Enterprise Risk Management (ERM) Program
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Enterprise Risk Management (ERM) Program PNM Resources, Inc. March 29, 2007. Presentation to American Public Power Association March 2007 Austin, Texas. How we got started Definition of ERM. Depends on Risk Focus

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Enterprise risk management erm program pnm resources inc

Enterprise Risk Management (ERM) Program

PNM Resources, Inc.

March 29, 2007

Presentation to American Public Power Association

March 2007

Austin, Texas

1


How we got started definition of erm

How we got started Definition of ERM

  • Depends on Risk Focus

    • Committee of Chief Risk Officers: ERM is a program that works to manage all risks faced by an enterprise in an integrated fashion. Risks are identified, measured, and prioritized uniformly throughout business units. ERM then works to manage these risks based on their overall impact to the entity by allocating mitigation resources on a consolidated basis.

    • AON: ERM is the proactive execution of a senior management sponsored entity-wide strategic process of assessing and responding to the collective risks that impact an organization’s ability to maximize shareholder value.

2


Program goals erm value drivers

Program GoalsERM Value Drivers

  • Aligning Corporate Tolerance & Strategy

  • Coordinating Disparate Risk Management Functions

  • Quantifying Risks & Risk Adjusted Returns

  • Improving The Deployment of Capital

  • Enhancing Risk Response Decision-Making

  • Identifying & Managing Cross-Enterprise Risks

  • Providing Integrated Responses to Multiple Risks

3


Risk management corporate structure

Risk Management Corporate Structure

Enterprise-

Wide Risk

Management

Board

of

Directors

Executive

Policy

Committee

Board

Risk

Liaison

Chief

Financial

Officer

  • Set Risk Tolerance

  • Develop Strategic Risk Focus

  • Prioritize Mitigations

  • Risk Map

  • Coordination with Strategic Plan and Capital Allocation

  • Management of Mitigations

Risk

Management

Committee

Audit

Committee

Finance

Committee

Oversee Adequacy of Risk Policies and Procedures

Oversee Financial Risk Tolerance and

Insurance Coverage

Establish Financial Risk Policies and Procedures

4


Steps to implementation erm program

Steps to ImplementationERM Program

Board Governance

Executive Policy Committee

Determines

“if”, “what” & “who”

of risk planning.

Start here

  • Integrated Strategic

  • Planning Process:

  • Incorporates Sr. Mgmt. Decision Making Into:

    • Corporate Strategic Plan

    • Long Range Plan

    • Annual Operating Plan

    • Performance Plans &

    • Incentive Plans

  • ERM Process Roadmap

  • Identifies, measures, prioritizes risk

  • Reports risk to Sr. Management

  • Provides mitigation management & monitoring

In a cyclical process, ERM provides decision support to Executive Policy Council (EPC). Then, the EPC sets strategic focus for risk action planning which later is followed by ERM monitoring of strategic plans.

5


Enterprise risk management erm program pnm resources inc

ERM Process Roadmap

Execute Risk Action Plan

and

Monitor Effectiveness

Begin Each Year

Identify Risk

  • Data Collection

  • Interviews with PNM Experts

  • Due Diligence

  • Financial Statements

  • Internal Reports

  • External Databases

  • Research

  • Compare to Industry Data

Mitigation

Decision Making

&

Allocation of Risk

Measure Risk

  • Decisions & Mitigations

  • Hedge

  • Insure Risk

  • Allocate Mitigation Resources

  • Optimize Risk Appetite

  • Determine Risk Tolerances

Risk Database

2001-2007 Data

Prioritize Risk

  • Risk Map & Risk Reports

  • Top 20 Risks

  • Effects Short & Long Range Plans

  • Effect on EPS

  • Risk Analytics

  • Probabilities

  • Impacts

  • Expected losses

6


Identifying risks

Identifying Risks

Operational

Commodity

Capital and

Investment

Strategic

Risk 1

X

Risk 2

X

Risk 3

X

X

Risk 4

Risk 5

X

Risk 6

X

Risk 7

X

X

Risk 8

X

Risk 9

X

X

X

Risk 10

X

7


Measure risks

Measure Risks

When risks are segmented by function a clearer picture begins to develop.

8


Prioritize risks

Prioritize Risks

Traditional Risk Maps assist in bringing perspective to the relationships between the various risk issues.

9


Prioritize risks1

Prioritize Risks

The Executive Policy Committee chooses key risks for strategic focus—ones that are actionable and provide the highest mitigation value.

10


Analyze risks examples

Analyze Risks….examples

Monte Carlo simulation has proven a powerful analytic tool in measuring the probabilities associated with key exposures.

Monte Carlo simulation is used to adjust earnings projections for outage exposures.

11


Strategic focus risk action planning

Strategic FocusRisk Action Planning

Each Business Unit is charged with creating strategic action plans that align with corporate strategy and mitigate known exposures.

12


Strategic focus decision making mitigation planning allocation

Strategic FocusDecision Making, Mitigation Planning & Allocation

Each strategic action plan is measured for cost and effectiveness…….all plans are compared to one another to determine those offering the greatest value.

13


Strategic focus budgeting

Strategic FocusBudgeting

Mitigation budgeting is part of the yearly budget process. Management knows what kinds and size of exposures to anticipate and how much it will cost.

14


Erm value as a strategic tool

ERM Value As A Strategic Tool

ERM is a long journey but its value as a strategic tool is bearing fruit. Better risk decision-making results in better deployment of capital and a better compliance structure in an atmosphere of greater risk awareness.

15


Lessons learned

Lessons Learned

  • Buy-Off on ERM Should First Come from Executive Management

  • Buy-Off on ERM Should First Come from Executive Management

  • Buy-Off on ERM Should First Come from Executive Management

16


Enterprise risk management erm program pnm resources inc

17


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