Committee of Chief Risk Officers 8000 Research Forest Dr. info@ccro.org STE 115 #278 http://ccro.org The Woodlands, TX 77380 8 Advancing Our Energy Industry’s Risk &Compliance Best Practices Anderson: Number six concerns risk adjusting an LNG business. This involves trying to get a higher-level view of the capital demands of the business, for the purpose of accurate measurement of true returns. Risk adjustment can be critical when thinking about capital allocation. Such is the case when you're facing choices regarding a portfolio of transaction opportunities, a situation every energy company faces, not just those in LNG. Risk adjustment can be critical when thinking about capital allocation. There are some helpful guidelines around things we'd be looking at for prospective transactions here. Things like RAROC, economic value, and so on. We’ll be trying to get a handle on “What is the invested capital associated with these big transactions?” so that companies understand the performance issues of their LNG business alongside other businesses. 6) Risk-adjusting an LNG Business • Can we establish a more objective framework to build a perspective on RAROC? • Avoid the term RAROC to aide acceptance? • We do not want a purely academic initiative – needs to be practical use • Maybe objective #1 is: Can we “get a handle” on what the Invested Capital of the LNG business includes? (or are we studying only the LNG trading business?) • Then: The returns side is easier • Finally: How do we risk adjust the returns? • Economic Value – is “challenging” for LNG given poor valuation techniques available • CCRO has access to plenty of recent work on the framework • This might establish a basis for us to create an LNG risk practitioner’s framework that is more practical… www.ccro.org 8 Potentially for discussion: The fundamentals… ? ? ? ? ? =? ? ? ? ? ? ?? ? ? ?? ? ? ? ? ? ? ?? ?? ?? ?? ? ? (? ?? ?? ? ? ? ? ? ? ? )Economic Value includes a charge for the use of Invested Capital