Vitality Risk Management Credit Rating Perspective

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Vitality Risk Management Credit Rating Perspective

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Energy Trading & Marketing Credit Rating Methodology Our Objective: Understand a vitality organizations' dangers and how well those dangers are overseen Both quantitative and subjective examination devices are utilized to assess dangers Findings are fused into FICO assessments

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Analysis Tools Three pronged approach Risk Management Practices Evaluation of an organization's capacity to distinguish and screen noteworthy dangers, restrict misfortunes and work inside all around imparted hazard resiliences Capital Adequacy Measures discrete dangers of market, credit and operational dangers Liquidity Measures presentation to security calls under push situations

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Risk Management Practices Qualitative appraisal of hazard administration hones Analysis will be custom fitted for particular plan of action For an organization that has great money related adaptability and capital or goes out on a limb couple of uncommon or complex dangers, chance administration practices will be less imperative For an organization that has powerless budgetary adaptability and capital or goes out on a limb surprisingly high or complex dangers, chance administration practices will be critical

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Risk Management Practices Framework Policies – Risk Culture and Structure II. Framework – Process and Technology III. System – Measurement and Reporting

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Policies Business Strategy What is the plan of action? What dangers are incorporated into the business methodology? Chance Tolerance Is the hazard resilience steady with the business methodology? Powers Do powers mirror a craved resilience for hazard? Divulgence Is the hazard and its impact on income uncovered remotely and inside?

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Policies Evaluation In the arrangement measurement, Standard & Poor's will search for: Corporate responsibility to hazard administration Communication with board on hazard positions and hazard administration programs Clearly characterized and imparted chance administration approaches Corporate administration structure that backings chance administration Independent hazard administration work Consistency between business technique and hazard Senior administration's contribution in the hazard procedure Risk confines that reflect chance resilience and capital sent Compensation is attached to accomplishment of hazard administration goals

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Infrastructure Technology Is complex programming and successful equipment set up? Operation What is the nature of the operational procedures? Information What is the level of information respectability? Individuals Are the fitting individuals utilized and are the best possible motivator programs set up?

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Infrastructure Evaluation In the Infrastructure measurement, Standard & Poor's will search for: Qualified hazard administration staff Adequate preparing and spending plan accessible to hazard administration staff Compensation connected to accomplishment of hazard administration goals Proper framework exists to bolster chance administration Data quality – information is approved and auspicious Controls are set up as for information use Technology utilized is steady with hazard resistance and business technique

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Methodology VaR, push testing and different measures Are the models and stretch tests fitting for the plan of action verifying Are the models appropriately verified? Valuation How are the positions esteemed? Execution Are the systems tied into execution? Administration understanding Does senior administration comprehend the model dangers? System inquiries will be customized for plan of action

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Methodology Evaluation In the technique measurement, Standard & Poor's will search for: Identification of measurements used to measure hazards and oversee limits Understand how measurements impact basic leadership Metrics are proportionate with business procedure Independent approval of Models that are approved against real market results Risk considers that are assessed occasionally Assumptions that are sensible Reports that are set up to bolster consistence with hazard administration approaches Reports adequately control business exercises and uncover chances on a convenient premise Appropriate hazard administration documentation is set up

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Capital Adequacy Model Addresses the potential financial misfortune because of market, credit and operational danger of an exchanging operation Estimate the measure of hazard capital and ascribe it as obligation Current Model attributes obligation = 6x exchanging VaR + 4x likelihood balanced credit introduction

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Market For exchanging positions, Standard & Poor's principally depends on VaR computation Use a 10 day holding period with 99% certainty interim Multiple is utilized relying upon FICO assessment, e.g. 4x that number is essential for a "BBB" rating

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Credit hazard is measured by taking the one year default likelihood times the unsecured credit line for each counterparty That number is duplicated by an element relying upon FICO assessment, e.g. 4x for speculation review

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Operational hazard ought to consolidate both money related and physical operational hazard Currently utilizing half of the market chance capital

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Liquidity Analysis Standard & Poor's Objective: To quantify the adequacy of liquidity under stretch situations Credit Event Downgrade to non-venture review Market Event Stress test development in item costs

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Liquidity Analysis Tools CELA measures an organization's presentation to a credit occasion MCELA measures an organization's introduction to a synchronous credit occasion and market occasion

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Liquidity Analysis Tools Credit Event Liquidity Adequacy Primary liquidity . CELA = Neg MTM without value push Market and Credit Event Liquidity Adequacy MCELA = Primary liquidity . Neg MTM with value stretch Primary liquidity = unhindered money + submitted credit lines

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Ratings Implications

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Ratings Implications Investment Grade organizations ought to keep up a MCELA proportion of 1.0x

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Mitigating Factors Discretionary stock Reserves Discretionary business Capital spending Debt development profile

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Arleen Spangler Director, Utilities, Energy and Project Finance Standard & Poor's 55 Water Street New York, NY 10041 P 212-438-2098 F 212-438-2154 arleen_spangler@sandp.com

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