ChevronTexaco Natural Gas, to be headquartered in Houston and staffed by as many as 100 energy traders, will enter the wholesale energy merchant business in April, backed by a corporate “AA” credit rating, strong finances resources and perhaps as important, no “baggage,” after severing long-term natural gas purchase and sales contracts with Dynegy Inc. on Friday.

The transaction between Dynegy and ChevronTexaco Corp. was initiated last October, when Dynegy, the first North American energy merchant, announced it would exit the marketing arena. Its purchase and sales contracts with ChevronTexaco, originally set to extend through August 2006, will be officially terminated February 1.

Under the former agreement, which was completed in 1996, Dynegy Marketing and Trade had purchased substantially all of ChevronTexaco’s Lower 48 natural gas production — well over 2 Bcf/d — and supplied the natural gas requirements of ChevronTexaco’s downstream and power facilities.

Under the new arrangement, ChevronTexaco will produce its own gas and will assume some of Dynegy’s sales contracts, with counterparty consent, according to spokesman Fred Gorell. There was no information released on which contracts may be assumed by ChevronTexaco.

Jacques Rousseau, an analyst with Friedman, Billings, Ramsey, said the deal was a “good thing” for Dynegy, and will give ChevronTexaco “more control over its product.” He also does not believe the terminated contracts will have a major impact on earnings for the major. “It’s a matter of how much this will add to their overall cost structure because, obviously, they’ll have to bring in a group of people to handle these operations.”

Former Dynegy energy traders — and perhaps some of the 12,000 others fired when the merchant business crumbled last year — will be considered for positions at the new ChevronTexaco business unit, said ChevronTexaco’s Gorell. He did not know who would be running the new operation, which will be based in existing ChevronTexaco office space in Houston.

Dynegy and ChevronTexaco remain business partners in several aspects. ChevronTexaco still holds a 26.5% stake in Dynegy. Also, subsidiary Dynegy Midstream Services retains its agreements to process ChevronTexaco’s North American natural gas liquids through 2006, according to Dynegy spokesman David Byford.

Until ChevronTexaco begins its merchant operations, Dynegy will provide the company with several transition services through March 31, including agency arrangements, scheduling, invoicing and accounting. ChevronTexaco Natural Gas then will begin full operations in April, the company said.

“The cooperative effort by which this change took place is gratifying and will ensure a seamless transition,” said Ray Wilcox, president of ChevronTexaco North America Upstream. “We are looking forward to re-establishing ourselves in the domestic wholesale natural gas marketing business. Our large equity supply base coupled with our financial strength puts us in position to be a strong player in the North American market.”

As Dynegy’s energy merchant business crumbled last year, the business relationship between the two long-time business partners also suffered. As it teetered toward bankruptcy last fall, Dynegy announced it would exit gas marketing and trading. To make the exit, Dynegy requested that ChevronTexaco consider an early termination to the sales agreements (see NGI, Oct. 21, 2002; Nov. 4, 2002). As part of the contract terminations, Dynegy paid ChevronTexaco approximately $11 million, and it also will transfer some third-party contracts to ChevronTexaco.

“This transition in our business is consistent with Dynegy’s strategy of exiting our third-party marketing and trading activities and thereby reducing collateral requirements,” said new Dynegy CEO Bruce Williamson. “By the time the transition is complete, overall collateral postings will be lowered by approximately $180 million, providing yet another significant boost to liquidity, as we work to improve the company’s financial position and rebuild Dynegy around our core power generation, natural gas liquids and regulated energy delivery assets.”

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