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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

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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.

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Program Goals

ERM 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

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Risk Management Corporate Structure

Boardof

Directors

AuditCommittee

FinanceCommittee

RiskManagementCommittee

•Risk Map•Coordination with Strategic Plan and Capital Allocation

•Management of Mitigations

Oversee Adequacy of Risk Policies and Procedures

Oversee Financial Risk Tolerance andInsurance Coverage

ExecutivePolicy

Committee

Enterprise-Wide Risk

Management

•Set Risk Tolerance•Develop Strategic Risk Focus•Prioritize Mitigations

Establish Financial Risk Policies and Procedures

Board Risk

Liaison

ChiefFinancialOfficer

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Steps to Implementation

ERM Program

Executive Policy CommitteeDetermines

“if”, “what” & “who” of risk planning. 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

Board Governance

Start here

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.

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Data Collection•Interviews with PNM Experts

•Due Diligence•Financial Statements

•Internal Reports•External Databases

•Research•Compare to Industry Data

Risk Database2001-2007 Data

Begin Each Year

Risk Map & Risk Reports• Top 20 Risks

• Effects Short & Long Range Plans• Effect on EPS

Decisions & Mitigations•Hedge

•Insure Risk•Allocate Mitigation Resources

•Optimize Risk Appetite•Determine Risk Tolerances

Mitigation Decision Making

&Allocation of Risk

Risk Analytics•Probabilities

•Impacts•Expected losses

Prioritize Risk

Identify Risk

Measure Risk

ERM Process Roadmap

Execute Risk Action Plan and

Monitor Effectiveness

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Identifying Risks

Str

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Co

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od

ity

Ca

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d

Inv

es

tme

nt

Risk 1 X

Risk 2 X

X

X

X

X

X X

X

X X X

X

Risk 4 Risk 5 Risk 6 Risk 7 Risk 8 Risk 9

Risk 3

Risk 10

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Measure Risks

Technical Risk0.15%

Operational Risk26.17%

Legal Risk3.62%Natural Risk

0.06%

Human Capital Risk3.47%

Financial Risk4.04%

Environmental Risk10.92%

Competitive/Marketing Risk

14.97%

Sabotage Risk0.14%

Regulatory/Political Risk

20.51%

Organizational/Strategic Risk

15.95%

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

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Prioritize Risks

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

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Prioritize Risks

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

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Analyze Risks….examples

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

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

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Strategic FocusRisk Action Planning

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

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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.

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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.

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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.

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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

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