Finance Transformation William F. (Bill) Aimone Deloitte Consulting LLP CFO Turnover is Emblematic of the Sustained Pressures on Finance… • • • • • Regulatory Scrutiny Activist Investors Business Complexity Scope of CFO Role Increased Cost of Control • Less Resources for Everything Else CFO Changes: 1994-2005 US Public Companies with Revenues > $1Billion* 450 400 350 300 250 200 150 100 50 0 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 * Source: Deloitte Analysis, 2006 Regulatory pressure and the fear of financial errors continue… • Internal staff continues to be sapped • Too many controls • Increased company accountability and fear of SEC investigations • Greater shareholder scrutiny of a company’s financials and internal controls Total SEC Fines* $4 $3 Billions $2 $1 $0 2003 2005 * Source: ComplianceWeek, 04/06 Restatements Caused by Major Accounting Issues Continue to Increase… • Passing of the Sarbanes-Oxley Act • Increased autonomy and caution of ―independent auditors‖ • Greater market scrutiny of company financials Number of Financial Restatements* 1400 Number of Companies 1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 CFO Scope of Authority has Elevated Finance, But Potentially Diffused Focus… • Decline in COO positions has thrust CFO into ―number 2‖ role • Responsibilities have expanded • Enhanced accountability for enterprise performance • Greater Board and CEO scrutiny Total COO Positions* Total COO Positions 225 200 175 2001 2002 2003 2004 2005 * Source: 2005 Crist Volatility Report (Note: Sample of 662 companies from Fortune 500 & S&P 500) Now, CFOs are asking how can we… Execution • Partner with other senior managers to drive strategy execution? • Reduce costs while maintaining our focus and adding value? Performance • Create a common language for management to see themselves as investors do? • Ensure that our investments yield the greatest returns? Control • Ensure the data the company relies on provides the most useful information? • Reduce the burden of maintaining controls without compromising integrity? Efficiency • Organize finance to serve the needs of the different stakeholders? • Attract, develop, and retain the talent required to fulfill finance’s mission? The Four Faces of the CFO are key to addressing finance’s challenges… • Stimulate behaviors across the organization to achieve strategic and financial objectives Leading Edge Threshold Performance • Provide financial leadership in determining strategic business direction and align financial strategies Finance CFO Function Focus Triangle • Protect and preserve the assets of the organization • Balance capabilities, costs and service levels to fulfill the finance organization’s responsibilities The Steward Focus: Accounting and control, risk management, and preserving assets Role: Ensure compliance with financial reporting and control requirements Competencies: Accounting and reporting, compliance, and good judgment Critical Issues: Information quality and rationalizing controls The Operator Focus: Efficiency and service levels Role: Dynamically balance cost and service levels; define and adapt finance’s operating model Competencies: Leverage system capabilities, program/project management, problem solving, and process management perspective Critical Issues: Operating model development and evolution, talent management; more change management skills The Strategist Focus: Helping to set future direction to enhance shareholder value Role: Leveraging financial perspective to improve risk awareness and performance management Competencies: Critical thinking, presentation of data, strategic agility, and dealing with ambiguity Critical Issues: Providing a financial perspective and translating market expectations into internal business imperatives The Catalyst Focus: Disciplined execution of strategic choices; changing organization behavior Role: Gain business alignment to successfully execute strategies; partner with other executives Competencies: Business perspective, change management, organizational facilitation, conflict management, and strong communication. Critical Issues: Establishing enterprise accountability for results, acceptance from business management Now, let’s hear about a real example of how an energy company is addressing Finance’s challenges… a meaningful company doing meaningful work delivering meaningful results John R. (J.R.) Sult Sr. Vice President & Chief Accounting Officer; Pipeline Group Chief Financial Officer Deloitte Energy Conference May 15, 2007 Cautionary Statement Regarding Forward-looking Statements This presentation includes forward-looking statements and projections, made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding our plans for 2007 and our expected financial and operating results for 2007, as well as other statements regarding matters other than historical fact. The company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this presentation, including, without limitation, our ability to meet production volume targets in our Production segment; outcome of litigation and government investigations; our ability to comply with the covenants in our various financing documents; our ability to obtain necessary governmental approvals for proposed pipeline projects and our ability to successfully construct and operate such projects; the risks associated with recontracting of transportation commitments by our pipelines; regulatory uncertainties associated with pipeline rate cases; actions by the credit rating agencies; the successful close of our financing transactions; our ability to successfully exit the energy trading business; our ability to close our announced asset sales on a timely basis; changes in commodity prices for oil, natural gas, and power; inability to realize anticipated synergies and cost savings associated with restructurings and divestitures on a timely basis; general economic and weather conditions in geographic regions or markets served by the company and its affiliates, or where operations of the company and its affiliates are located; the uncertainties associated with governmental regulation; political and currency risks associated with international operations of the company and its affiliates; competition; and other factors described in the company’s (and its affiliates’) Securities and Exchange Commission filings. While the company makes these statements and projections in good faith, neither the company nor its management can guarantee that anticipated future results will be achieved. Reference must be made to those filings for additional important factors that may affect actual results. The company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the company, whether as a result of new information, future events, or otherwise. Please note that the proved reserves attributable to our proportionate share of Four Star represent estimates prepared by El Paso and not those of Four Star. 14 Defining Our Purpose El Paso Corporation provides natural gas and related energy products in a safe, efficient, and dependable manner 15 Creating a New Culture the place to work the neighbor to have the company to own 16 El Paso Corporation • Pipelines – 42,000 miles of natural gas pipeline – 19% of total U.S. interstate mileage – 28% of deliveries to U.S consumers • Exploration & Production – 2006 year-end reserves: 2.6 Tcfe – 2006 Production: 798 MMcfe/d – Top 10 Independent Note: E&P data includes our 43.1 % share of Four Star Oil & Gas 17 El Paso Pipeline System Colorado Interstate Gas Mojave Pipeline Wyoming Interstate Cheyenne Plains Pipeline Southern Natural Gas El Paso Natural Gas Mexico Ventures Florida Gas Transmission (50%) Elba Island LNG Tennessee Gas Pipeline • 19% of total U.S. interstate pipeline mileage • 23 Bcf/d capacity (16% of total U.S.) • 16 Bcf/d throughput (28% of U.S. consumption) • Best market connection • Best supply access • Leading pipeline integrity program 18 El Paso E&P: Top 10 Independent Total Company • Total year production of 798 MMcfe/d • Year-end reserves of 2,637 Bcfe* • R/P: 9.1 Nile Delta Onshore* • Total year production of 413 MMcfe/d • Year-end reserves of 1,711 Bcfe • R/P: 11.3 Texas Gulf Coast • Total year production of 187 MMcfe/d • Year-end reserves of 406 Bcfe • R/P: 6.0 Egypt Egypt Egypt Sinai Gulf of Suez • 2 exploration blocks Brazil Rio de Janeiro Brazil • Total year production of 24 MMcfe/d • Year-end reserves of 248 Bcfe • R/P: 28.7 GOM/SLA • Total year production of 174 MMcfe/d • Year-end reserves of 272 Bcfe • R/P: 4.3 19 *Includes our 43.1% share of Four Star; all data 2006 unless noted A New Chapter for El Paso—Post ANR • Financially strong, flexible – Pipeline back to investment grade (Moody’s, Fitch) • Premier natural gas pipeline franchise • Greatly improved E&P business • Favorable macro environment for both businesses 20 Restoring Financial Condition December 2003 Complexity High December 2006 Low Post ANR Low At or near investment grade Leverage Very high Manageable Financial flexibility None $1.9 billion loss in 2003 Improved Return to Profitability Very good Further EPS growth in 2007 Profitability Disclosure/ transparency Improved Excellent Excellent 21 El Paso’s Finance Transformation • Vision and Guiding Principles • Financial Controls • Business Process Optimization • Finance Roadmap 22 Defining the Culture of a World Class Finance Organization • Technically competent & capable people • Highly motivated & results oriented • Defined as having a culture of ―excellence‖ • Operates as a ―trusted business partner‖ • Oriented toward well controlled, standardized & efficient processes & systems • Champions of continuous improvement 23 Vision for Finance The Finance and Accounting organization is a customer oriented support function and business partner that is grounded in integrity, judged by accountability, and measured by excellence 24 Guiding Principles for Finance • Proactively engage with customers to add value and become a trusted business partner • Continuously improve transaction processing and reporting • Maintain an effective internal controls environment • Create a motivating and rewarding work environment and focus on developing the competencies of employees Customers Process Controls People 25 Financial Controls: Pre-2006 • Lack of clarity of ownership and accountability • Annual assessment managed as a ―project‖ • High cost implementation, reliance on contractors • Limited benefit from lessons learned due to outsourcing • Control framework built ―bottoms up‖ • Limited utilization of technology 26 New Financial Controls Model • Centralized financial controls group • Implemented self-assessment model • Institutionalized the controls assurance process to improve sustainability • Better use of technology • ―Find and fix‖ culture 27 Financial Controls Realignment—Benefits • Improved accountability by control owners • Significantly reduced cost of compliance • Consolidated control and testing instructions into single tool available to all users • Improvements in managing the ―right‖ controls • Integrated financial control compliance with business processes, not as a bolt-on project • New model supports ability to make further improvements each year 28 Business Process Optimization (BPO) BPO Mission: • Promote a culture of ―excellence‖ • Champion continuous improvement Objectives: • Enable process owners through: – – – – Proven methods Analytical tools Project management templates Effective training and mentoring • Project management and support • Provide governance framework 29 BPO Governance Roles & Responsibilities Overview • Steering Committee – Approval and prioritization – Monitoring status Steering Committee BPO • BPO Group – Standard processes – Portfolio management Proces s Owners • Process Owners – Project originates from the businesses – Own the day-to-day project management 30 Finance Roadmap Purpose: • Improve the effectiveness, efficiency, and performance of the finance function aligned with organization vision and strategy Scope: • Entire finance organization across all segments Recommendations developed around: • People and organization • Processes • Technology and data management 31 Key Findings Current State Challenges & Implications • Data Management • Process • People • Organization 32 Examples of Key Findings • Varied metric definitions • Data exists within silos • Redundant efforts • Complex finance organization • Dated technology and data model • Inconsistent processes • Information not shared • Structure for talent management 33 Roadmap Benefits: Future State Objectives • Improve management reporting • Shift effort to higher value analysis and decision support • Streamline and standardize processes • Improve measures to drive strategy execution • Enable efficiency and flexibility with technology • Improve effectiveness of talent management • Optimize balance between capabilities, costs, and service levels 34 Program Initiatives • Data Management • Process Improvement • Personnel Development • Supply Chain Improvement Roadmap Timeline 4Q06 Data Management Stream Data Governance Strategy Data Model Design Financial Systems Fit/Gap Analysis Chart of Accounts Design Financial Systems upgrade Hyperion Upgrade Asset & Project Accounting Tax Accounting for Fixed Assets Financial Planning & Analysis Capital Forecasting Improvement Close to File Improvement Tax System Rationalization Process Improvement Stream Roadmap Quick Hits Finance Performance Metrics Sales & Use Tax Redesign Revenue Cycle Strategy - E&P Policy & procedure Development Tax Workload Study Revenue Cycle Strategy - Pipes Allocation Rationalization Personnel Development Stream Communications Strategy Finance Development Finance Training Curriculum Supply Chain Stream Supply Chain Strategy Sourcing Implementation AP Process Improvement 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 35 Program Initiatives Data Management • Data governance • Reporting strategy and data model Process Improvement • Standardize key processes • Capital allocation, spending and commitments • ERP evaluation • Common COA • New processes • Tax accounting processes • Close-to-file cycle times 36 Program Initiatives Personnel Development • Uniform organizational identity • Competency model and talent management Supply Chain Improvement • Sourcing strategy • Supply chain processes • Procure to pay 37 Final Thoughts • Vision and strategy defines the transformation • Develop complete roadmap upfront • Secure executive commitment and support • Engage and involve stakeholders early and often • Communicate³ • Change management plan • Project management expertise 38 a meaningful company doing meaningful work delivering meaningful results John R. (J.R.) Sult Sr. Vice President & Chief Accounting Officer; Pipeline Group Chief Financial Officer Deloitte Energy Conference May 15, 2007 ©2007 Deloitte Development LLC All rights reserved.
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