Even though its energy trading venture turned in a less-than-stellar performance over the past few months, investors shouldn’t take that to mean Entergy Corp. is ready to join the growing list of power companies throwing in the towel on energy trading. When the dust finally settles from the current market upheaval, Entergy CEO Wayne Leonard sees the company’s trading operations as well positioned to take advantage of a “much deeper space” expected in the sector after the current shakeout.

“This is a good business for us,” Leonard said in a conference call with investors last Tuesday. “We are committed to energy trading and we view it as a necessary complement to our overall strategy. The companies and the customers in our industry will continue to have to manage energy commodity price risk.”

Entergy offers wholesale energy marketing and trading services through Entergy Koch LP, a joint venture between subsidiaries of Entergy and Koch Industries Inc. The joint venture, in turn, operates through several subsidiaries including Entergy Koch Trading.

From Entergy’s point of view, the “inherent volatility” and complexities of energy trading will result in the business remaining a profitable one “for those that follow a sound business model and have the necessary skills and discipline,” Leonard went on to say.

“With that said, we have clearly seen dislocations in the market over the last few months, with the exit or downsizing of many players,” the Entergy executive noted. “We’ve seen lower liquidity in certain areas [and] we’ve had to rethink our trading strategy to ensure we’re entering the market where we are confident we’ll have the ability to get out in the timeframes anticipated in our risk measures.” In addition, Entergy has seen areas in energy trading where liquidity is decent, but question marks have emerged over the counterparties that are present.

“In both these situations, we’ve had to adjust or curtail our trading activity,” Leonard said. “The point is, we only trade based upon an analytically supported point of view, but recently in some cases where the opportunity is most clear, either the lack of liquidity or the counterparty credit risk has precluded executing on that point of view. You can be right, but if you can’t get out or you can’t get paid, it doesn’t really matter.”

But the seemingly overnight evaporation of liquidity in energy trading markets and growing concerns over the financial health of trading partners is most likely a temporary phenomenon, Leonard added. “This is a logical and expected part of the business cycle, particularly given the various uncertainties as to whether all the parties have been playing by the same set of rules and the lack of clarity on what the rules even are.”

In the near term, Entergy expects energy trading markets to remain choppy for a couple of reasons. “The exit of many players [and] the almost forced liquidation of their books have skewed short-term prices and market structure, while injecting additional credit and liquidity risk into the market.”

El Paso Corp., Dynegy, Williams Cos., Aquila Inc. and CMS Energy Corp. all have announced plans in recent months to drastically reduce or eliminate their energy trading operations. Equity and debt analysts have put much of the sector under the microscope in the wake of Enron Corp.’s collapse last year, while federal and state regulators continue to probe a series of tactics designed to artificially boost trading volumes and revenues.

Leonard said that the energy sector is also seeing “significant uncertainty” tied to the transition of reporting gas demand and storage statistics from the American Gas Association to the Energy Information Administration. “But we believe the fundamentals will prevail in the end, and markets will return to a more normal state of liquidity and rationality.”

In the meantime, Entergy saw lower operational earnings contributed from Entergy Koch Trading in the most recent second quarter, primarily due to lower electricity volatility and lower profitability on gas trading. “For the quarter, our results at Entergy Koch weren’t as impressive as they have been in previous quarters, meaning they made money overall, just not as consistently day-in, day-out as we are used to,” Leonard said.

But Entergy Koch Trading’s results in the second quarter don’t raise questions on the unit’s long-term performance potential or Entergy’s ability or desire to stay in the trading business. “In fact it is quite the opposite,” Leonard told investors. “All of this accelerates an inevitable rationalization of the market and opens a much deeper space for [Entergy Koch Trading] and enhances our long-term prospects.”

Entergy on Tuesday reported that its earnings on an operational basis were $267.1 million, or $1.17 per share, in the second quarter 2002, compared with $238.9 million, or $1.06 per share, in the year-earlier period.

On an as-reported basis, Entergy recorded income of $241.7 million, or $1.06 per share, a per share amount equal to earnings for the same period in 2001. Second quarter 2002 reported results reflected a special charge associated with the restructuring of Entergy’s wholesale power development business, which was announced earlier this year.

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