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Northeast Utilities System. Enterprise Risk Management Review Standard & Poor’s June 19, 2006. Topics To Cover Today. Regulated company update Divestiture update NUEI risk management Enterprise risk management. Regulated Company Update - Legislature. New Hampshire - PowerPoint PPT Presentation
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Enterprise Risk Management Review
Standard & Poor’s
June 19, 2006
Northeast Utilities System
2Northeast Utilities System
Topics To Cover Today
Regulated company update
Divestiture update
NUEI risk management
Enterprise risk management
3Northeast Utilities System
Regulated Company Update - Legislature
New Hampshire– Governor Lynch signed mercury reduction bill allowing upgrade of Merrimack coal-
fired station
– No action on second PSNH wood-fired plant
Connecticut– Regular 2006 legislative session ended without action on generation stimulus bill
4Northeast Utilities System
Rate Case Update
PSNH– Filed request for $49 million T&D increase– Reached settlement on $24 million temporary increase effective 7/1/06
WMECO
CL&P
5Northeast Utilities System
Competitive Business Divestiture Is Progressing
Wholesale: New England divestiture completed in 2005 PJM contracts rapidly rolling off NY municipal association contract continues through 2013
Services: 4 of 6 businesses (electrical, HVAC, telecommunications performance contracting)
completely sold Most of 5th business (Select Energy Contracting) sold E. S. Boulos (electrical contractor) still to be divested
Telecom: All 2.7 million shares of Globix (GEX) sold in April, netting $6.7 million
Retail: Closed June 1 on sale to Hess Corporation
– NU making three payments to Hess totaling $44 million
Generation: Bidding process under way for 1,442 MW book of assets Book value $825 million
6Northeast Utilities System
Risk Management At NUEI Wholesale Until Final Divestiture
Every position hedged where possible
Risk management policies updated, effective June 1, 2006
No trading
No new standard offer sales commitments
VaR limits lower
PJM book flattened and falling rapidly
– 75% of March 2005 commitments will have rolled off by year-end 2006
NYMPA positions flattened in early years, still open in later years
Daily reporting
Monthly Risk Oversight Committee meeting on positions
Regular reports to Board of Trustees
7Northeast Utilities System
Risk Management Elsewhere At NUEI
Generation– Mt. Tom output significantly hedged through 2008
Coal supplies also hedged through 2008 SCR installation complete
– Conventional hydro output unhedged
Services– SESI sold to Ameresco; parent performance guarantees gone in12 months– Remaining services business, electrical contractor E. S. Boulos, no draw on
capital
Retail– Sold to Hess
8Northeast Utilities System
Risk Management At NU: The Vision
Improve risk management and capital expenditure decision making in order to increase NU’s ability to achieve its strategic vision
Development of an ERM framework was initiated in late 2004, with the assistance of PWC’s risk management consulting capabilities
The specific rationale for moving forward was based on:– Management’s and the Board’s need to capture, understand, monitor and
mitigate risk on a continuous basis
– The company’s recently announced multi-billion dollar distribution and transmission capital program had the potential to expose the company to numerous financial and operation risks
– Prudently incurred costs may give rise to financial losses as a result of recovery lags
– Robust risk and capital management provided a methodological basis for defending decisions questions by regulators
– Capital commitments, energy marketing and procurement exposed the company to cash flow volatility and financing risk
– A belief that a proper application of an ERM framework would advance the company’s and its management’s financial and operational literacy
9Northeast Utilities System
Moving Forward With ERM
The implementation phase of ERM within NU was initiated in the second quarter of 2005
The implementation was based on the findings and recommendations of an internal multi-functional team working with PWC
Among the major recommendations:
– Create a corporate risk function supported by independent Business Unit Risk Controllers “BURC”
– Establish a corporate Risk and Capital Committee (“RaCC”) and working group – integrate risk and capital expenditure decisions
– Clarify the roles and charters of existing corporate and Board committees and coordinate them with that of the RaCC
– Establish capital project review standards and thresholds
– Develop standard tools and techniques for analyzing, monitoring, and reporting on capital investments and risk
Accountability for risk taking remains with the business units
10
Northeast Utilities System
NU’s Enterprise Management Organization
Corporate ERM Group
Director
TG Risk ControllerTG Risk
Controller
UG Risk ControllerUG Risk
ControllerPresident
Utility Group
CFO
Board of Trustees
CEO
PresidentTransmission
ERM Organization Structure
PresidentSelect Energy
RaCC Chair
Unreg. Risk
Controller
Unreg. Risk
Controller
Senior Risk
Analyst
Senior Risk
Analyst
11
Northeast Utilities System
Background Of Risk Management Managers
DirectorEnterprise Risk
Management
DirectorEnterprise Risk
Management
NUEI Business Unit Risk Controller
NUEI Business Unit Risk Controller
Transmission BusinessUnit Risk Controller
Transmission BusinessUnit Risk Controller
Utility Business Unit Risk Controller
Vacant
Utility Business Unit Risk Controller
Vacant
• Current position since March 2006
• Manager, risk analysis, analytics, reporting 2003-2006
• Analyst, Senior Engineer, Engineer 1995-2003
• Current position since 2005
• ENMAX (Calgary) 1998-2004
• Treasurer, VP-Strategy, other management positions
12
Northeast Utilities System
The Risk And Capital Committee
Approved and oversees ERM policies and procedures
Meets monthly
Executive management membership
Chaired by CFO
Capital projects reviewed
Risk scorecard review
13
Northeast Utilities System
Implementing Enterprise Risk Management Culture
Develop a leadership team that understands ERM
Create an environment where all levels of employees are encouraged to question and challenge
Develop an orientation and education program that is mandatory for all employees
– Develop a common language
Demonstrate that inappropriate/unethical behavior is unacceptable and action is taken
Incent appropriate behavior
Understand and communicate the risk/reward inter-relationship
Demonstrate the role of risk management in every employee’s job
14
Northeast Utilities System
Define The Language Of Risk Management
Risk: Uncertainty around outcomes
Risks: Uncertainty drivers
Critical Outcomes: Define business success
Impact: What can we lose or gain?
Likelihood: Given current controls…
Risk Score: Impact X Likelihood
Dashboard: Critical outcomes (gauges) and maximum impacts (level 5 outcomes)
Mitigation/control: Response?
15
Northeast Utilities System
Need Proposal Peer Review
Independent Analysis
Committee Approval
Monitoring
The ERM Process Is Currently In Implementation
Business manager develops a business case for making the investment in NU’s standard template
Business manager identifies potential capital requirement to support business goals
Cross functional peer managers review the case’s assumptions, risks, and analysis
BURC examines the case’s assumptions (stress tests), risks, analysis, and strategic goal fit and compares the investment to alternatives
BURC reviews the investment’s progress, provides routine and event-driven reports back to the RaCC, and records its performance for use in future business case development
RaCC evaluates the case and BURC’s assessment to make its recommendation to the CEO
Determines the legitimacy of the business case and value of the investment in terms of achieving the corporate strategic goals
Continually compares the investment to the case
projections to determine the investment’s viability
A Socratic evaluation of the efficacy of the business case’s premises and conclusion by an expert who
has no agency conflicts
A quantitative and qualitative description of how an
investment helps achieve the firm’s strategic goals
Enhances the case’s quality before independent
analysis
Driven by economics, regulation, operations and
customer demand
Capital Project Approval Dimension
16
Northeast Utilities System
Risk Assessment Dimension
Utilizing both a bottoms-up and tops-down approach, each business unit is creating a “risk scorecard” which selects and rank orders key risks
Risks are processed through a dashboard that assesses impact on several scales, including financial, legal, reputation, strategy, business continuity, customer service and environmental, health and safety
Business unit assessments will be aggregated to create an enterprise dashboard
Risk List by BURisks Scored Using
“Heat Map” Approach
EnterpriseDashboard
• Risks to the long-term strategy
• Risks to the near-term operating plan, both financial and operational
• Risk to the corporate reputation
• Operation
• Financial
• Strategic
• Organizational
•Operational•Financial performance
Likelihood
Imp
ac
t
17
Northeast Utilities System
Implementation Timeline
Organizational Risk training completed
NU Risk Policy approved by RaCC*
RaCC Charter
approved
Capital Projects Approval
Policy (CaPP) & Limits
approved by RaCC
ERM Corporate Web page
Capital Project Risk Scorecards
($10M+ projects)
UG & TG Risk
Scorecards
Corporate Risk
Scorecards
TARGET COMPLETION DATE
Q1 2006 Q2 2006 Q3 2006
NU Risk Policy, RaCC Charter approved in Q1 2006, Capital Projects Approval Policy to be approved in Q2 2006
Organizational risk training targeted for completion in Q2 2006
ERM Corporate Web page developed
Operating Unit Risk Scorecards completed for all operating units by end of Q2 2006, Corporate Center by Q3 2006
Capital Project Risk Scorecards developed for all capital projects $10 million and above by end of Q2 2006
RaCC is the Risk and Capital Committee chaired by Chief
Financial Officer
Initiate Board
Reporting
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Northeast Utilities System
The Vision For Full Implementation
All sizeable capital projects are currently subject to the ERM framework
In excess of $2 billion in capital projects approved, including the country’s single largest transmission line currently under construction ($1.3 billion)
The 2006 strategic planning process is incorporating ERM principles and will be “risk assessed” prior to Board presentation
ERM will lead to robust scenario planning across all businesses
Quantitative relationships will identify natural hedges and exposures within the business
Improved organizational literacy will be achieved, leading to improved decision making and business execution
19
Northeast Utilities System
ERM Accomplishments To Date
Training Operations Capital
Five 5-hour top risk identification sessions with senior management from each business
Credit function integrated into Business Unit Risk Controllers
Capital project risk assessments completed for 4 SW CT transmission projects, LNG facility, Northern Wood
Five dashboard identification workshops and 10 top risk drill down sessions for each business line
Risk website developed3 PSNH projects totaling $79 million due in 2006
15 one-hour training presentations delivered to managers and above, workshop handbook developed
Risk assessment of key strategic assumptions
Post-completion reviews scheduled for 6 projects in 2006
20
Northeast Utilities System
Keys To ERM’s Long-Term Success
Highly dependent on the overall organizational participation, executive sponsorship, communication and buy-in
Equally dependent on the skills and experience of the risk management organization, both at the business unit level and corporate
The process must ultimately engage the entire organization and address risk as a cultural matter
ERM must be integrated with other company processes, including strategic planning, budgeting, compliance, SOX, etc.
Results and successes must be communicated within the organization