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BC Gas sets governing standards

Company honoured for innovative risk management

VANCOUVER -- As a conservative pipeline and utilities operator, BC Gas Inc. has long understood that its shareholders tend to be risk-averse types, seeking steady earnings growth and regular dividend payouts.

"If you wanted to characterize us, we are plodders," says Stephen Richards, the company's general corporate counsel and chief risk officer.

But there was nothing plodding about the company's move long before many other companies to adopt formal procedures to manage and mitigate the risks associated with running its gas distribution and oil transportation operations.

By implementing a so-called "enterprise risk management" (ERM) system back in 1999, the company aimed to reduce the chances that its revenue and earnings stream might be interrupted by an unexpected event, such as a pipeline breach -- and see such forward-thinking action rewarded in the stock market.

That attention to risk management, along with a number of other corporate governance practices by BC Gas, has also been more widely recognized. The company was honoured for being one of Canada's leaders in the arena when it recently won the Conference Board of Canada's annual National Award in Governance for 2003.

"A lot of corporations have embraced risk management, especially at the board level, in the past couple of years," said David Brown, principal in governance at the Conference Board. "But BC Gas was ahead of the pack."

Many companies have more recently been prompted by a number of business scandals down south and subsequent Sarbanes-Oxley legislation in the United States to pay closer attention to a variety of corporate governance issues.

With good reason. More than 60 per cent of institutional investors worldwide said they are avoiding investing in companies with poor corporate governance records, according to a 2002 report by McKinsey & Co., the global strategy consulting firm.

The McKinsey report also said an overwhelming majority of investors are prepared to pay a premium for companies exhibiting high corporate governance standards.

That's something that BC Gas recognized long before the McKinsey report. "We believed that if we could show that we were managing our earnings volatility more effectively, institutional investors would be prepared to pay a premium for the company's shares," said Stephen Richards, general counsel and chief risk officer at BC Gas.

What set BC Gas apart from other companies, the Conference Board said, is that it developed an ERM framework in 1999, well before corporate scandals made governance a higher priority for many companies.

In an interview, Mr. Richards said BC Gas moved early for number of reasons.

It wanted to comply with the recommendations drafted by the 1994 Dey committee and adopted by the Toronto Stock Exchange for its listed companies. Among its guidelines, it said a board must understand the principal risks of all aspects of a company's business activities.

The committee report also said any company should have systems in place to monitor and manage those risks with a view to the long-term viability of the corporation.

"The ERM was specifically implemented to satisfy that requirement," Mr. Richards said.

But BC Gas had other more pragmatic reasons for rolling out an ERM program.

It has two core businesses: natural gas distribution and pipelines.

The gas distribution business serves about 850,000 customers in British Columbia, while its pipelines transports heavy oil and bitumen from Alberta to B.C. and a number of U.S. states.

As a regulated utility, it views itself as a conservative company, which aims to be low risk and capable of delivering steady earnings growth to its shareholders and a reasonable return on their investment. "Consistent solid earnings growth and low risk is what we are focused on," said Mr. Richards.

Mr. Richards said the company adopted ERM on the expectation that it would not only mitigate against any risks to its business, but it would also help the company achieve its financial targets by managing earnings volatility.

In the last four years, the company has met its target of earnings per share growth of 6 per cent annually and is almost at its goal of an annual return on common equity of 12 per cent before non-recurring items.

After posting a five-year annual return of 10.85 per cent, as measured by its share price performance plus dividends, BC Gas has outperformed several other companies in its sector, including Enbridge Inc. and TransCanada Pipelines.

Before it began implementing its ERM in 1999, the company was managing risk on what Mr. Richards called "an ad hoc basis."

However, in a bid to focus its attention "globally," the company has established a network of 26 "risk champions" in all of its key business units to monitor and manage any risks that are identified.

Acting as advisers with respect to risk-taking and risk-management activities, these champions report to a four-person team of risk managers led by Mr. Richards.

They, in turn, are assisted by a computerized data base which allows them to evaluate and prioritize risks across the organization and continually assess the impact of change to any perceived risks.

"What this does is allow us to take a holistic view of the entire enterprise," said Mr. Richards. "It is like a radar screen that enables you to see where the missiles are coming from."

Information is incorporated into a risk assessment report which is presented annually to the company's executive management committee and, later, its board.

Mr. Richards said the most significant challenge facing BC Gas officials as they attempted to implement ERM was creating a company-wide culture where everyone would be accountable and understand that accountability for managing risk.

He attributed the success of the ERM process to the fact that it was initially tested in the company's key gas-distribution operations before being rolled out across the entire company.

"This is what contributed to it taking hold throughout the organization."

Efforts to promote a risk-aware culture were also boosted by the fact that BC Gas has been focused on good corporate governance for many years.

"This is not something like an overcoat that you can just put on," said Mr. Richards. "I've been with this company since 1988 and it is something that is just part of the culture."

In its submissions to the Conference Board, the company said it has maintained a separate chairman and president for at least the last 20 years.

The sole related director on the 12-member board is BC Gas president and chief executive officer John Reid.

"This gives us an enormous amount of strength in ensuring that the board is acting independently and in the best interests of shareholders and is not aligned with management in terms of having some form of clubby or cozy relationship," said Mr. Richards.

To ensure that the interests of the board are more closely aligned with those of the company's shareholders, all of the directors own shares of BC Gas. But no individual director owns any more than 6 per cent of the company.

Also, in order to ensure the accuracy and credibility of the financial information it delivers to shareholders, the company's external auditors are retained directly by the board.

Despite its attention to risk management, Mr. Richards concedes that even a regulated utility like BC Gas can never fully mitigate against all the risks it faces.

Still, he takes pride in the knowledge that the company's corporate governance practices meet and beat TSX requirements. "We want to ensure that shareholder interests are protected," he said.

© The Globe and Mail

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