Enterprise Management Program APPA Meeting Austin, Texas September 25, 2007 Presented by: L.D. Hollingsworth 1
Agenda Introduction - Why ERM? Governance & Reporting Structure CPS Energy s ERM Approach ERM Implementation Benefits & Challenges The Future 2
Introduction Why Enterprise Management ( ERM )? There are many reasons to implement an ERM program. Dynamically changing environment in the utility space based decision making and allocation of resources Increasing focus by rating agencies It is the right thing to do 3
S&P Releases Initial Review For Selected U.S. Energy Firms Policies, Infrastructure, and Methodologies (PIM) analysis of 10 utility companies was conducted to expand S & P s approach for assessing risk management and incorporating this analysis more formally into ratings process Key Findings: Governance - 3 of 10 companies met the best practice structure Control Processes takes years to develop robust risk control processes Many companies lack robust stress and scenario testing Next Steps: Expanded risk assessment approach that encompasses broader risks to the firm, going from trading risk management to enterprise risk management (ERM) for U.S. power companies 4
Governance Structure A key first step in developing a viable ERM Program is support from the top. Critical to have support from highest levels within the organization (GM or CEO) Establish governance structure appropriate for your company, Enterprise Management Committee ( ERMC ) Chief Officer is the champion of ERM at CPS Energy 5
Governance Structure Board of Trustees Enterprise Management Committee Chair CEO CRO Co-Chair EVP/CFO EVP Energy Delivery EVP-Strategy EVP Energy Devel. VP Gen Counsel VP/CIO VP/CAO ERMC meetings to be conducted bi -monthly 6
Reporting Structure The Chief Officer reports to CPS Energy s EVP and CFO to ensure optimum risk management performance across enterprise risk risk Strategic Operational risk Financial Legal/ regulatory/ compliance risk risk Hazard/ event 7
CPS Energy s Approach Best Practices Leverage COSO Leverage experience of mature ERM programs Conference calls and site visits of peers UTSA, Valero, Tesoro Selection of ERM Software Scalable improved efficiencies Automated platform Reporting Capabilities Management Reporting Via intranet metrics customized for CPS Energy Integrated with Strategic Planning & Decision making process Utilize a Best in Class Consultant to jump-start your process 8
CPS Energy s Approach Business Unit Assessments Enterprise Management Infrastructure Strategic Assessment Energy Development Energy Delivery Financial Services IT ERM Technology Platform -- CPS Energy Enterprise Assessment Achieve CPS Energy s Goals & Objectives Enterprise Reporting 9
Relationship of Appetite, Profile and Tolerance Ranges Appetite Statement of risk types we are willing/unwilling to take and the amount of those risks we can accept in our business activities Based on: Acceptable results variability relative to key parameters Strategic ambition Corporate values Inherent/potential capacities Profile Inventory and prioritization of risks that we are currently exposed to via our business processes, activities, commitments, external requirements and events Based on: Known and/or possible risks Unanticipated possibilities Business impact thresholds Likelihood of occurrence Current risk management effectiveness Tolerances Ranges that our current risks must be managed within to maintain a balanced risk profile aligned with our risk appetite Based on: Specific risk portfolio types impact sensitivities Aggregate risk portfolio performance targets Time bounded business and strategic objectives 10
The Strategic ERM Path CPS Energy Strategic Planning Methodology Profile Tolerance Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting Statement of risk types we are willing/unwilling to take and the amount of those risks we can accept in our business activities Based on: Strategic ambition Corporate values Inherent/potential capacities 11
The Strategic ERM Path CPS Energy Strategic Planning Methodology Profile Tolerance Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting Inventory of risks we are currently exposed to Based on: Known or possible risks Unanticipated possibilities 12
The Strategic ERM Path CPS Energy Strategic Planning Methodology Profile Tolerance Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting Prioritization of risks we are currently exposed to Based on: Business Impact thresholds Likelihood of occurrence 13
Key Components of Prioritization Process Top Down Approach: Begin risk assessment process with Executive Management and work down through organization. Measure : Heat maps provide a good communication medium Scale of 1 5 Impact: Each number is assigned a dollar value by CPS Energy based on internally determined materiality levels Probability of the occurrence over a defined time horizon Impact Probability 14
The Strategic ERM Path CPS Energy Strategic Planning Methodology Profile Tolerance Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting Ranges that our current risks must be managed within to maintain a balanced risk profile aligned with our risk appetite Based on: impact sensitivities Specific risk portfolio types 15
The Strategic ERM Path CPS Energy Strategic Planning Methodology Profile Tolerance Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting CPS Energy Dashboard and management reports Based on: Portfolio Categories 16
ERM Program Status CPS Energy Strategic Plan & Capital Allocation Methodology Phase I - Appetite Phase II - identification Phase III - prioritization Phase IV analysis Phase V monitoring & reporting Finalized and approved by ERMC Interviewed Level 4 management Identified key strategic risks Developed Strategic Inventory Finalized development of risk prioritization criteria through executive discussion Scheduled strategic risk prioritization work session with ERMC Types of measurements & modeling for evaluation of risks currently under review Current report features under review in Methodware 17
Other Key Components of Assessment Process Audit Services Involvement Assist with validating risk assessments Leverage risk assessment results to guide Annual Audit Plan 18
Collateral Benefits Employee s make risk-based decisions based allocation of resources Strong credit ratings lead to lower cost of capital Increased job ownership & accountability Identification of undocumented processes 19
Challenges Members face challenges with successful development and implementation of ERM Buy-in from the top Endorsement Budget Insurance Services vs. Enterprise Management Education & Awareness Getting the word out Talent competition for staff 20
The Future Rating agencies are continuing to look for ERM capability in their client segments The energy sector will be first, then role out to other sectors By the end of 2007, S&P intends to move to a full ERM analysis Arleen Spangler, S&P director of utilities, power and project finance as reported by Treasury & 21
Questions? 22