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Presentation for University of Houston
Bauer College of Business Risk
Management Class March, 2007
Agenda
Halliburton Company Information
Risk Management & Insurance Programs
Separating RM Programs in Major Divestiture
Enterprise Risk Management
Halliburton Overview
Second-largest oilfield services company and leading engineering, procurement and construction company
• # 103 on Fortune 500 ranking• Over $22 billion in annual sales• Equity market cap. of over $30 billion• ROCE in excess of 35%• Approximately 100,000 employees in over 100
countries
Operating Group Overview Energy Services Group provides a broad array of products
and services to help customers explore for and produce oil and gas globally
• Approximately $13 billion in annual sales• Equity market cap. of over $30 billion• ROCE in excess of 40%• Approximately 46,000 employees in nearly 100 countries
KBR provides engineering, procurement, construction, and logistics capability to two main customer segments
• Over $9 billion in annual sales• Equity market cap. of nearly $3.75 billion• ROCE of approximately 11%• Nearly 58,000 employees in over 100 countries• Anticipate full separation to be concluded by April, 2007
Halliburton Operations Worldwide
Top Line Strategies
1
KBR separation to enhance shareholder value
Pure play Energy Services company Dominate North America, continue
to grow in the East Distinct competitive advantages
• Global Footprint• Service Quality• Vertical Integration
Growth• Technology• Acquisitions
Halliburton / Energy Services Group
Halliburton Business Segments
HALLIBURTON
Production Optimization
Drilling, Evaluation &
Digital SolutionsFluid Systems
Reservoir evaluation, advanced well
placement, efficient drilling systems and transform wells into
real-time digital asset
Well construction, drilling and completion
fluids and waste management
Enhance recovery of hydrocarbons over the
life of the asset
▪ Revenue: $4 billion▪ Op. Inc. margin: 25.1%
▪ Revenue: $3.6 billion▪ Op. Inc. margin: 22.2%
▪ Revenue: $5.4 billion▪ Op. Inc. margin: 28.5%
Revenue Profile ($13 billion in 2006)
Production Optimization
Drilling, Evaluation &
Digital Solutions
Fluid Systems
27.5%
41.5%
31%
North America
LatinAmerica
Middle East /Asia Pacific
Europe /Africa
50%
11.5%
17%21.5%
Segment Revenue Geographic Revenue
KBR
28%
12%
28%
32%
E&C(Gas Monetization)
$4.2
E&C (Other)
$1.8
G&I (Middle East)
$4.2
G&I (Other)
$4.8
By Segment
63%
37%
Cost-Reimbursable
$9.5B
Fixed Price $5.5B
KBR: A Leading Global Engineering & Construction Service Provider
Headquarters: Houston, TX
LTM Revenue:(1) $9.8 Billion
Operating History: 100+ years
Employees: ~57,700
Engineers: 4,000+ (Avg. 23 yrs. at KBR)
Countries: 45
Two Operating Segments:
Energy & Chemicals (E&C)
Government & Infrastructure (G&I)
Extensive Service Capabilities:
Engineering, procurement, construction, commissioning and start-up (EPC-CS) to the global oil & gas and petrochemical industries
Defense, logistics, contingency support and infrastructure-related services
$15 Billion Backlog at 9/30/06
(1) As of 9/30/06.
By Contract Type
Investment Highlights
Global Market Leader
Best-in-ClassTechnical Expertise
Strong Management
Team
Blue-ChipClient Base
Improving Financial
Profile
Stringent Risk Management
Compelling E&C Growth
Opportunities
Balanced Project Portfolio
NASA
Architect engineer for Johnson Space Center
1964
First North Sea platform
(BP West Sole)
1947
World’s first offshore platform
(Kerr McGee - Gulf of Mexico)
1942
First fluid catalytic cracking facility
DoD – WWII
Completed 359 destroyer escort and
other vessels
KBR: A History of Successful Innovation
2005
World’s largest ammonia plant at groundbreaking
(BFPL Australia)
2004
Largest CO2
sequestration project (In Salah)
2004
World’s largest LNG plant in operation
(SEGAS)
KBR: How We Walk the Talk Regarding Risk
Implementing a transversal risk awareness program throughout the organization
Instituted Business Development Oversight capability to insure transparency and best practices on all new projects and provide a “double regard” on project risk and returns
Separating project management oversight, estimating, scheduling, and project controls outside of business unit
Clearly defined delegation of authority at divisional, corporate, and board levels
KBR’s Objective: To be the industry leader in risk awareness and risk management
IdentifyProspect
Invitation to Bid
Sales
Technical
Review
Commercial
Review
KBR Mgmt.
Executive Comm.
KBRBoard
Division Executive
Prospecting Risk Review Stages
Corporate
BusinessDevelop-
mentOversight
Fixed Price Contracts < $25MM$25 to
$250MM >$250MM
Authorization Limits
ProjectExecution
OngoingMonthly Review
Stringent Risk Review Process Targets Improved Results
Risk Management
Risk Management Risk Management AccountingAccounting
Medical Medical ManagementManagement
Global Insurance Global Insurance Programs & SystemsPrograms & Systems
ClaimsClaims
Risk Management Risk Management Services Services
Enterprise Risk Enterprise Risk ManagementManagement
Litigation Litigation ManagementManagement
RM ServicesRM Services
- Design, implement and administer project insurance programs
- Identify and evaluate risk exposures
- Business acquisition and execution support
Global Insurance ProgramsGlobal Insurance Programs
- Design and place Company and worldwide insurance plans
- Implement and administer insurance policies
- Manage internal communication and support
Global Claims
- Employee Claims
- General Liability Claims- Eastern Hemisphere Auto Liability Claims- Cargo Claims- Personal Effects Claims
- Property Claims
- Hull and Aircraft Claims
Medical Management
- Return to work- Medical case management- Absence case management
- STD, LTD, FMLA- Health care provider
management- Medical treatment protocols- Corporate Medical Director
Risk Management Accounting
- Retained risk program administration
- Record maintenance- Accounting system & compliance- Reporting
- Invoice processing and payment- Cost distribution
Other Activity
- Law Department / Liability Claims- Investigate & manage claims - Identify and evaluate risk exposures- Loss prevention support
- RM systems and data management- Underwriting and compliance info- Reporting
Business Services
Conduct risk management due diligence for acquisitions and mergers
Identify exposures arising from business activities Determine desired means of managing exposures to risk of loss Obtain insurance required by and in accordance with applicable laws Review contract proposals for consistency with insurance programReview bids to determine project specific insurance and bond needsProvide evidence of insurance coverage or other required documentation to operating groups, customers, regulatory agencies, and courtsExecute project insurance and bonding requirements
Insurance Purchasing Philosophy
The Company will assess the effects on its business activity of casualty, commercial, operational, financial and environmental risks, applying consistent techniques in the management of those risks.
Insurance transfer mechanisms will be employed only in the following circumstances:
catastrophic risks where feasible and economical
exposures that can be insured at a cost less than expected losses
where required by law or contract
General Liability – 3rd party liability or civil liability Auto Liability – Liability resulting from use of vehicles Workers’ Compensation – Statutory requirements Employer’s Liability – Covers liability to employees Excess Liability Cargo Property – Fixed facilities Vessels - Hull & Machinery Protection & Indemnity Other Corporate Coverages
Fiduciary Liability Crime Director’s & Officer’s Liability
Global Insurance Placements
Halliburton Co. Summary of Insurance (as of February 2007)
*
$135-140M - AWAC
GL - Ded. $5M AL - Ded. $5M EL - Ded. $5M Ded. $1M Ded. Nil Ded. $250K Ded. $250K Ded. $1M Ded. $10K Ded. $2M Ded. $1MDed. $2.5M Ded. $10M
Crime$25M -
AW
AC
/
Axis/L
lo
$10-25M Hartford Ins.$20-30M - Ded - $10M
$10MM XS of 5MM - Lloyd's $10M - HCC $10M$3MM XS of 2MM - Lloyds (part of deductible)
$10MM XS of 40MM - Ace USA $40-55M HCC Global
$25M Per Shipment / $50M Aggragate Cap
ELU - $25M$25MM XS of 15MM - AIG $25-40M National Union
Watercraft Cargo WC$55-70M AWAC CNA - $10MAxis - $10M
Per Schedule Lloyd's
Stat. Limits Ace, USA
$100M USAIG
Per Schedule Lloyd's / St. Paul /
Navigators
Fiduciary Liability$70-85 Max Re, LTD
$1
00
M - L
ex
ing
ton
Ins
. Co
.
$50MM XS of 50MM - XL (Bermuda)$85-100M RSUI
$100M Lloyd's / St. Paul /
Navigators
Well Control AircraftOffshore Property
$110-120M HCC Global
$100-110M Starr
$225M X
S o
f 25M - S
R In
ternatio
nal In
s. Co
mp
any
D&O
Side A DIC$185-195M ACE
$170-185M Arch
$150-160M Starr
$140-150M Hartford
$120-135M RLI
$150MM XS $450MM Bermuda Companies (ACE /Starr Excess)
Onshore Property
$400M X
S o
f $100M - X
L In
suran
ce Co
mp
any (B
urm
ud
a)
$250 XS
of 250M
- Llo
yd's, L
on
do
n an
d S
R In
ternatio
nal
Insu
rance C
o.
$500M - A
IG / Z
urich
/ AC
E
$100MM XS $350MM Bermuda Companies (Arch/AWAC/XL)
$250MM XS of 100MM Lloyd's & London Companies
$250M - G
reat Lakes In
suran
ce Co
mp
any (M
un
ich R
e)
Excess LiabilityGL AL EL
Separating RM Programs in Major Divestiture
Divestiture Scenario
Existing organization: Parent Company with two major operating divisions (Energy Services Group and KBR)
• RM organization• Insurance programs
Plan: Separation into two independent companies• Reasons• Method• Timing
RM/Insurance Considerations• Establishment of RM function and capability• Design and implementation of new, separate insurance placements for KBR• Create top rate program(s) while minimizing cost impact to both groups• Complete separation by or contemporaneously with effective date of
transaction
Risk Assessment and Enterprise Risk Management
First – Risk Assessment Process
Why implement a formal risk assessment process at Halliburton?
To satisfy NYSE corporate governance rules and Sarbanes Oxley internal controls requirements that dictate Halliburton have a formal approach for identification, evaluation and management of risks faced by the Company.
Purpose
To develop and implement a plan that will enable the Company to demonstrate its activities to assess its business risk exposures and the effectiveness with which those risks are managed. Risks are defined as any events the occurrence of which has the potential for significant impact to the Company.
What we did to develop and put a Halliburton risk assessment process in place
A team was formed to establish a system for:- Identification and categorization of risk exposures- Determination of executive responsibility for each
risk category- Assessment of specific risk’s impact on Company
success- Ascertain controls in place for management of the
risks- Develop documentation and reports to
demonstrate functioning of the process
Basic Risk Categories
· Strategic – Factors that may interfere with the execution of Halliburton’s strategies and objectives such as reputation risks, adverse publicity, investor and analyst confidence and general and industry economic conditions.
· Financial - Risks associated with Halliburton's capital structure, liquidity, margin erosion, tax burden, foreign exchange volatility and credit risks.
· Legal & Regulatory - Traditional liability and regulatory compliance, as well as the vulnerability of intellectual capital and effectiveness of business transactions.
Basic Risk Categories, cont’d
. Human Capital – Critical areas such as employee selection, retention and turnover, compensation, executive effectiveness, depth and succession planning.
· Political – The affect of domestic and international politics, in addition to traditional nationalization, confiscation and trade disruption risks.
· Operational & Project –Business-specific exposures such as contract performance, project and business entity management, customer relations, environmental damage and crisis management.
· Technology - Product and process obsolescence, systems security and effectiveness and network liability.
Management Responsibility for Risk Exposures
Category Responsible Executive Position
Strategic Risks Corporate CEO
Financial Risks Corporate CFO
Legal & Regulatory Risks Corporate General Counsel
Human Capital Risks HR VP
Political Risks Corporate General Counsel
Operational & Project Risks Corporate COO
Technology Risks CIO/VP Tech (ESG)
Risk Ranking Scoring System
Significance: This rating is based on the potential negative impact to the Company if a single significant adverse event or situation or a continuing series of connected events occurred within a specific risk exposure. The score is based on the largest monetary impact realistically possible for a particular event.
1 – Less than $5mm 2 – Between $5 - $50mm 3 – Between $50 - $125mm 4 – Between $125 - $500mm 5 – More than $500mm
Risk Ranking Scoring System, cont’d
Likelihood: This rating is the quantification of how often a loss will occur within a specific risk exposure. The score here is based on how often it is thought that an event of the most significance within the particular risk exposure will happen.
1 – Extremely rare, not expected to occur once in 20 years2 – Rare, may occur once in 10 years3 – Periodic will probably happen in the next 5 years4 – Recurrent, almost certain to happen in the next 2 years5 – Frequent, multiple times per year
Top Ten Risks – Absolute BasisCorporate Level
Risk Absolute Consequence
Absolute Likelihood Severity
1 Mass Toxic Tort Liability >$500 million Recurrent Extreme
2 Damage to Reputation/Image >$500 million Recurrent Extreme
3 Unfavorable Public Relations >$500 million Recurrent Extreme
4 Unsuccessful Projects >$500 million Recurrent Extreme
5 Failure to Maintain Adequate Internal Financial Controls
>$500 million Periodic High
6 Legal Mistakes in Business Transactions >$500 million Periodic High
7 Shareholder Class Action and Derivative Liability
>$500 million Periodic High
8 Loss of Investor/Analyst Confidence >$500 million Periodic High
9 Adverse Action by Competition >$500 million Periodic High
10 General Economic Slowdown >$500 million Periodic High
Top Ten Risks – Controlled BasisCorporate Level
Name Controlled Consequence
Controlled Likelihood
Controlled Risk
1 Unsuccessful Projects $125-$500 million Recurrent Extreme
2 Damage to Reputation/Image >$500 million Periodic High
3 Adverse Action by Competition >$500 million Periodic High
4 General Economic Slowdown >$500 million Periodic High
5 Inaccurate Budget/Business Planning $125-$500 million Periodic High
6 Failure to Maintain Adequate Internal Financial Controls
>$500 million Rare High
7 Loss of Investor/Analyst Confidence >$500 million Rare High
8 Unavailability of Catastrophic Insurance Coverage
>$500 million Rare High
9 Inadequate Planning in M&A Implementation
>$500 million Rare High
10 Retained Risk from Divestitures >$500 million Rare High
4. Joint Venture Management Failure
Description: Financial losses from unsuccessful business performance. Improper accounting leading to misstatements in accounts.
Absolute With Controls
Significance 3 3
Likelihood 5 3
Gross Total Score 15 9
Adjusted Classification High Moderate
Controls: Specific process for approval of and formation of joint venturesManagement oversightInternal audit for compliance with company procedures
Next Stage – Enterprise Risk Management
ERM Progress – 2004 To Date Risk Assessment
• Established ESG ELT Risk Committee in Q3 2006
• Efforts focused so far on following areas:
− Legal
− Business operations
− Information technology
− Internal controls and SEC documentation
• Completed “ballpark” assessment of largest exposures
− High margin of error
− Need for better and more detailed process
Risk Mitigation
• Insurance program
• Contractual risk transfer
• Company policies and internal controls (i.e. HSE, financial controls, COBC hotline, etc.)
• Increased awareness of exposures and consequences
Monitoring
• In compliance with regulatory requirements
• Documented risk assessment work to date
• Annual Audit Committee updates
ERM Objectives Enhance existing risk management process that leads to:
• Higher returns on capital
• Better margins
− Reduce severity and frequency of losses
• Reduced cash-flow volatility
• Lower risk profiles for acquisitions
• Reduced risk of unsuccessful projects and poor execution
• Remaining in compliance with NYSE rule and Sarbanes Oxley guidance that require a formal approach to identification, evaluation, and management of risks faced by the Company
• Incremental costs less than $500,000 annually
Risk management process overview:• Risk Assessment
− Identify, understand, and prioritize exposures
− Prioritize based on size of exposure and likelihood of occurrence
• Risk Mitigation
− Avoidance or transfer of unacceptable levels of risk
• Monitoring
− Ongoing monitoring of existing and new exposures and proper documentation of process
ERM OrganizationHalliburton Senior Management
Operations Advisory Committee-Sr. VP Division (2)-Sr. VP Strategy
-Sr. VP Western Hemisphere-Sr. VP Eastern Hemisphere
-Sr. VP Technology-Sr. VP BD
ERM CommitteeChairman: Craig Nunez-Director Risk Management
-VP Internal Audit and Controls-Law Department Representative
Corporate Advisory Committee-Sr. VP & CAO
-Sr. VP Commercial Law-VP HR & Administration
-Sr. VP Litigation-CIO
-Sr. VP Supply Chain Management-VP Corporate Development
-VP Tax Services
Resources-Charles Muchmore
George Jones-Robert Bush-Tim McKeon
-Abu Zeya-Richard Whiles
Subject Matter Experts ("SME")To be determined as needed
Roles of ERM Participants
ERM Committee
• Lead ERM process and make decisions
• Recruit Subject Matter Experts (“SME’s”)
• Utilize resources when necessary
• Liaise with Audit Committee
• Obtain input and assistance from the Advisory Committees as appropriate
Subject Matter Experts
• Called upon to provide expertise and assistance in their area as needed
Advisory Committees
• No decision making responsibility
• Sounding boards for initiatives created in ERM
• Door-opener within the organization to facilitate implementation of ERM
2007 Plan Risk Assessment
• Refine estimates of previously identified exposures
• Perform assessments in remaining areas:
− Business operations
− Mergers & Acquisitions group
− Legal
− IT
− Business Development
− Finance & Accounting
− Supply Chain Management
− Human Resources
Risk Mitigation
• Reassess insurance philosophy in light of findings
• Continue to quantify value of mitigation efforts
• Transfer mitigation best practices among business lines and geographic regions
Monitoring
• Fully integrate risk management into a sustainable process
• Continue documentation of new information
• Communication and training
• Report to Board Audit Committee by December 2007
Q&A