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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

our resource needs, such as if energy efficiency becomes a big force in the market, that could have an impact in the long term. Short term, we don’t anticipate changing the resource mix. However we did announce that we will defer some expansion on the generation side. [ Editor’s Note:  In a recent analyst call, Duke CEO James Rogers said the company expects to spend at least $200 million less on capital expenditures in 2009 than it did in 2008. The company “re-prioritized” routine capital projects in its retail business, and delayed the start of construction on its Buck gas-fired combined-cycle power plant.]


Fortnightly: How have falling commodity prices affected your financial risk-management strategy?

Brown: They’ve impacted the value of our hedges, which means they went from being in the money to barely in the money, or maybe out of the money. This won’t impact the bottom line much. The only place I can think of where it will affect the bottom line is in the international market, where we have an investment in methanol production as a derivative of crude oil. Returns are down for that product, but we don’t hedge that. For the most part ours is a spread-driven business. The difference between the price of power and the price of coal is the key thing.


Fortnightly: What do you see as the most important political and regulatory risks facing Duke Energy? How are you positioning to address them?

De May: At the macro level, President Obama’s energy policy could have a very m aterial impact on our business, especially with carbon regulation, because we have a significant carbon footprint. At the micro level, we have a large capital spending program. The ability to recover those costs is a key part of our business plan. As the economy changes, upward or downward, it affects the risk of our company’s ability to recover costs in a timely and fair way.


Exelon: Road to Recovery

Fortnightly: How has the credit crunch affected Exelon’s risk outlook and market risk-management strategy? How are you positioning the company for financial stability in the current troubled market?

Kenneth W. Cornew, Senior Vice President, Exelon Corp., and President, Exelon Power Team:  We’ve been marketing power and managing a portfolio of physical and nuclear assets for many years. It’s always been our approach to manage earnings certainty in a certain context, meaning we like to ensure certainty and cash flow in a two- to three-year time frame in order to invest in our nuclear plants properly so they’re reliable, and pay a dividend or other value-return element to our shareholders, to maintain an adequate credit rating that allows us to get our product into the market effectively. That hasn’t changed. What we’ve seen in this market with the credit crunch is exactly what we’ve prepared for. Unlike several other entities you’ve seen, we considered several scenarios with regard to liquidity and capital adequacy, and several years ago we put in place facilities that secured capital, and maintained it through 2012.

We focus on our value,