- Industry: Utilities, Telecom
- Product(s): @RISK
- Application: Investment Analysis
Colombian energy transport company ISA (Interconexión Eléctrica S.A.) uses @RISK for corporate wide financial analysis and forecasting.
The great thing about our enterprise-wide simulations is that we only had to build the @RISK model once. Now it’s easy to assess new opportunities. We reset the probabilities in the model, and then just go in and run it.Risk analyst, Interconexión Eléctrica S.A.
Palisade’s successful expansion into Latin America is exemplified by Colombian energy transport company ISA’s (Interconexión Eléctrica S.A.) use of @RISK for corporate wide financial analysis and forecasting. The giant energy, telecommunications and systems of linear infrastructure utility consists of 10 component enterprises which offer energy and telecommunications transmission throughout Central and South America. ISA’s individual investments and projects are often valued with the most rigorous strategic and financial plans, and the ISA financial team’s goal is to produce detailed, integrated models to simulate the potential performance of these investments and determine the optimum use of its financial resources.
Diagnosis of the Corporate Portfolio
Rather than assess each potential investment or project in isolation, the ISA financial team looks at the effect that transaction will have on the entire portfolio of ISA investments. This “portfolio diagnosis” takes into consideration:
- the liquidity of the enterprises.
- an index of cash flow that captures estimated income and outflows
- a debt profile that identifies market risks and possible mitigating factors, accounts for fluctuations in currency and interest rates, and the timing of maturities of its obligations.
- a calculation of the basic indicators that will affect the management of ISA’s portfolio, including investment duration, the efficient frontier, the cost of debt, and credit spreads.
Rigorous Path to EaR and CFaR Risk Measurements
The ISA financial team then initiates a rigorous five-step process that leads to risk simulation and its results:
- Choose the measure of values and define the time period for the simulation.
- Identify the variables that influence those values and, based on enterprise data, quantify their effects on earnings and cash flow.
- Project possible values for each economic variable within the defined time period.
- Simulate ISA’s cash flow and Profit and Losses statements by means of Monte Carlo simulations.
- Quantify the risk measurements EaR (Earnings at Risk) and CFaR (Cash Flow at Risk) and determine the maximum allowed loss in term of money for each statement.
@RISK in the Fourth Step
In the fourth step, the Monte Carlo simulation, the ISA team accounts for factors that occur irregularly throughout the portfolio. What if the exchange rate shifts in one of the countries involved in an ISA investment but not in the others? Or perhaps potential revenues vary widely across the group’s region.
To account for the internal variations in the model, the analysts integrate @RISK’s Monte Carlo simulation with proper forecasting models. In this way, the ISA team provides an estimate for a range of macroeconomic variables in each of the countries involved in a particular project or investment. It allows the group to identify the most influential of those variables, and their enterprise-wide model then correlates the selected variables with net profit.
A Durable Model
Even before Palisade offered @RISK in a Spanish language version, the ISA financial team was an experienced user of the software. They rely on @RISK for the consistent support it gives to decision-making at ISA. They find that it promotes a systematic approach to evaluating investments, spin-offs, and acquisitions, and at the same time allows the group to monitor the corporation’s progress in meeting goals.
“The great thing about our enterprise-wide simulations,” says the ISA team, “is that we only had to build the @RISK model once. Now it’s easy to assess new opportunities. We reset the probabilities in the model, and then just go in and run it.”