Financial Risk Management at American Electric Power

In 1906 Richard Breed, Sidney Mitchell, and Henry Doherty set up American Gas & Electric (AG&E) in New York to buy 23 utilities from Philadelphia's Electric Company of America. AG&E began acquiring and merging small electric properties. By 1926, the company was operating in Indiana, Kentucky, Michigan, Ohio, Virginia, and West Virginia...

AEP was subject to various risks. These included abnormal weather conditions, fluctuation in prices of fuels, electricity and gas, changes in interest rates, new legislation and government regulation, new competition in areas where deregulation was being introduced and unforeseen risks such as wars, terrorism, embargos and catastrophes...

AEP believed liquidity management had become a critical factor due to volatility in wholesale power markets and vulnerability to credit rating downgrades. On December 31, 2002, AEP had an estimated liquidity of $3.5 billion (See Table) including cash of $1 billion...

AEP limited credit risk through the use of internal ratings. AEP also used Moody's Investors Service, Standard and Poor's and other qualitative and quantitative data to assess independently the financial health of counterparties on an ongoing basis...