(Editor’s Note: This story originally ran in the March 7 edition of Daily GPI)

Conectiv Energy, the trading arm of Washington, DC-based Pepco Holdings, Inc. (PHI), has suspended trading in natural gas futures after taking a substantial loss due to the high gas prices last week.

Conectiv experienced a net loss of about $20 million in February, although its gas trading losses were partially offset by gains in electricity trading, the company said in a press release Monday.

“Due to our trading position, the rise in gas prices early last week generated the losses in our natural gas contracts portfolio and triggered pre-established mitigation procedures, which required elimination of further exposure by closing out our natural gas [futures] trading positions. As a result, we have no further exposure to natural gas trading losses,” Pepco said.

“Given what is clearly a more volatile gas market, and the limited risk appetite of a company like ours, we intend to limit our gas [futures]trading activities to the hedging and risk management of our assets,” said Andrew W. Williams, Pepco’s CFO. “In the meantime we will assess the risks of any future gas market trading in light of these changes in the market.” A spokesperson said Conectiv was suspending only gas futures market trading. The company is continuing its physical gas trading involving supply for its power generation, which represents about 90% of its gas transactions.

Over the past three years Conectiv Energy’s value-added trading operation has been profitable each year, meeting or exceeding an objective to add 10% in incremental value to its asset positions through limited trading, the company said. Conectiv Energy typically contributes approximately 20% of PHI’s corporate earnings.

Last week natural gas futures prices escalated to the highest level, and at the most rapid rate, in the history of the gas futures market. On Monday, Feb. 24, the New York Mercantile Exchange’s March 2003 gas futures contract price rose an unprecedented 40% higher than the previous trading day.

Conectiv Energy’s trading activities are controlled through Corporate Risk Management limits, including use of an industry accepted value-at-risk (VaR) measure. VaR represents the potential gain or loss on instruments or portfolios due to changes in market factors, for a specified time period and confidence level. Conectiv Energy historically has used a daily VaR limit, based on a 95% confidence level. Last Monday’s extreme move in the natural gas futures price was well outside the 95% confidence band.

Conectiv Energy is principally engaged in the production of power to serve, among others, Pepco Holdings’ electric distribution affiliate, Delmarva Power & Light. Pepco also has a distribution utility serving the Washington, DC, area.

Conectiv Energy uses its trading operation to manage and hedge its physical assets, which historically has contributed approximately 80% to 90% of its operating margins, the company said. It also has a limited participation in the energy trading markets, designed to add value by taking advantage of price fluctuation and arbitrage opportunities, which produced the February 2003 loss.

Pepco Holdings Inc. is a diversified energy company with headquarters in Washington, D.C. Its principal operations consist of Pepco and Conectiv Power Delivery, which deliver 50,000 gigawatt-hours of power to more than 1.8 million customers in Washington, Delaware, Maryland, New Jersey and Virginia. PHI engages in regulated utility operations by delivering electricity and natural gas, and provides competitive energy and energy products and services to residential and commercial customers.

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