calls to mind Ronald Reagan’s famous dictum: Trust, but verify. Enter the “fossil-fuel beta,” a metric that can pinpoint the impact of fossil-fuel prices and contingent GHG emissions liabilities across the value chain. Such a metric could furnish market-based data to support fossil-fuel targets and truly substantive sustainability reports.
The fossil-fuel beta — or FFβ™ — developed for CFO by finance professor Anant Sundaram and the Allwin Initiative for Corporate Citizenship at Dartmouth’s Tuck School of Business, estimates exposure of a company’s market returns to changes in fossil-fuel prices. This new benchmark zeroes in on one pivotal question: To what degree do corporate policies and hedging strategies help decouple a firm’s market returns from fossil-fuel price changes?
The figures presented on the following pages do not address a potential carbon tax or the cap-and-trade cost implications of fossil-fuel consumption. That analysis must wait for improved quality of carbon-use audits; today fewer than half the companies in the S&P 500 provide a detailed public accounting of their GHG emissions, according to the CDP.
However, FFβ introduces an objective, accessible handle on a major component of energy risk. It combines reliable and widely used stock-market data from the Center for Research in Security Prices with fossil-fuel prices from the Bureau of Labor Statistics. The results pose new questions about bottom-line virtues of “natural” hedges that reduce fossil-fuel use and strategies that offset costs.
Using three calendar years of stock-market returns and fossil-fuel price data (through December 2007), the 2008 FFβ roster highlights inequality across a range of S&P 500 companies. Routine regression analysis tracks excess stock returns for changes in fossil-fuel prices at 135 companies in 10 industries. The tables illustrate the impact of a 10 percent fossil-fuel price increase.
Like conventional market betas, FFβs measure percentage changes in expected returns subject to another variable. Positive betas flag companies that tend to mute consequences of higher oil prices or even convert increases to added profits. Negative betas signal earnings more vulnerable to rising fuel prices. “It is not good or bad, per se, to have a positive or negative FFβ,” Sundaram says. “But it may be strategically sensible for a company to decouple its core business from fossil-fuel prices in the long run by gravitating to a zero beta.” Neutral FFβs can furnish a target for managers who want to insulate core earnings from fossil-fuel price fluctuations. Using the same scale, managers might instead adjust betas to accommodate any risk appetite or energy outlook.
An FFβ expresses the expected change in a company’s excess market capitalization for every 1 percent change in the price of fossil fuel. The change in market capitalization divided by the number of shares forecasts an imputed share-price impact of a change in fossil-fuel cost. When combined with consensus analyst estimates of the forward P/E ratio, it produces an earnings-per-share equivalent impact. This equivalent impact does not drive actual earnings up or down in a given quarter, as sales would. Instead, it imputes an energy toll (or bonus) to EPS subject to many other influences.
Take, for example, two package-delivery rivals, FedEx and United Parcel Service. Both spend enough on fuel to affect bottom lines and, hence, market values. UPS reported to the CDP that 6 percent of its 2007 operating expenses assigned $2.8 billion to fuel. FedEx reported a $3.5 billion fuel bill, or 11 percent of its total operating costs. Although both deliver packages, their excess earnings respond differently to changes in fossil-fuel prices.
What did the different sensitivity mean for shareholders of UPS (FFβ 0.0576) and FedEx (FFβ -0.1411)? Enough to nudge earnings in opposite directions by several cents a share. A 10 percent increase in the cost of fuel, Sundaram estimates, would strip the equivalent of 10 cents a share from FedEx. That, in combination with a P/E ratio of 12.2, relinquished an imputed $1.22 in share price, a penalty that a different energy policy might have offset. Conversely, a 10 percent drop in fuel prices should boost earnings in equal measure.
By maintaining a neutral FFβ, closer to zero, UPS delivers 3 cents of implied excess earnings, or 41 cents in share price (applying a P/E of 15.9). This net difference of $1.63 in the stock prices of two rivals resulting from a 10 percent change in fossil-fuel prices highlights why a fossil-fuel beta might help managers frame savvy questions around energy consumption. One explanation might lie in UPS’s aggressive pursuit of conservation initiatives, such as more fuel-efficient facilities, minimizing miles flown or driven, and converting 25 percent of its truck fleet to lower-emission vehicles.
Even steeper differences separated rivals in other industries. The imputed market impact of a 10-cent rise on petroleum producer Apache Inc. (FFβ 0.0657) was 71 cents a share; on Valero Energy Corp. (FFβ 0.5351), $3.75 a share. All 13 oil producers in the roster have neutral-to-positive FFβs, an outcome consistent with classical economics, says economist Robert Hansen, director of Tuck School’s Allwin Initiative. “This is the likely result of an increase in the demand for energy over this period, combined with rising asset values associated with the energy firms’ fossil-fuel reserves.”
In retailing, fossil-fuel exposure at Nordstrom (FFβ −0.4953) appeared to surrender $1.82 of market value, while a neutral profile at Wal-Mart (FFβ 0.0228) appeared to add 11 cents, for a net price difference of $1.93.
Nordstrom, in fact, had posted the most negative FFβ grouping in the retail sector as of December 2007, capping negative results in all rolling three-year periods since 1998. The imputed impact on its EPS: minus 16 cents. Citing favorable recent experience as fuel prices slid (when a high negative FFβ should have furnished a benefit), Nordstrom dismisses its 2008 FFβ as “coincidence,” but the Seattle-based retailer withholds its analysis.
Sundaram’s methodology calculates a neutral beta for Wal-Mart (FFβ 0.0228). Energy consumed by the giant retailer’s North American stores, warehouses, and delivery vehicles should have pushed Wal-Mart toward a negative FFβ along with most of its retailing peers. It is possible that undisclosed financial hedges, in combination with natural hedges, braced the giant retailer’s earnings against oil-price fluctuation in either direction. A fuel-efficient truck fleet, for example, furnishes a natural hedge that saves millions of gallons of gasoline a year, while rising oil prices may actually boost business by herding consumers toward value-oriented retailers. And Wal-Mart and its subsidiary Sam’s Club supply oil at gas stations nationwide. Those factors appear to have combined to create a rare positive FFβ in the retail sector.
Energy costs have long eluded means to manage them. Cost volatility alone warrants a new look at market-based analytical tools. Pressure to go green compounds demand for better data, not least in conjunction with looming cap-and-trade initiatives and related taxes. Besides furnishing a new tool aimed at critical cost control, this first look at a fossil-fuel beta should advance the ongoing energy dialogue. Think of it as just one window on a sustainability landscape still in need of wider exploration.
S.L. Mintz is a deputy editor of CFO. Robert Burnham of the Tuck School provided crucial analytical support for this story.
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UBI NEWS Tags:
energry,
fossil-fuels,
risk
(KSL News) Gov. Jon Huntsman is hoping to alleviate some of the state’s budget woes with a $14-billion wish list for Barack Obama’s $850-billion economic stimulus plan.
The state estimates 124,000 jobs could be created if the entire list is federally funded. $11.7 billion of the list is slated for roads, including I-15 reconstruction in Utah County, improvements on US Highway 6, and the Mountain View Corridor.
The rest of the stimulus money would go to transit, water and building projects.
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Economy,
Jobs,
Utah
From KSL.COM
Falling gas prices seem to come as good news to drivers, but they are the cause of hard times at Ogden-based Flying J.
The gasoline refining and distribution company filed for Chapter 11 bankruptcy protection; but at the same time, the company says it is not planning layoffs or closures right now.
Falling oil prices and a tight credit market both hit Flying J hard. Now, the company says it will reorganize while it recovers from significant, unavoidable debt.
Several months ago, the company bought a large amount of crude oil when prices were still at record levels, topping at least $140 a barrel. Today, oil is selling for a little over $40 a barrel. It’s been dropping for months. What the difference means for Flying J corporate is millions of dollars of debt. And, because credit is frozen, the company can’t get a loan to cover its short-term losses.
J. Phillip Adams, Flying J President and Chief Executive Officer, said: “Even though Flying J today is a successful and historically profitable company, it faced near-term liquidity pressure from an unprecedented combination of factors: the precipitous drop in the price of oil and the lack of available financing from our traditional sources due to disrupted credit markets. With this sudden and unanticipated inability to meet our liquidity needs, we regret that we had no other choice than a Chapter 11 filing to enable us to stabilize our financial base.”
Ironically, the same market forces are offering relief for consumers. Gas prices at the pump have dropped by half in two months. One driver we spoke with said, “It’s making a difference, definitely. It’s nice.”
Another driver said, “It’s far more affordable to get where I need to go. It’s great. I love it.”
While Flying J reorganizes, the company says it will continue operations as usual and none of its refineries or 250 Travel plazas will close. Adams said, “The good news is we have valuable assets, we do not expect layoffs will be necessary, and we are optimistic we will be able to generate substantial cash internally to allow us to meet our obligations going forward.”
What’s happening could be a bad sign for Utah’s overall economy, though. Financial analyst for Wells Fargo Kelly Matthews says the trend deserves close attention. “I’m worried that if this process goes further and continues, it will be reflected in adverse consequences in terms of our employment status and the strength of our companies.”
Flying J has 16,000 employees in the U.S. and Canada. It’s one of the largest private companies in the nation, with $16 billion in sales last year.
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Economy,
Energy,
Utah
From KSL.COM
The Salt Lake City Police Department today took another step forward to save gasoline and choose renewable energy. The next time you spot flashing lights in the rearview mirror, it might just be a hybrid patrol vehicle chasing you down.
Administrators already drive hybrids, but this may be the first Utah test of hybrids on patrol. “I think it’s necessary, given the direction of the economy, as well as the budget challenges we have here in the city,” Salt Lake City Police Chief Chris Burbank said.
The force added five Toyota Camry hybrids. It also picked up two chargeable electric Segways that police will use to patrol Pioneer Park and the Jordan River.
Even though prices are down, the department spends $1.5 million on gasoline each year. The hybrids are rated at 33 miles per gallon in the city and 34 miles per gallon on the highway, while the Chevy Impala cruisers in the fleet average 23 miles per gallon in the city and 26 miles per gallon on the highway.
The hybrids cost $4,000 more, but the chief thinks they will be cost effective and that they fit city goals. According to Mayor Ralph Becker, those goals are “to manage our fleet more wisely, in terms of energy use, and to just progress our city one step at a time to being a sustainable city.”
Another advantage with saving gas money: The chief says he can keep as many officers on the street as possible. “We’re looking for alternatives that we can save on our budget elsewhere so we can keep our personnel costs where they are and maintain the staffing levels that we have,” Burbank said.
The department will test the hybrids over a year and decide whether to buy more next year.
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Alternative Energy,
Green
On September 25, 2008 President Bush signed into law the Americans with Disabilities Act Amendments Act of 2008 (ADAAA)? The ADAAA significantly broadens the definition of “disability” from the original ADA, increasing the number of protected employees and increasing a business owner’s exposure to disability discrimination claims. The following is a quick outline of the changes:
The ADA Amendments Act of 2008
On September 25, 2008, President Bush signed into law the ADA Amendments Act of 2008 (the “Act”). The Act carries out the Americans with Disabilities Act’s objectives of providing a clear and comprehensive national mandate for the elimination of discrimination and clear, strong, consistent and enforceable standards addressing discrimination by reinstating a broad scope of protection to be available under the ADA which had been narrowed by the courts since the passage of the ADA.
The ADA will be construed in favor of broad coverage of individuals. Employers should be aware of this expansion of who is “disabled” under the Act. In order for employers to avoid liability for violating the Act, it is imperative that employers have legitimate, non-discriminatory reasons for their employment decisions. The Act does not change the definition of employer, so if you have 15 or more employees, you must comply with the ADA and the ADAAA. The Act is effective on January 1, 2009.
“Disability” Under the Act
According to the ADAAA, the definition of disability must be broadly construed in favor of coverage for the individual. The Act also makes is easier for an individual to meet the definition of a person regarded as having a disability.
The ADAAA defines disability as: (1) a physical or mental impairment that substantially limits one or more major life activities; (2) a record of such an impairment; or (3) being regarded as having such an impairment.
The ADAAA’s definition of “major life activities” includes but is not limited to the following: caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, working and also includes the operation of a major bodily function.
Additionally, the ADAAA sets forth rules of construction regarding the definition of “disability,” including that: (1) such term shall be construed in favor of broad coverage of individuals under the Act; (2) an impairment that substantially limits one major life activity need not limit other major life activities in order to be a disability; (3) an impairment that is episodic or in remission is a disability if it would substantially limit a major life activity when active; and (4) the determination of whether an impairment substantially limits a major life activity shall be made without regard to the ameliorative effects of specified mitigating measures.
The ADAAA gives the following examples of mitigating measures: medication, medical supplies, equipment or appliances, low-vision devices (not including eyeglasses or contact lens), prosthetics, hearing aids or other implantable hearing devices, mobility devices, oxygen therapy equipment and supplies, and the use of assistive technology, reasonable accommodations or auxiliary aids or services or learned behavioral or adaptive neurological modification.
The ADAAA makes clear that no accommodations are necessary if an individual is protected under the Act because they are regarded as having a disability.
Discrimination on the Basis of Disability
The Act prohibits employment discrimination against a qualified individual “on the basis of disability.” Current law prohibits employment discrimination against a qualified individual with a disability because of the disability. The Act also prohibits the use of qualification standards, employment tests, or other selection criteria based on an individual’s uncorrected vision unless the standard, test, or other selection criteria, as used by the covered entity, is shown to be related to the position and is consistent with business necessity.
Rules of Construction
Section 6 of the Act declares that nothing in the Act: (1) alters the standards for determining eligibility for benefits under state worker’s compensation laws or under state and federal disability benefit programs; (2) alters the requirement to make reasonable modifications in policies or procedures, unless such modifications would fundamentally alter the nature of the goods, services, facilities, or accommodations involved; or (3) provides the basis for a claim by an individual without a disability that the individual was subject to discrimination because of the individual’s lack of disability.
What Should Employers Do Now?
These amendments may require employers to provide more accommodations to more of their workforce. Specifically employers should:
(1) Start training supervisors and managers about the new rules;
(2) Review existing protocols and make sure that they conform to the new definitions;
(3) Review job descriptions and ensure job functions are spelled out;
(4) Make sure that supervisors pass along disability related questions to HR, and
(5) Consult with an employment attorney about how these changes will affect your company specifically.
If you have questions regarding this important legislative development, please contact your UBI representative.
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ADA,
Employers Liablilty,
EPL
