EnterpriseWide Risk Management

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Enterprise-Wide Risk Management

• GARP MeetingSeptember 16, 2004

Kathryn W. DindoVice President Chief Risk
Officer
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Enterprise-wide Risk Management
Agenda
Introduction to FirstEnergy History of Risk
Managementat FirstEnergy EWRM Process at
FirstEnergy Tangible Example of Enterprise
value Aging Workforce Tool Q A
Risk is a choice, not a destiny.
- Peter Bernstein
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• 12.3 billion in annual revenues and morethan
  33 billion in assets
• 4.4 million customers
• 20 generating plants
• 135,000 transmission distribution miles
• Approx. 13,800 employees in electric utility
  operations and 2,100 employees in oil, natural
  gas and mechanical contracting operations

Rankings amongElectric Utilities
Assets 7 Customers 5 Revenues 4 Market Cap 7
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Period of Rapid Growth
Number of Customers
Acquisition of GPU
4M
FirstEnergy Merger
7OperatingCompanies
2M
4OperatingCompanies
1M
2OperatingCompanies
2001
1997
Timeline
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The History of Risk Management at FirstEnergy
ExpandingEnterprise-wideRisk Management
2000
2004
1998
2002
Risk managementat FirstEnergy
Approach
Focus
Integration
Policies
Communication
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FE Audit Committee Charter
COSO Framework
Enterprise-wide Risk Management
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EWRM Org Chart
Kathryn W. Dindo Vice President andChief Risk
Officer
EnterpriseRisk Management Director
CorporateCredit Risk Manager
InsuranceRisk Management Manager
FES Commodity Risk Management Director
Enterprise Risk Manager
Enterprise Risk Manager
Staff
Staff
Staff
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EWRM Employee Skill Set

• 1. Team Players
• Partnering Culture mentality
• 2. Diverse Experiences / Backgrounds
• Familiarity with the Business Units
• 3. Project Management Skills
• Not routine or repetitive work
• 4. Facilitation Skills
• Risk workshops
• 5. Solid Quantification Skills
• Modeling skills (Excel expertise at a minimum)

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Independent Study FE Finance Project
Risk Management Best Practices Framework

• Comprehensively identify risks across FE
• Prioritize gaps in risk management processes,
  knowledge and systems

Identification

• Quantify the impacts of significant individual
  risks and aggregate at enterprise level

Measurement Management

• Communicate enterprise risk metrics to senior
  management on a regular basis
• Establish a methodology for determining corporate
  risk tolerance and allocating risk dollars across
  the organization

Monitoring Reporting
Enterprise-wide Risk Management
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FirstEnergys Enterprise-Wide Risk Management

• Primary Focus Areas

Enterprise-wide Risk Management
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Build a Risk CultureABCs of EWRM Process
Assemble
Build
Conduct
Determine
Explain
Assemble asmall groupof dedicatedemployees
Determine topenterprise risksand dig into
thedetails
Present results toSr. Management,Board of
Directors andInvestment Community
Build acompany-widerisk framework
Conduct risksurveys andworkshops

• Diverseexperience
• Innovation
• Facilitationskills
• Analyticalskills

• Common risk language
• Identification quantification process

• Sr. Managementfocus
• Businessleadership engagement
• Organizational alignment

• Analyze
• Quantify
• Correlate
• Aggregate

• Planning integration
• Metrics
• Decision making
• Corporate governance

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Business UnitRisk Assessment Process
Role of EWRM

• Send risk questionnaire to target audience
• Consolidate questionnaire responses
• Facilitate meeting with business unit
  managementto compose Risk Exposure Map
• Present a framework to drill down into identified
  risks
• Business Unit Risk Matrix

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Risk Management Questionnaire
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Human Resources Risk Map
C
D
A
Low Severity
High
B
Low Likelihood
High
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Risk Categories
1. Market Risk exposure to loss due to changes
in market factors. 2. Event Risk exposure to
loss due to significant, unforeseen
events. 3. Business Risk exposure to loss due
to changes in external factors and high-level
strategy. 4. Operational Risk exposure to loss
arising from daily business activities (internal
factors).
Market Risk
Event Risk
Business Risk
Operational Risk
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Senior Management Survey Results
Total number of potential respondents 19 Number
of respondents with completed surveys 18 Number
of individual risks mentioned 112 Correlation
with Business Unit identified risks 89 Number of
risks identified per individual survey 38
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Senior Management Survey Results
Frequencyof responses
Source Senior Management Committee Survey
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Developing an Enterprise-wideRisk Map
Bottom-Up Approach EWRM consolidates business
unit risk maps into consolidated list of top
enterprise risks. Top-Down Approach EWRM
issues risk questionnaires to membersof senior
management and compares results to identify gaps.
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Risk Measurement Methodology

• What is Earnings at Risk?
• EaR analysis quantifies the uncertainty around
  key variables in terms of impact on the
  companys financial statements

• How do you calculate Earnings at Risk?
• FirstEnergy uses Monte Carlo analysis
  (simulation)
• Start with base case forecast
• Add standard deviation of key variables
• Add correlation between key variables

Commodity Portfolio Risk Analytics / Levels of
Sophistication
PositionReports
ScenarioAnalysis
Earnings at Risk(Monte Carlo)
SensitivityAnalysis
HistoricalVarianceAnalysis
Value at Risk(Monte Carlo)
StressTesting
PortfolioOptimization
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Earnings Distribution Market Risk

• Earnings Distribution Applications
• Develop corporate earnings expectations
• Set internal key performance indicators (KPIs)

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Tornado Chart Market Risk
EPS
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Forecast Risk Report
Probabilistic Version Corporate Forecast
(Market Operational)
Deterministic Version Corporate Forecast
(handed off to ERWM)
Add Risk Parameters
Quantifiable Risks and Analysis
(Operational Event)
Forecast Risk Report
Risk Exposure Maps Senior Management Surveys
AddDetailed Risk Analysis
NonQuantifiable Risks and Analysis (Strategic)

• Forecast Risk Report Overview
• 10-page report prepared quarterly in conjunction
  with Integrated Business Planning Process (IBPP)
• Provides both a high-level summary and detailed
  analysis of key market, event, operational and
  business risks

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Tangible Example of Enterprise Value

• Exposure Mapping process identifies certain
  risks
• Workforce Demographics
• Skill Set Demands
• Employee Retention
• Sr. Management surveys confirm the risks
• EWRM partners with HR to address the risks
• Significant risk with no owner
• HR sees the need BUT lacks theanalytical
  skills and manpower
• EWRM builds the tool and hands off to HR

• Talent Management
• Human Resource Risk
• Succession Planning

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Aging Workforce Tool

• The tool is
• A source of information about people,
  jobs,diversity, and retirement eligibility
• A predictive tool to forecast attrition due to
  retirement (incorporates actuarial and historical
  data)
• A common template for workforce planning

• The tool does not
• Tell you who will retire and when
• Identify skill sets that are critical
• Tell you optimal staffing levels
• Provide solutions

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Potential Retirement Ranges
Department A
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Benefits of Enterprise-Wide Risk Management

• Heightened risk awareness
• Consistent methodology and language
• Enhanced communication on cross-functional risks
• Clearer visibility of earnings volatility
• Enhanced decision-making