Decision-making guide

Decision-making guide
Decision-making guide
Copyright 2011 cesim@cesim.com
 Decision-making guide

Table of Contents
1. About Cesim ................................................................................................................. 1
1.1. General ............................................................................................................. 1
1.2. Cesim products ................................................................................................... 1
1.3. Contact Cesim .................................................................................................... 1
2. Simulation Platform Introduction ...................................................................................... 2
2.1. General User-Interface Options .............................................................................. 2
2.2. Home Page ........................................................................................................ 3
2.3. Decision Checklist ............................................................................................... 4
2.4. Decision Areas ................................................................................................... 5
2.5. Results .............................................................................................................. 7
2.6. Schedule ............................................................................................................ 8
2.7. Teams area ........................................................................................................ 9
2.8. Materials .......................................................................................................... 10
2.9. Forums ............................................................................................................ 11
3. Basics of Decision Making ............................................................................................ 12
3.1. General ............................................................................................................ 12
3.2. Market Conditions ............................................................................................. 12
3.3. Sales Decisions ................................................................................................. 13
3.3.1. Large Scale Industry ................................................................................ 13
3.3.2. Other Segments ...................................................................................... 14
3.3.3. District Heat ........................................................................................... 15
3.4. Procurement Decisions ....................................................................................... 16
3.4.1. Own Production ...................................................................................... 16
3.4.2. Carbon Emissions Trade ........................................................................... 16
3.4.3. Purchases ............................................................................................... 17
3.4.4. Electricity Market .................................................................................... 18
3.4.5. Eolic (Wind Power) ................................................................................. 19
3.5. Financials ......................................................................................................... 20
3.6. Risk Management .............................................................................................. 21
4. Model Logic ............................................................................................................... 22
4.1. Electricity Demand ............................................................................................ 22
4.2. Customer Segments ............................................................................................ 22
4.2.1. Households ............................................................................................ 22
4.2.2. Electric Heating ...................................................................................... 22
4.2.3. Small-scale Industry ................................................................................ 22
4.2.4. Large-scale Industry ................................................................................ 22
4.2.5. New Segment ......................................................................................... 22
4.3. Marketing and Sales Decisions ............................................................................. 23
4.3.1. Pricing .................................................................................................. 23
4.3.2. Advertising ............................................................................................ 23
4.3.3. Personal Selling ...................................................................................... 23
4.4. Electricity Procurement Decisions ......................................................................... 23
4.4.1. Own Production ...................................................................................... 23
4.4.2. Contract Purchases .................................................................................. 24
4.4.3. Electricity Market .................................................................................... 25
4.5. Risk Management .............................................................................................. 25
4.5.1. Electricity Forwards ................................................................................. 25
4.5.2. Derivative Market ................................................................................... 26
4.6. Financing Decisions ........................................................................................... 26
5. Results ....................................................................................................................... 27
5.1. Market Report ................................................................................................... 27

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5.2. Electricity Sales Overview ................................................................................... 28
5.3. Production Report .............................................................................................. 29
5.4. Purchase Report ................................................................................................ 30
5.5. Derivatives Report ............................................................................................. 31
5.6. Winning Criterion .............................................................................................. 31
5.7. Calculation of Key Financial Ratios ...................................................................... 32

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 Decision-making guide

List of Tables
4.1. Example ................................................................................................................... 25

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 About Cesim

Chapter 1. About Cesim

1.1. General
Cesim provides corporations, universities, and other educational institutions easy-to-use and cost-effective
business simulations that can be integrated in various business courses. Headquartered in Finland since
1996, we operate globally through our own offices and partner network.

1.2. Cesim products

Cesim offers four types of simulations to educational institutions:

Cesim Global Challenge

An on-line simulation designed for strategy and international business studies. It develops students'
understanding of the complexity of global business operations in a dynamic, competitive environment.

SimBrand

An on-line marketing management simulation that develops students' understanding of the marketing
decision-making process as a whole, with particular emphasis on profitability.

OnService

An on-line services management simulation that helps students to practice and learn service business
success factors in a Small to Medium sized Enterprise (SME) environment.

Hospitality

An on-line hospitality simulation that helps students to practice and learn about small scale hotel and
restaurant operations.

SimFirm

An entry level on-line simulation designed to develop understanding on how decisions in different func-
tions of a company attribute to overall success in a competitive, international business environment.

Simulations can be conducted in a few days or over an entire semester. The number of simulation rounds,
schedules, and team structures can be adjusted even after the course has started.

1.3. Contact Cesim

Cesim Oy
Arkadiankatu 21 A
00100 Helsinki
Finland
tel. +358 9 406 660
http://www.cesim.com/
finland@cesim.com

v1.66

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 Simulation Platform Introduction

Chapter 2. Simulation Platform

Introduction
2.1. General User-Interface Options

1. My Info Through this page, you can personalize your Cesim player account by adding personal data
about yourself, as well as a picture, which will then be shown in various part of the user interface. You
can also change your password here, or even your email. On the bottom of the page, there are two
checkboxes for determining when you wish to receive automated email notifications.

It is highly recommended that all students use valid emails here, as otherwise they could miss important
information during the game. Also, the "Forgot my password" feature works through email, making pass-
word recovery impossible through an invalid email address.

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 2. Support This is your best way to reach the Cesim Support team, should you run into problems or
issues relating to the game functionality. Please note that for any content related questions, you should
primarily contact your instructor.

3. Change Language You will find a list of supported languages for the game here. You can change the
user interface language at any point of the game.

2.2. Home Page

1. Player Information

2. Email function Use this to easily reach your team members and instructor through emails. An easy to
use checkbox allows you to choose which team members you want to reach.

3. This panel shows all the important on-going data of the course. On the top you see the main indicators of
the last round. Below it, you will find information about round deadlines, forums messages and quizzes.

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 4. Team Decision Log This feature allows you to see the decision making actions done by the team
members. Please note the "Show all rounds" and "More" buttons below the panel. By default, you only
see the current round latest decision saving action. Using the additional buttons, you can expand the
panel to show all rounds, and every decision saving action made during any of the rounds. Also note
that decisions made while in the team decision column (more on this in the Decision Checklist part of
the guide) will not be recorded in detail, only as "The teams decisions were modified by".

2.3. Decision Checklist

Cesim simulations offer the user an innovative decision making area, through which the team members
have a high level of control over the decision making process. The "Decision Checklist" is split into two
general sections: The individual "Student Decision Areas", and the "Team Decision Area". Please note, that
once the round deadline has passed, the round results will be calculated only based on the Team Decision
Area. During each round of the game, you can easily identify changes already made by the highlighted
cells on the checklist.

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 The Decision Checklist offers several tools to manage the decision making process, which are explained
below.

1. Round drop-menu: Use the indicated drop-down menu to select the desired round. You may select
previous rounds in order to review the decisions made during the rounds, however modifications will
be disabled.

2. The "Go" button allows a player to move to another team members decision making area, or the join
team decision making area. Use caution, as any modifications will be automatically recorded on their
respective area. Any modifications made directly in the team decision area will be used as final decisions
when the round ends, if no further actions are taken.

3. The "Copy" button copies a players decisions from the student area to the team area. Once copied,
the previous set of decisions cannot be recovered. Decisions can be copied from Student Area to Team
Area as many times as needed, before the round deadline. Please note that if decisions are made directly
into the team decision column, then no additional steps need to be taken, as they will be automatically
used for result calculation when the round ends.

4. The "Import" button, found on top of every decision area, transfers the decisions from the Team- or
Student Area to the importing players own Student Area. Once imported, the original decisions of the
importing player cannot be recovered. The decisions on the player that are being imported from will
not be changed in any way.

5. The budget for the round shows the estimated profits based on the current decisions, as well as the
"change in sales %" comparable to the previous comparable round.

2.4. Decision Areas

The Decision Area is split into several theme based sub-categories (e.g. Demand, Production, etc.). Please
refer to your decision making manual to determine where the decision making process should begin, and
what the suggested order of the process is. Some areas should be filled out first, as the effect of those areas
may influence some calculations and estimates elsewhere.

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The actual decisions are entered into dedicated fields within their respective areas. There are three general
types of decision making fields:

1. In the white cells you enter your decisions.

2. In the highlighted cells , you enter estimates of your sales, personnel turnover and so on. These estima-
tions act as a basis for the budgets shown in the system.

3. Drop-down menus are used in certain decisions where there are some specific options to choose from.

The system automatically updates the budgets and calculations as you make decisions

It is important to note that there are two decision making areas. The first one is the Student Decision Making
Area. Each team member has their own personal decision making area, where they can freely input any
figures they want to see the effects they have on the projected results. The students always start on their
own student area by default, when logging into the game. After satisfactory decisions have been made on
the student area, they can easily be copied over to the second area type, the Team Decision Making Area,
through use of the "Copy" button. Once copied, the decision set will be used to calculate the rounds results.

Alternatively, decisions can be made directly into the team area. To do this, a team member can move to
the Team Area through use of the "Go" button. Any changes here are automatically recorded, and will be
used to calculate the round results, if no other decisions are copied over. It is important to note that if a
team members decisions are copied over the decision set made directly to the Team Area, there is no way
to restore the originals, unless a player has "Imported" the set into their own Student Area.

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 Once the round deadline is passed, the game will automatically calculate results based on the final decisions
found in the Team Decision Area. Again, be sure to have copied over the decision sets from the student
areas before the deadline, if decisions are not made directly into the team area.

2.5. Results
As mentioned before, the round results are calculated immediately after the deadline passes based on the
decision set on the Team Area. The games also allow you to review the results from previous rounds,
including possible practice rounds, at any given time during the course of the simulation by using the
Results page drop-down menu. You may also utilize some special features, such as downloadable excel
versions of the round results and slideshows of main indicators.

1. The universe drop-down menu lets you choose any universe in the on-going course.

2. Use the Round drop-down menu to choose the desired round results.

3. Use the "Download" button to download an excel file of the chosen round results.

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 4. Use the "Slides" button to view a slideshow of the key indicators of the round.

5. Use the "Printable" button to print the round results.

2.6. Schedule

In the schedule section, you can see a list of the amount of rounds that have been set for the course, as well
as the deadlines for each round. In cases where the users computer time is different from the system time,
this page will show the deadlines in both user time and the system time set for the course.

The simulation games are often started with practice rounds. Please note that practice round results have
no effect on the results of the real rounds, and are simply used to learn game mechanics and practice
forecasting results. Once the practice round(s) are over, the game will reset to the initial market situation.

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2.7. Teams area

The Teams area allows you to see details about players across all teams in all universes of the course. You
may also edit team information, like team name, slogan and team description.

Team members may also move freely between teams until the deletion of empty teams has occurred, and
the game has officially begun. Click the "Join Team" button to move to a different team. Once empty
teams have been deleted and the game has begun, it is only possible for the instructor to move students
between teams.

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2.8. Materials

This section contains all the documentation that is needed to understand and enjoy the game. The generic
reading materials will include the decision making guide and the case description. Instructors can also
upload custom case specific materials here.

The decision making guide shows you the basics of the simulation, such as user-interface functionality,
how to make the decisions, what should be considered when making decisions, and the general order which
you should begin with each round.

The case description gives information regarding the business case that is being played during the course.
It gives a general understanding of the industry situation, trends in the industry, future challenges. Certain
case specific parameters may also be given in the case description.

In this section, you can also find a video tutorial of the game, if available.

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2.9. Forums

The forums are a great way for the players to contact their instructors or co-players, and vice versa, when
face-to-face contact is not possible. The benefit of forum usage compared to private emails is that it is easy
for everyone with the rights to view the forum to contribute to the discussion.

The forums are split into a Team Forum, and a Course Forum. As the names suggest, in the Team Forum,
only your team members can see the posts and reply to them. The Course Forum on the other hand is
available for everyone on the course to participate in, regardless of team and universe.

Instructors are able to view and reply to forum posts in both sections. As such, the course forum is a good
place to ask questions that everyone on the course can benefit from, while the team forum is the ideal place
to discuss sensitive team related issues.

Unless disabled in the "My Info" section, players will get notified by email whenever something is posted
on their team forum area.

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 Basics of Decision Making

Chapter 3. Basics of Decision Making

3.1. General
SimPower decision area is designed to help in decision-making during the simulation. Navigation in the
user interface works through main menu bar, which is visible at the top of the screen when you login to
the system. These chapters will introduce you to the user interface and map out a recommended decision
making process in the end.

3.2. Market Conditions

The market conditions are given for each round and they give you an indication of the future market
developments. Presented here, are the market outlooks and estimates of future costs, tax rates, etc.

The market conditions will always be complemented with a "Parameters" page that will contain informa-
tion as interests, fuel prices, purchases, variable costs, etc.

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3.3. Sales Decisions
3.3.1. Large Scale Industry

In the large scale industry page you make marketing decisions concerning this segment. You can set the
price either as an absolute price or as a margin over the market price. You can check the actual market
price that was realized during that round from Market report-page under Results. You can only use one
pricing method the absolute price or the margin price. If you want to change the pricing systems insert zero
to both cells and then set the new price. You will also insert the marketing budgets and sales estimates.

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3.3.2. Other Segments

"Other Segments" -page contains pricing, advertising budget and personal selling budget decisions for four
segments (new segment might not be available). You also set the sales estimates for these segments.

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3.3.3. District Heat

"District Heat" -page summarizes the sales of district heat. Here you can check if you are fulfilling the
demand. You will also see the expected income. Remember that the demand figures are only good estimates
and are subject to various weather conditions.

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3.4. Procurement Decisions
3.4.1. Own Production

On Own production-page you decide steering prices and investments on production. Steering price deci-
sions are made for both types of plants and for both summer and winter. These prices will be used to
decide whether you produce by yourself or buy all the electricity from the market. In investment decisions
you decide the number of plants you want to build and how much you are going to use on improvements.
Improvements decrease the variable costs. You can also make plant sales/acquisitions if they are allowed.

3.4.2. Carbon Emissions Trade

Coal and natural gas fired power plants emit CO2 for which the companies need to have allowances or
permits. The government may give part of the allowances free of charge, but the companies need to pur-
chase the rest of the allowances they need at CO2 allowance market price. Coal plants emit more CO2 per
MWh than natural gas plants, and thus need more CO2 allowances.

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3.4.3. Purchases

On the Purchases-page you decide on additional purchases from other wholesalers, both for the summer
and for the winter. You can also make two-year contracts. If you make a two-year contract you are delivered
the agreed amount both this year and the next year with the price indicated this year. Purchases-page also
has information on all the purchase contracts that are in effect and on the amount purchased from the
electricity market. The amount purchased from the market is the amount not covered by own production
and contract purchases.

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3.4.4. Electricity Market

Electricity market-page shows you the amount of electricity you are about to buy from/sell to the electricity
market, according to current decisions and estimates.

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3.4.5. Eolic (Wind Power)

All of the wind power related decisions are made on the Eolic-page i.e. the marketing decisions are made
separate from other customer segments. You decide whether to invest into more wind power by deciding
to acquire wind parks or sell them - provided that you already have built them. You can also decide wind
power price, advertising and personal selling levels. Moreover, the sales estimation for eolic power is
made here. Furthermore, it should be noted that the wind power exchange is separate from the general
electricity market.

Simpower can be played with or without the eolic module. It is up to the instructor whether to include
it or not.

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3.5. Financials

From the "Cash Flow Statement", the management group can follow the cash flow from operations, cash
spent on investments, and changes in the companys cash position. Here you make the decisions for the
change in the long-term loan. You can either pay it off by putting in a negative figure or take some more
by inserting a positive figure. In addition to the cash flow statement, you will find some key financial
indicators in this section.

Related financial statements can be found at the bottom page in a separate menu along with other reports.

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3.6. Risk Management

"Electricity Forwards" -page allows you to trade electricity forwards. Sales contracts are inserted as posi-
tive figures and purchase contracts as negative figures. Here you see also trading reports from this and last
year. On the right-hand side of the page, you can see the open position section. In open position section of
the page, you can see how much of your activity in the electricity market is covered with forwards. In top
of the section you have your open position for both summer and winter. These figures show the difference
of amounts traded in the electricity market and the forward market. To minimize the risks involved with
market price you should try to make the absolute difference as small as possible i.e. as close to zero as
possible. In the bottom part, you have your open position broken apart so that you can see how it is formed.

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 Model Logic

Chapter 4. Model Logic

4.1. Electricity Demand
So how is demand for electricity formed? Total demand of energy follows the economic trends, which are
defined in the calculations of the case you are playing. Chances of a single company affecting the total
demand are very limited. The rise in the price of electricity should not cut the total demand dramatically
in the short term. Importantly, one should always remember to make clear distinction between the total
market demand and the demand faced by a single company (market share).

4.2. Customer Segments

The market is divided into five different segments according to their buying behaviour. In large-scale in-
dustry segment there is a possibility to make both short (1 year) and long (2 years) contracts. The man-
agement decisions for all the segments are pricing, advertising budget and personal selling budget. The
characteristics of the different segments are described below.

4.2.1. Households
The customers in the households segment are not as price sensitive as the industry but they respond far
better to advertising. Your companys call centre services offered for households are included in the per-
sonal selling. The demand of households segment during a year is divided so, that 55% of the total demand
comes during the winter and 45% during the summer.

4.2.2. Electric Heating

Electric heating segment is mainly comprised of households, so they have quite similar characteristics.
The difference is that demand in this segment is divided between winter and summer in 70/30 ratio.

4.2.3. Small-scale Industry

Small-scale industry segment comprises of new and potential small-scale industry customers. It is so new
that it still has not revealed its true characteristics but it is believed to stress price as their main issue
influencing the buying decision. Marketing and personal selling efforts should be emphasized to attract
more customers in this segment. The demand is divided between winter and summer in 54/46 ratio.

4.2.4. Large-scale Industry

Large-scale industry segment comprises of new and potential large-scale industry customers and is very
price sensitive. Unlike the other segments, large-scale industry clients are offered both one and two year
contracts. Two-year contracts oblige the company to deliver agreed upon amount of electricity in the agreed
price for two years. The demand is divided between winter and summer in 52/48 ratio.

4.2.5. New Segment

It is possible that the market is divided into even finer segments. For this reason, there is a so called new
segment. The possible introduction of a new segment and the effects that it has on electricity demand
patterns will be announced in the market outlook. The standard case does not include the introduction of
the new segment.

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4.3. Marketing and Sales Decisions
To succeed in the deregulated markets electricity companies have to understand different customer profiles
when marketing their products. Marketing decisions include pricing, advertising and personal selling.

4.3.1. Pricing
The companies decide their average price (Euro/MWh) for each customer segment. Keep in mind that
the customers and their price sensitivities are different in different segments. Furthermore, customers are
interested in your companys price relative to the competitors price. In the large-scale industry segment
the price can be set either normally as Euro/MWh or by setting the margin over the market price.

4.3.2. Advertising
The company makes advertising budgets for each customer segment. Segments are different with respect
to the effectiveness of advertising. Remember that your advertising efforts relative to competitors are
important. Advertising efforts have also a long-term effect. Advertising in one period will carry on for the
next periods too. The impact diminishes over time.

4.3.3. Personal Selling

The company makes personal selling budgets for each customer segment. Segments are different with
respect to the effectiveness of personal selling. Again, remember that your personal selling efforts relative
to competitors are important.

As in advertising also personal selling efforts have a long-term effect. Personal selling in one period will
carry on for the next periods, the impact diminishing over time.

4.4. Electricity Procurement Decisions

Company can procure their electricity from three sources: own production, purchases, and electricity mar-
ket. For risk management, companies can also take part in the derivatives markets (electricity derivatives).

Management makes decisions about the procurement of electricity for both winter and summer. This is
because the demand is different during different seasons and also the costs are different between the two
seasons. The year is divided into two equally long seasons (summer = 6 months, winter = 6 months).

Electricity can be acquired through various sources, which are own production, contract purchases, and
electricity market. In the following the different sources of electricity supply are described in detail.

4.4.1. Own Production

Own production is controlled by defining the so called steering price (Euro/MWh) for both coal and nat-
ural gas plants. To set the steering price one must estimate the effective variable costs (effective variable
cost can be different from direct variable cost if district heat is sold) in own production. For example, if
the effective variable costs of producing electricity are higher than the current market price it is more eco-
nomical to stop the production and purchase the electricity from the electricity market. In other words, if
the steering price is set higher than the market price, own production is stopped and the needed electricity
is bought from the market.

It is important to notice that the effective variable costs are different for different types of plants. The
effective variable costs of a plant can also differ from summer to winter.

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 Example: Steering prices are set as follows: coal 16 Euro/MWh and natural gas 18 Euro/MWh.

Case 1: Market price is 17 Euro/MWh. Only the coal plants are used and natural gas plants are idle. The
needed electricity is bought from the market.

Case 2: Market price is 20 Euro/MWh. In this case all the plants are used.

Market price = 17 Euro/ MWh Market price = 20 Euro/ MWh

Steering price = 16 Euro / MWh Plant in use Plant in use
Steering price = 18 Euro / MWh Plant not in use Plant in use

As a rule of thumb, steering price should be lower in the winter than in the summer because during the
winter more district heat is sold. This makes electricity production more expensive during the summer
since the effective variable cost is higher due to lower district heat revenue.

Especially in the Nordic countries, modern power plants are constructed as co-generation plants, producing
both electricity and district heat. This provides much greater efficiency in production since the heat that
is generated through electricity production can be utilized instead of wasting it. Plants produce electricity
and heat in a given ratio. This ratio is different for different types of plants. The fluctuations in district
heat demand between winter and summer are important to understand when planning the usage of plants.
Management does not make any direct decisions about district heat but can affect it by their production
decisions. The demand of district heat during the summer is on average 40 % of that during the winter.

Electricity can be produced with two types of plants. Plant types have different cost structures and all
details regarding the investment costs and operating costs are disclosed in the market review. The plant
can be taken into use one year after the investment. For example, an investment made for 2010, is available
for use in 2011. The investment must be paid completely during the year of investment. First depreciation
takes place when the plant is in operation.

Coal

The coal plants are size 100 MW and they can produce 500 GWh of electricity per year. In the standard
case, the coal plants are not co-generation plants and thus, do not produce heat. The depreciation period
is approximately 30 years with declining balance depreciation.

Natural Gas

Natural gas plants are size 50 MW and can produce 250 GWh of electricity per year. They also produce
200 GWh of heat in the standard case. The depreciation period is approximately 20 years with declining
balance depreciation. Remember that the fuel prices for natural gas plants are different for winter and
summer.

Sales/Purchase of Plants

Sales or purchase of a plant is possible to their balance sheet value. Therefore there will not be any gains
or losses on the income statement. When buying or selling an existing plant, the company receives/looses
also the district heat contracts with the plant. Sales/purchase offers are not necessarily available and
they are announced in the market outlook.

4.4.2. Contract Purchases

Management can decide to buy electricity from other producers and wholesalers. There are one and two
year contracts available. Two-year contract implies delivery during both contract years. The contracted

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 amount is always delivered regardless of the companys demand and own production. The contract price
is common for all the companies in the industry and it is disclosed in the market review. Management
only decides the quantity.

4.4.3. Electricity Market

Electricity market has a big role in the procurement of electricity. The market price of electricity changes
daily in the markets it should be taken into account when making the pricing decisions. In SIMPower,
market price is given as an average market price for summer and winter.

Management does not make direct decisions concerning the electricity market but the market activity is
determined by the other management decisions. Electricity market acts as a balance between supply and
demand so that if company supply is higher than market demand the extra electricity is sold at the market
and vice versa.

Single companies form only a small part of the electricity market so their actions do not affect the market
price. There is always a risk involved to the market price and it cannot be forecasted with certainty. Mar-
ket price is strongly influenced by weather conditions and other possible macroeconomic and regulatory
factors. The 1yr forward price reported in the market outlook is the best possible forecast for the coming
market price.

4.5. Risk Management

4.5.1. Electricity Forwards
Companies can protect themselves against market price risk by buying or selling forward contracts. For-
ward contract is an agreement calling for the delivery of electricity at a specified later date or dates, at a
price established at the time of contracting. In practice there is no physical delivery of electricity involved,
the trade is settled with cash. If a company makes a sales contract (sells forward) for certain amount it
agrees to deliver that amount at the expiration with the agreed price. If corresponding market price (spot
price) is higher than the forward price at time of expiration the company has to pay the price difference
multiplied by the contract amount. Purchase contracts (buy forward) act the opposite. Sales amount is
marked as a positive figure in the decision sheet and purchase amount as a negative figure.

Table 4.1. Example

Year 1 2
Year 1 amount (GWh) -100 100
Year 1 price (Euro/MWh) 40 42
Spot price (Euro/MWh) 38 36
Result (tEuro) -200 600

At time year=1 one purchases 100 GWh forward contract at price 40 Euro/MWh. Forward expires when
the spot price is 38. So one pays the 2 Euro difference for every unit with total of 200 kEuros (2 Euro/MWh
x 100 GWh). At time year=2 one sells 100 GWh forward contract at price 42 Euro/MWh. Forward expires
when the spot price is 36. So one gets the 6 Euro difference for every unit with total of 600 kEuros (6
Euro/MWh x 100 GWh).

There are four types of forwards: yr1 summer, yr1 winter, yr1, and yr2. Yr1 summer expires at the end of
the summer, yr1 winter at the end of the winter, yr1 at the end of the year and yr2 at the end of the next
year. The yearlong forwards are compared to the average spot price of the year.

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 Buying large amounts of forwards can cause their price to go up and selling large amounts of forwards
can make the price go down. The effective price is seen at the decision sheet.

4.5.2. Derivative Market

This report shows all the activity that has been in the derivatives market during the year. It also shows the
forwards position of all the companies.

4.6. Financing Decisions

There are three ways to raise external financing: shares issues, long-term debt and short-term debt. In share
issues participants decide on how many new shares will be issued to the public. The average issue price
goes down with the size of the share issue. In debt issues the increase or decrease of long-term debt is
decided by the participant but the amount of short-term debt is automatically adjusted based on the cash
position of the company.

Finance decisions also include two ways to distribute funds to back to shareholders: share repurchases
and dividend payouts. With share repurchases the average price goes up with the size of the repurchase.
Moreover, retained earnings restrict both means of profit distribution.

The management also has to decide on the risk level the company can withhold. It has electricity forwards
at its disposal to protect against market price fluctuations.

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 Results

Chapter 5. Results
In the following are brief descriptions about the report given out after each round. They include information
about all the competing companies and therefore offer an excellent opportunity to make some competi-
tiveness analysis. Below are described some of the reports presented in this section. Most obvious reports,
such as balance sheet and income statement, will not be specified further here.

5.1. Market Report

The market report shows all the companies selling prices, quantities, and market shares for each customer
segment. In addition, the market report gives information about the electricity market trading.

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5.2. Electricity Sales Overview

This report shows the sales and commitments of all the companies this year. The information is divided
by segments. There is also information about the commitments for next year.

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5.3. Production Report

The following items are reported for both production plant types.

Number of plants in operation: number of plants

Production capacity (GWh): The total capacity facilitated by the companys plants. Also possible forth-
coming production capacity increases are reported.

Amount of electricity produced for the year (GWh): This can be different from production capacity if
production is limited with capacity usage ratio.

Variable costs on Electricity (Euro/MWh): Direct variable costs (fuels and other variable costs) per elec-
tricity unit produced.

Amount of district heat produced for the year (GWh): The district heat production depends solely on the
electricity production capacity. Management makes no direct decisions concerning district heat.

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 Additionally, the Total amount of electricity produced for the year (GWh), is reported for the whole year.
The number is a total from both coal and natural gas plants.

5.4. Purchase Report

Amount of contract purchases for the year (GWh): The amount that management decided to buy with
contracts from other producers and wholesalers.

Purchases from electricity market (GWh): If the companys own production added with contract purchases
did not meet the demand, electricity market is used fill the gap.

Variable costs (Euro/MWh): Total variable costs per electricity unit produced. This figure takes into ac-
count the sales revenue, if any, from district heat by deducting the district heat revenue from variable costs.

Total costs (Euro/MWh): Companys total costs (variable, fixed, and net financing expenses) divided by
the amount of electricity obtained (own production, contract purchases, market purchases). This figure
also takes into account the sales revenue, if any, from district heat by deducting the district heat revenue
from total costs.

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5.5. Derivatives Report

The derivatives report details the open position, trading in electricity forwards, the forward positions and
income from derivatives.

5.6. Winning Criterion

The winning criterion in the simulation is the cumulative total shareholder return per annum (See section
"Calculation of key financial ratios"). This ratio captures the annualized growth of the original investment
the best possible way. It takes into consideration the market value of the company, total dividends and
the exact times at which the dividends were paid to the shareholders. Moreover, the market value of the
company reflects profitability, market position and the risks involved in operating activities.

Companys marketing efforts contribute to the long-term goodwill of the company, which is used partly
to calculate companys market position. The risk policy of the company, which can be estimated e.g. with
the net open position, is one of the most important risk factors.

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5.7. Calculation of Key Financial Ratios
Sales margin
Sales margin, % =
Turnover

Operating income before depreciation

Operating income before depreciation, % =
Turnover

Profit before taxes

Profit before direct taxes, % =
Turnover

Operating profit (EBIT)

Return on capital employed (ROCE), % = Average shareholders' equity + Average In-
terest-bearing liabilities (short- and long-term)

Equity
Equity ratio, % =
Balance sheet total

Operating Income
Operating margin, % =
Revenue

Net profit after tax

Net profit ratio, % =
Revenue

Current asset
Current ratio, % =
Current liabilities

Share price
P/E ratio =
Earnings per share

Weighted average cost of capital, % (WACC)

Equity Debt
( Cost Equity * + Cost Debt * (1-Tax rate) * )*100%
Total assets Total assets

WACC is calculated using market values, not book values.

ROCE - WACC ) * ( Total shareholders' equi-

Economic Profit = (
ty + Long-term loans + Short-term loans )

Cumulative total shareholder return, % (winning criterion):

current share price + cumulative dividends per share

100% * [( (1 / this period )
) - 1]
first period share price

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