1. 1 Enterprise Risk Management (ERM) Program PNM Resources, Inc. March 29, 2007 Presentation to American Public Power Association March 2007 Austin, Texas

2. 2 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.

3. 3 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

4. 4 Risk Management Corporate Structure Board of Directors Audit Committee Finance Committee Risk Management Committee Risk Map Coordination with Strategic Plan and Capital Allocation Management of Mitigations Oversee Adequacy of Risk Policies and Procedures Oversee Financial Risk Tolerance and Insurance Coverage Executive Policy Committee Enterprise- Wide Risk Management Set Risk Tolerance Develop Strategic Risk Focus Prioritize Mitigations Establish Financial Risk Policies and Procedures Board Risk Liaison Chief Financial Officer

5. 5 Steps to Implementation ERM Program Executive Policy Committee Determines “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.

6. 6 Data Collection Interviews with PNM Experts Due Diligence Financial Statements Internal Reports External Databases Research Compare to Industry Data Risk Database 2001-2007 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

7. 7 Identifying Risks StrategicOperationalCommodityCapital and Investment Risk 1 X Risk 2 X X X X X XX X XXX X Risk 4 Risk 5 Risk 6 Risk 7 Risk 8 Risk 9 Risk 3 Risk 10

8. 8 Measure Risks When risks are segmented by function a clearer picture begins to develop.

9. 9 Prioritize Risks Traditional Risk Maps assist in bringing perspective to the relationships between the various risk issues.

10. 10 Prioritize Risks The Executive Policy Committee chooses key risks for strategic focus—ones that are actionable and provide the highest mitigation value.

11. 11 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.

12. 12 Strategic Focus Risk Action Planning Each Business Unit is charged with creating strategic action plans that align with corporate strategy and mitigate known exposures.

13. 13 Strategic Focus Decision 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.

14. 14 Strategic Focus Budgeting 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.

15. 15 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.

16. 16 Lessons Learned Buy-Off on ERM Should First Come from Executive Management

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