Enterprise Risk Management Review

Standard & Poor’s

June 19, 2006

Northeast Utilities System

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Topics To Cover Today

Regulated company update

Divestiture update

NUEI risk management

Enterprise risk management

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Regulated Company Update - Legislature

New Hampshire– Governor Lynch signed mercury reduction bill allowing upgrade of Merrimack coal-

fired station

– No action on second PSNH wood-fired plant

Connecticut– Regular 2006 legislative session ended without action on generation stimulus bill

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Rate Case Update

PSNH– Filed request for $49 million T&D increase– Reached settlement on $24 million temporary increase effective 7/1/06

WMECO

CL&P

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Competitive Business Divestiture Is Progressing

Wholesale: New England divestiture completed in 2005 PJM contracts rapidly rolling off NY municipal association contract continues through 2013

Services: 4 of 6 businesses (electrical, HVAC, telecommunications performance contracting)

completely sold Most of 5th business (Select Energy Contracting) sold E. S. Boulos (electrical contractor) still to be divested

Telecom: All 2.7 million shares of Globix (GEX) sold in April, netting $6.7 million

Retail: Closed June 1 on sale to Hess Corporation

– NU making three payments to Hess totaling $44 million

Generation: Bidding process under way for 1,442 MW book of assets Book value $825 million

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Risk Management At NUEI Wholesale Until Final Divestiture

Every position hedged where possible

Risk management policies updated, effective June 1, 2006

No trading

No new standard offer sales commitments

VaR limits lower

PJM book flattened and falling rapidly

– 75% of March 2005 commitments will have rolled off by year-end 2006

NYMPA positions flattened in early years, still open in later years

Daily reporting

Monthly Risk Oversight Committee meeting on positions

Regular reports to Board of Trustees

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Risk Management Elsewhere At NUEI

Generation– Mt. Tom output significantly hedged through 2008

Coal supplies also hedged through 2008 SCR installation complete

– Conventional hydro output unhedged

Services– SESI sold to Ameresco; parent performance guarantees gone in12 months– Remaining services business, electrical contractor E. S. Boulos, no draw on

capital

Retail– Sold to Hess

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Risk Management At NU: The Vision

Improve risk management and capital expenditure decision making in order to increase NU’s ability to achieve its strategic vision

Development of an ERM framework was initiated in late 2004, with the assistance of PWC’s risk management consulting capabilities

The specific rationale for moving forward was based on:– Management’s and the Board’s need to capture, understand, monitor and

mitigate risk on a continuous basis

– The company’s recently announced multi-billion dollar distribution and transmission capital program had the potential to expose the company to numerous financial and operation risks

– Prudently incurred costs may give rise to financial losses as a result of recovery lags

– Robust risk and capital management provided a methodological basis for defending decisions questions by regulators

– Capital commitments, energy marketing and procurement exposed the company to cash flow volatility and financing risk

– A belief that a proper application of an ERM framework would advance the company’s and its management’s financial and operational literacy

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Moving Forward With ERM

The implementation phase of ERM within NU was initiated in the second quarter of 2005

The implementation was based on the findings and recommendations of an internal multi-functional team working with PWC

Among the major recommendations:

– Create a corporate risk function supported by independent Business Unit Risk Controllers “BURC”

– Establish a corporate Risk and Capital Committee (“RaCC”) and working group – integrate risk and capital expenditure decisions

– Clarify the roles and charters of existing corporate and Board committees and coordinate them with that of the RaCC

– Establish capital project review standards and thresholds

– Develop standard tools and techniques for analyzing, monitoring, and reporting on capital investments and risk

Accountability for risk taking remains with the business units

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Northeast Utilities System

NU’s Enterprise Management Organization

Corporate ERM Group

Director

TG Risk ControllerTG Risk

Controller

UG Risk ControllerUG Risk

ControllerPresident

Utility Group

CFO

Board of Trustees

CEO

PresidentTransmission

ERM Organization Structure

PresidentSelect Energy

RaCC Chair

Unreg. Risk

Controller

Unreg. Risk

Controller

Senior Risk

Analyst

Senior Risk

Analyst

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Northeast Utilities System

Background Of Risk Management Managers

DirectorEnterprise Risk

Management

DirectorEnterprise Risk

Management

NUEI Business Unit Risk Controller

NUEI Business Unit Risk Controller

Transmission BusinessUnit Risk Controller

Transmission BusinessUnit Risk Controller

Utility Business Unit Risk Controller

Vacant

Utility Business Unit Risk Controller

Vacant

• Current position since March 2006

• Manager, risk analysis, analytics, reporting 2003-2006

• Analyst, Senior Engineer, Engineer 1995-2003

• Current position since 2005

• ENMAX (Calgary) 1998-2004

• Treasurer, VP-Strategy, other management positions

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Northeast Utilities System

The Risk And Capital Committee

Approved and oversees ERM policies and procedures

Meets monthly

Executive management membership

Chaired by CFO

Capital projects reviewed

Risk scorecard review

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Northeast Utilities System

Implementing Enterprise Risk Management Culture

Develop a leadership team that understands ERM

Create an environment where all levels of employees are encouraged to question and challenge

Develop an orientation and education program that is mandatory for all employees

– Develop a common language

Demonstrate that inappropriate/unethical behavior is unacceptable and action is taken

Incent appropriate behavior

Understand and communicate the risk/reward inter-relationship

Demonstrate the role of risk management in every employee’s job

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Northeast Utilities System

Define The Language Of Risk Management

Risk: Uncertainty around outcomes

Risks: Uncertainty drivers

Critical Outcomes: Define business success

Impact: What can we lose or gain?

Likelihood: Given current controls…

Risk Score: Impact X Likelihood

Dashboard: Critical outcomes (gauges) and maximum impacts (level 5 outcomes)

Mitigation/control: Response?

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Northeast Utilities System

Need Proposal Peer Review

Independent Analysis

Committee Approval

Monitoring

The ERM Process Is Currently In Implementation

Business manager develops a business case for making the investment in NU’s standard template

Business manager identifies potential capital requirement to support business goals

Cross functional peer managers review the case’s assumptions, risks, and analysis

BURC examines the case’s assumptions (stress tests), risks, analysis, and strategic goal fit and compares the investment to alternatives

BURC reviews the investment’s progress, provides routine and event-driven reports back to the RaCC, and records its performance for use in future business case development

RaCC evaluates the case and BURC’s assessment to make its recommendation to the CEO

Determines the legitimacy of the business case and value of the investment in terms of achieving the corporate strategic goals

Continually compares the investment to the case

projections to determine the investment’s viability

A Socratic evaluation of the efficacy of the business case’s premises and conclusion by an expert who

has no agency conflicts

A quantitative and qualitative description of how an

investment helps achieve the firm’s strategic goals

Enhances the case’s quality before independent

analysis

Driven by economics, regulation, operations and

customer demand

Capital Project Approval Dimension

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Northeast Utilities System

Risk Assessment Dimension

Utilizing both a bottoms-up and tops-down approach, each business unit is creating a “risk scorecard” which selects and rank orders key risks

Risks are processed through a dashboard that assesses impact on several scales, including financial, legal, reputation, strategy, business continuity, customer service and environmental, health and safety

Business unit assessments will be aggregated to create an enterprise dashboard

Risk List by BURisks Scored Using

“Heat Map” Approach

EnterpriseDashboard

• Risks to the long-term strategy

• Risks to the near-term operating plan, both financial and operational

• Risk to the corporate reputation

• Operation

• Financial

• Strategic

• Organizational

•Operational•Financial performance

Likelihood

Imp

ac

t

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Northeast Utilities System

Implementation Timeline

Organizational Risk training completed

NU Risk Policy approved by RaCC*

RaCC Charter

approved

Capital Projects Approval

Policy (CaPP) & Limits

approved by RaCC

ERM Corporate Web page

Capital Project Risk Scorecards

($10M+ projects)

UG & TG Risk

Scorecards

Corporate Risk

Scorecards

TARGET COMPLETION DATE

Q1 2006 Q2 2006 Q3 2006

NU Risk Policy, RaCC Charter approved in Q1 2006, Capital Projects Approval Policy to be approved in Q2 2006

Organizational risk training targeted for completion in Q2 2006

ERM Corporate Web page developed

Operating Unit Risk Scorecards completed for all operating units by end of Q2 2006, Corporate Center by Q3 2006

Capital Project Risk Scorecards developed for all capital projects $10 million and above by end of Q2 2006

RaCC is the Risk and Capital Committee chaired by Chief

Financial Officer

Initiate Board

Reporting

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Northeast Utilities System

The Vision For Full Implementation

All sizeable capital projects are currently subject to the ERM framework

In excess of $2 billion in capital projects approved, including the country’s single largest transmission line currently under construction ($1.3 billion)

The 2006 strategic planning process is incorporating ERM principles and will be “risk assessed” prior to Board presentation

ERM will lead to robust scenario planning across all businesses

Quantitative relationships will identify natural hedges and exposures within the business

Improved organizational literacy will be achieved, leading to improved decision making and business execution

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Northeast Utilities System

ERM Accomplishments To Date

Training Operations Capital

Five 5-hour top risk identification sessions with senior management from each business

Credit function integrated into Business Unit Risk Controllers

Capital project risk assessments completed for 4 SW CT transmission projects, LNG facility, Northern Wood

Five dashboard identification workshops and 10 top risk drill down sessions for each business line

Risk website developed3 PSNH projects totaling $79 million due in 2006

15 one-hour training presentations delivered to managers and above, workshop handbook developed

Risk assessment of key strategic assumptions

Post-completion reviews scheduled for 6 projects in 2006

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Northeast Utilities System

Keys To ERM’s Long-Term Success

Highly dependent on the overall organizational participation, executive sponsorship, communication and buy-in

Equally dependent on the skills and experience of the risk management organization, both at the business unit level and corporate

The process must ultimately engage the entire organization and address risk as a cultural matter

ERM must be integrated with other company processes, including strategic planning, budgeting, compliance, SOX, etc.

Results and successes must be communicated within the organization