Energy companies launch risk management initiative

CHARLOTTE, N.C., May 30, 2002 — A group of energy companies recently announced the formation of an industry committee to identify best practices in risk management. The group, comprised of chief risk officers from participating companies, will be called the Committee of CROs.

The creation of the Committee of CROs reflects the rapid growth of the merchant energy industry in the United States, following the expansion of wholesale competition in markets for natural gas in the 1980s and for electric power in the 1990s. The increasing profile and interest in the sector among investors, regulators and other parties has created demand for commonly understood and accepted risk management procedures.

Companies participating in the announcement include American Electric Power (NYSE:AEP), Constellation Energy Group (NYSE:CEG), Duke Energy (NYSE:DUK), Mirant (NYSE:MIR), Tractebel North America, Inc. (NYSE:SZE) and TXU (NYSE:TXU). The committee is open to all companies participating in energy trading and marketing activities and encourages other companies to join.

“A robust risk management function is one cornerstone of a strong corporation,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer. “In our industry, the rapid expansion of energy trading makes that function more critical from day-to-day. For that reason, the potential value of bringing industry players together to focus on developing guidelines for trading-related risk cannot be overstated,” Draper added.

“Due to recent market events and the increased scrutiny being placed on companies involved in energy trading and marketing, it is important for those of us actively involved in the industry to take constructive steps to define risk management practices and communicate these standards to our stakeholders,” added Mayo A. Shattuck, III, president and chief executive officer of Constellation Energy Group.

“While individual companies have developed extensive risk management structures and procedures, members of this committee saw the need to work together on common standards that are applied throughout the industry and are recognized by investors, regulators, credit rating agencies and counterparties,” said Richard B. Priory, chairman, president and chief executive officer of Duke Energy.

“Greater cooperation in our industry can deliver tremendous benefits for companies and their stakeholders. The Committee of CROs is an excellent forum for making this happen. Through the committee, it is possible to create new netting agreements and clearing platforms that can reduce our industry’s collateral requirements by as much as 90 percent. Ultimately, that’s capital that can be invested to strengthen America’s energy infrastructure,” said Marce Fuller, president and chief executive officer of Mirant.

“We look forward to participating in this important initiative, sharing best practices, and demystifying risk management methodologies for the benefit of interested consumers and the U.S. energy industry at large,” added William P. Utt, president and chief executive officer of Tractebel North America Inc.

The Committee of CROs is forming working groups to develop proposals for standardization in areas including risk management metrics, credit practices and disclosure. In addition, the committee will also take steps to develop generic guidelines for risk policies and procedures.

The risk management metrics working group will identify, define and offer guidance on risk management and valuation techniques and metrics that provide energy trading and marketing companies with consistent tools to quantify and evaluate risk. As part of this effort, the group will attempt to define more specific valuation techniques and metrics that can be used to quantify capital at risk in energy trading and marketing companies.

The disclosures working group will identify disclosures to help interested parties reasonably assess the risks of a company’s energy trading and marketing activities and to compare them with risks incurred by other companies.

The working group looking at credit will identify, define and provide guidance on credit risk management techniques. This group will identify standards for credit measurement and monitoring. It will also look to advance credit and collateral efficiencies through development of a standard form master netting and margining agreement, as well as analysis and recommendation for utilization of multi-lateral clearing platforms for energy products.

The committee plans to release recommendations on key risk management issues to interested parties within the energy industry.

American Electric Power is a multinational energy company with a balanced portfolio of energy assets. AEP, the U.S.’s largest electricity generator, owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets.

AEP is a wholesale energy marketer, ranking among North America’s top providers of wholesale power and natural gas with a growing wholesale presence in European markets. In addition to electricity generation, AEP owns and operates natural gas pipeline systems, natural gas storage, coal mines and the fourth-largest inland barge company in the United States. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s wires. The company is based in Columbus, Ohio.

A Fortune 500 company based in Baltimore, Constellation Energy Group owns energy-related businesses, including a North American wholesale power marketing and merchant generation business and the Baltimore Gas and Electric Company (BGE), a regulated energy delivery company. BGE provides service to more than 1.1 million electric customers and approximately 600,000 natural gas customers in central Maryland. At year-end 2001, Constellation Energy Group reported combined revenues of $3.9 billion and assets of $14.1 billion.

Duke Energy is a diversified multinational energy company with an integrated network of energy assets and expertise. The company manages a dynamic portfolio of natural gas and electric supply, delivery and trading businesses – meeting the energy needs of customers throughout North America and in key markets around the world. Duke Energy, headquartered in Charlotte, N.C., is a Fortune 100 company traded on the New York Stock Exchange under the symbol DUK.

Mirant is a global competitive energy company. Mirant delivers value by integrating an extensive portfolio of power and natural gas assets with marketing and risk management expertise. The company has facilities in North America, Asia, the Caribbean and Europe.

Tractebel, the energy division of Suez, is a global energy and services business and is the world’s fifth largest independent power producer. Tractebel represents installed electricity generating capacity of more than 50,000 MW and operates gas transportation and distribution networks worldwide. Its core business is electricity and gas, including the generation, transmission, and sale of electricity; trading of wholesale electricity and gas; and transportation and distribution of natural gas and LNG (liquefied natural gas).

Tractebel North America, Inc., headquartered in Houston, Texas, was formed in December 2000 to strengthen and grow Tractebel’s business activities in North America.

TXU provides electric and natural gas services, merchant energy trading, energy marketing, energy delivery, telecommunications, and energy-related services. With $40 billion in assets and $28 billion in annual revenue, TXU is one of the most influential energy services companies in the world.

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