While the recent surge in natural gas prices has found more than one energy company on the wrong side of a trading position, a top executive with American Electric Power (AEP) told financial professionals last Wednesday that his company stands to gain from the run up.

“As gas prices go up, the fundamental picture is that AEP’s generation is more and more in the money since we’re primarily a coal-fired entity,” said Linn Draper, president of the Ohio-based electric utility, in an appearance before Morgan Stanley’s 10th Annual Global Electricity and Energy Conference in New York.

“The amount that we’re more in the money depends on how much of that coal-fired generation we have pre-sold,” he noted. “We recognize that we’re in a position where the generation output for our own facilities is more than our own customers require, so we will sell some of that in longer dated contracts to near neighbors, other utilities and so forth,” Draper said.

“So there’s not a one-to-one correlation between the movement of gas price and the value of our…generation given the fact that some of it’s pre-sold, but the fundamental answer is that as gas prices rise that helps AEP,” Draper said.

Reliant Resources earlier this month said that it has decided to leave the financial gas trading business after it incurred an estimated $80 million pre-tax loss when it closed trading positions that were battered by high prices in late February.

An analyst asked Draper whether the recent volatility in gas prices has made the unwinding of the company’s trading book any more difficult or costly.

AEP announced last fall that it would exit the trading business “in those parts of the country where we did not have physical assets,” the AEP executive noted. “That means, the West, the Northeast, et cetera. What we have done in those regions of the country over the last six months or so is substantially flatten the book,” Draper said.

“We have some longer dated positions in those regions of the country, but we’ve tried to match them so that as prices move, we don’t experience ups and downs in the mark to market book. In the areas of the country where we do have physical assets — that would be the Midwest, Texas, et cetera — we have continued to hedge our position, both our generating fleet and the output from our storage facilities, particularly at the Bammel storage facility near Houston,” Draper said.

“So as prices move, we will see value created around those, if we are on the right side of those hedging activities, and I think it’s safe to say that we are,” he noted.

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