1. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2010 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. The Role of Enterprise Risk Management in S&P Ratings of Non-Financial Companies Steve Dreyer Managing Director U.S. Utilities & Infrastructure Ratings

2. 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Standard & Poor’s Ratings History 1860:Henry Varnum Poor Publishes “The History of the Railroads & Canals of the United States” 1906:Luther Blake founds Standard Statistics Bureau to Provide Financial Info on c. 100 Cos. 1916:Standard Statistics Begins to Assign Debt Ratings to Corporate Bonds 1941:Poor’s Publishing and Standard Statistics Merge 1966:The McGraw-Hill Companies, Inc. Acquires Standard & Poor’s Coverage  Ratings on Securities Valued At Over $30 Trillion  Ratings on Debt In More Than 100 Countries  Offices in 22 Countries Scope  Corporate (Industrials, Financial Institutions)  Municipal and Other Public Entities  Sovereigns  Structured Transactions

3. 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Standard & Poor’s Role in the Capital Markets Credit Ratings Provide Investors, Debt Issuers, Traders and Counterparties… – An Independent, Objective and Forward Looking Opinion of Creditworthiness – A Global Benchmark for Investors to Compare Credit Risk Among Peers

4. 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Standard & Poor’s Credit Ratings Scale BB+ BBVulnerable BB- B+ BMore Vulnerable B- CCC+ CCCImminent Vulnerability CCC- CCHighly Imminent Vulnerability D Default AAA Extremely Strong AA+ AAVery Strong AA- A+ AStrong A- BBB+ BBBAdequate BBB- Investment Grade Speculative Grade

5. 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. BB+ BB BB- B+ B B- CCC+ CCC CCC- CC D AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- 70% of Ratings are Below Investment Grade Counterparty Credit Ratings of U.S. Non-Financial Companies at Sep. 1, 2010 2% 9% 20% 42% 6% 1% 20%

6. 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Default Frequency by Rating Category Copyright © Standard & Poor’s 2010 Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro ® Global Corporate Cumulative Average Default Rates by Rating, 1981-2009 (%) (Time horizon, years)

7. 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology MinimalModestIntermediateSignificantAggressive Highly Leveraged Excellent AAAAAAA-BBB-- Strong AAAA-BBBBBBB- Satisfactory A-BBB+BBBBB+BB-B+ Fair --BBB-BB+BBBB-B Weak -- BBBB-B+B- Vulnerable -- B+BCCC+ Business Financial Our ratings combine the Business Risk Profile Score and Financial Risk Profile Score

8. 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology: Business Risk Profile Excellent Strong Satisfactory Fair Weak Vulnerable Business Excellent Strong Satisfactory Fair Weak Vulnerable Components of the Business Risk Profile Score Country Risk Industry Risk Competitive Position Peer Comparisons Profitability

9. 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology Business Excellent Strong Satisfactory Fair Weak Vulnerable Excellent Strong Satisfactory Fair Weak Vulnerable + Management: Strategic Positioning Operational Effectiveness Components of the Business Risk Profile Score Country Risk Industry Risk Competitive Position Peer Comparisons Profitability

10. 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology MinimalModestIntermed.SignificantAggressive Highly Leveraged Components of the Financial Risk Profile Score. Financial MinimalModestIntermed.SignificantAggressive Highly Leveraged Financial Cash Flow Adequacy Liquidity / Short-Term Factors Capital Structure / Asset Protection Accounting / Information Risk

11. 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology MinimalModestIntermed.SignificantAggressive Highly Leveraged Components of the Financial Risk Profile Score. Financial MinimalModestIntermed.SignificantAggressive Highly Leveraged Financial Cash Flow Adequacy Liquidity / Short-Term Factors Capital Structure / Asset Protection Accounting / Information Risk + Management: Financial Management Governance & Financial Policies MinimalModestIntermed.SignificantAggressive Highly Leveraged

12. 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Corporate Ratings Methodology MinimalModestIntermediateSignificantAggressive Highly Leveraged Excellent AAAAAAA-BBB-- Strong AAAA-BBBBBBB- Satisfactory A-BBB+BBBBB+BB-B+ Fair --BBB-BB+BBBB-B Weak -- BBBB-B+B- Vulnerable -- B+BCCC+ Business Financial Our ratings combine the Business Risk Profile Score and Financial Risk Profile Score

13. 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. * “Discussion Questions at Management Meetings”, on www.erm.standardandpoors.com 1.What are the company’s top risks? How big are they? How often are they likely to occur? How/when is this list updated? 2.What is management doing about each of the top risks it faces? 3.What size operating or cash loss has management and the board agreed is tolerable? 4.Describe the staff responsible for risk management programs and their place in the organization chart. How do you measure the success of risk management activities? 5.How would a loss from a key risk impact incentive compensation of top management and on planning/budgeting? 6.Tell us about discussions about risk management that have taken place at the board level or among top management when making strategic decisions. 7.Give an example of how your company responded to a recent “surprise” in your industry and describe whether the surprise affected your company and others differently. S&P ERM Review for Non-Financial Corporations: Discussion Questions *

14. 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Business Risks: Strategic Positioning Scoring: Positive Neutral Negative Credibility vs. Company’s Stated Objectives, Capabilities & History vs. Our Expectations vs. Industry, Market & Economic Conditions vs. Strategy of Peers vs. Company Culture vs. Shareholder/Stakeholder Expectations

15. 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Business Risks: Strategic Positioning Scoring: Positive Neutral Negative Incentives Alignment of Compensation with Strategy Consequences of Underperformance (Businesses & Individuals) Culture Communication of Plans & Objectives Record of Implementing Policies Understanding Causes of Successes and Failures

16. 16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Business Risks: Strategic Positioning Scoring: Positive Neutral Negative Strategy Stability Frequency and Nature of Changes Unanticipated Acquisitions/Divestitures/Restructurings Strategic Fit Diversification Market Share Gains Availability of Excess Cash, Cost Synergies Valuation Considerations

17. 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Business Risks: Operational Effectiveness Scoring: Positive Neutral Negative Execution Expertise in Each Key Line of Business Effectiveness of Audit & Control Systems Performance vs. Expectations Organization Structure: Effect on Efficiencies & Achievement of Strategies Risk Awareness Forecasting Ability Identification of Influencing Factors

18. 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Financial Risks: Financial Management Sophistication of Financial Standards Financial Risk Appetite: Beyond Unadjusted Leverage Interdependencies of Risk Performance vs. Expectations Risk / Reward Tradeoffs Aggressiveness Capital Levels & Structure Liquidity Policy: Access to Financing Allocation / Quality of Investments Interaction with Board of Directors Scoring: Positive Neutral Negative

19. 19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Financial Risks: Financial Management Use of Risk Management Tools Detail and Comprehensiveness of Guidelines Asset / Liability Matching Appropriate Use of Insurance, Hedging Accounting & Management Information Aggressiveness of Accounting Choices Degree of Adjustment Required Transparency & Responsiveness, especially under stress Scoring: Positive Neutral Negative

20. 20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Managing Financial Risks: Governance & Financial Policies Scoring: Neutral Negative Governance: Ownership Issues Degree of Board Independence Board Activism & Nature of Management Interaction Governance: Management Issues Turnover, Concentration Complexity of Organization Structure Governance: Stakeholder Issues Quality, Frequency, Consistency of Communications Frequency & Level of Regulatory, Tax or Legal Conflict

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