“Finding creative ways to make deals happen is a bigger challenge for me than assessing a financial statement,” according to Frank Hilton, vice president and chief credit officer for AEP. “You have to look at other things besides the balance sheet,” Hilton told the audience at the LDC Forum Tuesday in Chicago.

It is particularly important for the credit department to “stay in close contact with the market and with the commercial people everyday. We rely heavily on our commercial guys,” Hilton added. He discussed how AEP, which had Enron as one of its largest counterparties at mid-year last year, began to hear rumors through its commercial traders of problems the giant energy company appeared to be having around September of last year.

AEP picked up on the fact that Enron was changing its trading pattern. “Whenever a company starts changing the way they do business, you know there is a problem. If you ask them about it, and they say they have no problem, that’s an even stronger signal. The more they deny it, the bigger the problem is.”

Based on these signals last fall, AEP began to mitigate its risk so that by the time Enron declared bankruptcy, AEP had only a small exposure that was manageable. “We sweated through it,” Hilton said, adding that his credit officers “had to yell, scream and shout” at the commercial people in order to pull it off.

If you wait for the rating agencies to downgrade a company you’ll be stuck. “You can’t allow the credit agencies to dictate your strategy.” Hilton kicked off some after-the-fact methods of mitigating exposure to certain companies, such as the use of credit derivatives and the purchase of put options on equities of counterparties that you believe are in trouble. “This strategy can be applied to the stock of a particular counterparty, or to a group that will be negatively impacted by the default of a counterparty.” In this manner a company can recoup in the stock market losses from its trading with the failing counterparty.

Hilton noted that new players, particularly banks, are playing greater roles in the natural gas market. But he predicted that some of the old companies — those that survive the next 4-6 months — will roll back into the business over the next couple of years.

One aggregator backed up Hilton’s reading of the market signals, telling NGI that he became suspicious when one of the large marketers said they were changing their payment policy and spreading payments out over a series of months. “They didn’t owe me that much, and I didn’t understand why they couldn’t just pay it off,” the aggregator said. “I asked if there was a problem, and they said it was just a policy change. It didn’t make sense. They could take me out on a golf party, but they couldn’t pay my bill for gas.”

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.