Key actions can benefit energy leaders from all sectors
From technology transformation to regulatory concerns to renewable opportunities, Grant Thornton’s 2023 Energy Symposium featured fresh insights on important energy trends closely monitored by the firm’s professionals.
Here’s a sampling of what industry leaders shared at the symposium—and what you can expect when you view the on-demand webcast series to learn more. Whether you’re in oil and gas, renewables—or both, applying these insights helps you create a competitive advantage.
Transforming your technology
Technology innovations are causing a rapid shift in the way energy companies conduct their operations, helping them provide better products and services with faster delivery times.
The discussion with Grant Thornton Energy Advisory Leader John Stilwell and Principal of Technology Transformation Will Whatton focused on technology strategies that can make an immediate difference for many organizations in the energy industry.
- Leadership can derive benefits from migrating on-premises enterprise applications to the cloud and investing in new cloud-based capabilities. This can enable the sunsetting of legacy applications and hardware that are no longer driving value, while opening the door to new capabilities that can improve the end-user experience.
- Energy companies need to establish robust data governance practices that span the entire organization rather than specific segments and systems. These practices drive consistent reporting and enable informed decision-making. Establishing a data governance committee with oversight responsibility can enhance this process, which ultimately can result in the development of relevant, objective, measurable, complete data that can be used by analytics platforms to provide significant differentiation and opportunities. As energy companies enhance their data governance function, assessing and understanding their underlying data quality and availability is critical to supporting a data-driven organization.
- By developing big data and analytics programs, energy companies that have already established robust data governance practices are establishing “data lakes” that can extract data from multiple sources on a timed, periodic basis. This data is used to standardize and automate reporting and analytics, establishing a platform for accurate forecasting that leads to more effective planning. The best energy companies utilizing big data capabilities are constantly cleansing and monitoring their overall data quality throughout the business to establish greater data trust.
- Once a strong foundation of data governance and data analytics is established, energy companies can take the next step and reap the benefits of machine learning and artificial intelligence (AI). The more data you can define, control and trust, the greater the value you can deliver from these advanced capabilities.
Grant Thornton insight
One AI application that’s paying dividends in energy is the creation of digital twins—models that AI platforms can use to show the predicted outcome of numerous strategies. This scenario-planning approach helps companies see a range of potential outcomes and enables better planning and design of facilities and machinery.
Regulatory watch list
SEC comment letters can cause considerable angst for any public company, and one session at the Symposium described the most frequent areas of SEC comment in the energy industry over the last two years. The discussion featured Grant Thornton Partner, SEC Regulatory Matters, National Professional Standards Group Rohit Elhance; Partner, Professional Practice Director Hilary Penrod; and Partner, Audit Andrea Brown.
Energy finance leaders need to be aware that the SEC has been heavily scrutinizing numerous areas.
- Comments on management’s discussion and analysis (MD&A) for energy companies typically revolve around results of operations or performance measures. With results of operations, finance leaders are encouraged to scrutinize their SEC reporting for inconsistency. If the MD&A within an 8-K attributes revenue growth to a recent acquisition but the subsequent 10-Q or 10-K cites an improved drilling program, this type of discrepancy may attract SEC attention. SEC staff comments on performance measures often focus on clear disclosures of financial position and any changes in financial position. Disclosing the primary driver for a financial position change is required, and it should align with any discussion and disclosure of the matter elsewhere in SEC filings.
- With respect to climate-related disclosures, the SEC staff has been commenting on inconsistencies between a company’s social responsibility report and its SEC filings. They also focus on the failure to disclose risks, trends and impacts of climate change on a business, as well as the failure to disclose the potential material impact that climate change regulations may have. As this is an emerging area of disclosure (and climate-related disclosure requirements will get more prescriptive with the soon-to-be-released new SEC rules), reviewing example comments provided by the SEC staff is important in enabling compliant reporting.
- The SEC staff has also been commenting on development plans for proven, undeveloped reserves, asking registrants to provide additional information on proven or probable reserves. Related to fair value measurement, the SEC staff often comments on the valuation techniques and key inputs in fair value calculations, and qualitative information used for significant unobservable inputs (for Level 3 designation).
Grant Thornton insight
Non-GAAP measures are a constant focus of the SEC. Energy companies are receiving comments about the prominence of non-GAAP measures compared with GAAP measures, reconciliations to GAAP measures, and the appropriateness of adjustments related to non-GAAP measures. Grant Thornton professionals recommend that when any kind of key performance indicator is discussed in SEC filings, leaders pause to determine if that KPI falls into the non-GAAP category and would require additional disclosures.
Trends to watch in renewable energy
Boosted by Inflation Reduction Act (IRA) tax credits, other incentives and a growing consumer interest, the renewable segment of the energy industry is getting a strong push forward. The discussion featured Grant Thornton Principal, Technology Transformation and Energy Advisory Leader John Stilwell; Principal, Advisory Services Adam Ross; and Senior Manager, Renewable Energy Dan Mueller.
- The demand for energy across the globe is increasing significantly across all sources. Meanwhile, renewable companies are benefiting from the resilience that has been built in supply chains as a result of the COVID-19 pandemic. In addition, energy and security concerns caused by Russia’s invasion of Ukraine have caused countries to intensify their focus on developing renewable sources such as solar and wind energy.
- There are numerous opportunities to take advantage of technology advancements in the renewable sector, with many leading the way by moving their back-office enterprise resource planning, corporate performance management and operations systems to cloud-based software-as-a-service models. Big data is being combined with AI to inform decisions, enable efficiency and drive predictive maintenance across large networks. The addition of blockchain provides transparency in peer-to-peer electricity trading and contracting.
- The geographical opportunities related to renewables are numerous. Undeveloped offshore areas show tremendous potential for wind projects, and desert sun that otherwise makes areas undesirable can be ideal for solar energy collection. The challenge for bringing some of these opportunities to market is the need for stable infrastructure. It does little good to generate energy if there’s no transmission mechanism to deliver it to consumers. Meanwhile IRA incentives for clean hydrogen production, innovation and carbon capture have the potential to ramp up operations for this renewable source.
- The business risk landscape continues to evolve, with cybersecurity, enterprise risk management and internal control over financial reporting (ICFR) remaining top of mind for both public and private companies. This is consistent across energy sectors and other industries. The SEC adopted its final rule on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies as of July 26, 2023. Moreover, the National Institute of Standards & Technology (NIST) recently released its draft Cybersecurity Framework 2.0, which was open for public comment through Nov. 4.
Grant Thornton insight
Companies can tap both private and public sector funding to support renewable energy projects because there is a tremendous wealth of resources in both sectors. The IRA credits provide a huge incentive, and they’re not the only government investment in renewables. Nearly half of U.S. states have set renewable or carbon-free goals, and many are providing their own incentives. At the same time, private sector funding for renewable projects is increasing substantially. Large investor-owned utilities are establishing ambitious carbon reduction goals, and large multinational companies in oil and gas, private equity, the shipping industry and automobile manufacturing are investing in renewable initiatives.
Developing climate resilience
Public and private energy companies are paying increased attention to the importance of climate-related disclosures and resilient business practices. Conducting climate risk analysis and understanding the relationship between climate risk and enterprise risk management (ERM) can help energy companies be positioned for resilience.
Physical risks encompass natural disasters and long-term shifts in climate patterns that can threaten energy facilities. Transition risks related to the move to a lower-carbon economy may have a substantial impact in particular on the oil and gas sector. Grant Thornton’s speakers in this session were Strategic Risk Services Leader, Risk Advisory Services Yvette Connor and Managing Director, ESG & Sustainability Services Marjorie Whittaker.
- A climate-related scenario analysis helps organizations develop their understanding of their physical and transition risks and the related opportunities and risks presented by climate change. By building from qualitative narratives at the beginner stage to rigorous data sets and quantitative modeling at the advanced stage, energy companies can develop the background they need to strengthen resilience, mitigate losses, maximize returns and accelerate the adaptation of solutions related to climate change.
- Developing quantitative modeling enables an analysis of the financial implications of transition risks and informs strategic decision-making for the future. Meanwhile, energy companies can use quantitative models to stress test business assumptions and circumstances to prepare for a variety of future outcomes. And focusing on the highest-risk variables will safeguard against a scenario’s greatest potential loss, whether it’s the climate’s effects on a company’s operating curve or the physical location of an asset.
Grant Thornton insight
When an energy company undergoes a climate impact scenario analysis, it’s important not to do it alone. The process is more complete and provides more reliable output when it’s a collaboration among a diverse set of stakeholders, including communities, researchers, domain experts, planners and decision-makers. Together, they can develop an impact hypothesis and scenario parameters that drive collective understanding while revealing information gaps and accelerating adaptations that can drive resilience.
Tax planning for energy companies
Seizing tax opportunities to enable the business is key, along with proactive planning. Many energy companies are examining the substantial tax credits that are being offered for renewable projects. Grant Thornton’s presenters were Managing Director, Strategic Federal Tax Services Tracey Baird; Market Managing Partner/Partner Mergers and Acquisitions Tax Services, Houston Tracy Hennesy; Senior Manager, Strategic Federal Tax Services Samantha Joost; and Director, Mergers and Acquisitions Tax Services Calvin Nguyen.
- The Tax Cuts and Jobs Act resulted in significant changes to the treatment of research and experimentation (R&E) expenditures under Section 174 of the IRS code. For tax years beginning after Dec. 31, 2021, taxpayers are required to capitalize and amortize all R&E expenditures over a five-year period for research performed in the U.S. and a 15-year period for research performed outside of the U.S., regardless of how the expenditures were treated previously. The new rules can result in new book-tax differences and create related deferred-tax assets. Effective tax rates may be affected if a valuation allowance is required for the deferred tax asset or due to the indirect effects on other calculations, including:
- Interest expense limitations under Section 163(j)
- Base erosion and anti-abuse tax (BEAT)
- Tax on global intangible low-taxed income (GILTI)
- Foreign-derived intangible income (FDII)
- Energy companies need to carefully consider tax implications as they decide whether to refinance or reorganize their debt. Debt modification, debt-for-equity exchanges and debt repurchase arrangements all have the potential to result in the cancellation of debt income. Meanwhile, when debt is issued with property, warrants, equity and other property all represent additional original issue discount amounts to the borrower, as well as additional income to the lender.
- For companies considering an M&A process, buy-side or sell-side, it is important to make sure that these areas are addressed and documented thoroughly to ensure a smooth due diligence and deal negotiation process.
Grant Thornton insight
To take full advantage of the IRA’s $500 billion package of energy incentives, energy companies need to meet certain requirements. The new law enhances and extends existing incentives and creates many new credits, but full credits require prevailing wage and incentive requirements to be met. What may make the incentives more attractive to many energy companies, though, is the ease with which credits can be monetized. In many cases, credits can be transferred, refunded or carried back.
Is the timing right for an IPO?
The momentum in the energy industry may make this the right time for companies to consider an initial public offering. Grant Thornton Partner, Accounting Advisory Services Matthew Esposito and Managing Director, Accounting Advisory Services, Lisa Kaestle explained that energy IPO volume has picked up in 2023 compared with the past few years, and there are positive signs that IPO market activity will increase later in 2023 or in early 2024.
Company leaders are pursuing both add-ons and divestitures in an effort to strengthen their positions in anticipation of an IPO, and they’re preparing to execute their IPO strategy at the most favorable time.
- Mature private companies need to decide between the traditional IPO route or going public through a merger with a special purpose acquisition company (SPAC). While SPAC transactions have become less popular, they may provide more pricing certainty and a quicker entry into public markets. But a SPAC target company will not benefit from a diligence review and comments from underwriters and their counsel that are required during a traditional IPO.
- Ahead of an IPO, companies should assess their competencies related to corporate governance and Sarbanes-Oxley Act (SOX) requirements; financial reporting and SEC regulations; tax; human capital; and information technology. Gaps in any of those areas need to be addressed before launch. Companies often find they need to expand their accounting and finance teams, adding new roles for SEC reporting in addition to SEC counsel, general counsel, investor relations and internal audit roles. Third-party consultants are often engaged to help with this process by providing a comprehensive, independent assessment.
- Monthly close processes and financial planning and analysis also frequently need to be upgraded, and reliance on Excel often needs to be reduced in favor of enterprise resource planning and other software capabilities. Before going public, companies need to adopt the required public company accounting standards and prepare to be audited under PCAOB standards.
Grant Thornton insight
- Companies that are considering an IPO should put the required infrastructure in place well ahead of time. They need to ensure compliance with SEC disclosure requirements, perform the necessary system enhancements and updates, and review internal controls to make sure they’re ready for the Sarbanes-Oxley Act (SOX) management certification.
errad Heep has more than 14 years of experience serving private and publicly traded corporations and partnerships in the energy industry, including natural gas pipelines and storage, exploration and production, trading and marketing, chemical manufacturing and refining, oil field services, and seismic acquisition.
- Audit and assurance
Michael Osina is a partner in Grant Thornton’s Tax Services practice with an emphasis in the oil and gas industry. He has 13 years of experience providing tax services, focusing much of his time on ASC 740 issues. He previously worked at Andersen and Deloitte.
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