Entergy Corp. and Koch Industries Inc. puzzled investors and financial analysts last week with the news that they were conducting a “broad review” of their energy trading operations in the United States that could eventually lead to a sale or the addition of a third party.

The 50-50 Entergy-Koch venture was formed in 2000 to market electricity, natural gas, gas transmission and weather derivatives, and it became operational in early 2001 (see NGI, May 1, 2000). Although the venture was unveiled with fanfare, its initial impact was dimmed by Enron Corp.’s bankruptcy and subsequent investigations. However, the Entergy-Koch unit has been considered a successful venture — one of the few that has not had to restructure or diminish operations.

“Both owners believe Entergy-Koch has built an industry-leading trading franchise that may be highly valued in light of recent changes in market and competitive dynamics,” Entergy said in a statement. “Additional strategic alternatives under consideration include maintaining the current ownership structure; adding one or more new owners to the venture; or modifying the current ownership structure.”

One clue into the companies’ thinking may be Entergy’s first quarter report, which was released two months ago (see NGI, April 19). New Orleans-based Entergy reported earnings were down 47% from a year ago, and it partially blamed the drop on low volatility from the trading venture. At the time, CEO J. Wayne Leonard said that the quarter’s results “reflect the subdued volatility in energy commodity markets that limited opportunities in our trading business.”

Entergy lost its disproportionate income sharing advantage in the partnership during the quarter, which had allocated substantially all of the partnership’s profit to Entergy in 2003 based on the original agreement with Koch Industries. During the quarter the unit also delivered lower trading results, compared to the exceptionally strong first quarter 2003 earnings. Reduced market volatility and lower point-of-view trading profits led to the disappointing performance, the company said.

The companies said last week they were reviewing “strategic alternatives for enhancing the value of Entergy-Koch LP and its subsidiaries.” The review will include a potential sale of its primary subsidiaries, Entergy-Koch Trading LP, which markets energy in North America, and Entergy-Koch Trading Ltd., the European marketer. If a third-party sale results, the companies said they may initiate efforts to sell the Gulf South Pipeline Co. also.

Entergy said in its first quarter announcement that there were higher expenses at Gulf South, associated with an operational incident in late 2003 that forced the shut down of the new Magnolia gas storage facility near Napoleonville, LA. The high-deliverability storage field went into service last October with 4.1 Bcf of working gas capacity, expansion capability to 6.5 Bcf, and a deliverability of 400,000 Dth/d into Gulf South.

Gulf South (the old United Gas Pipe Line, renamed Koch Gateway before assuming its current name), operates one of the largest interstate natural gas pipeline systems in the Gulf Coast region and provides transportation, storage and capacity-related services, and it provides links to many major markets nationwide. Gulf South’s existing system comprises a web of more than 8,000 miles of pipeline through producing regions in Louisiana and Texas with 28 main transmission compressor stations and a number of major pipeline interconnects.

If the partnership is not sold, Entergy-Koch could follow the path recently announced by Credit Suisse First Boston (CSFB) and TXU Corp. (see NGI, May 24). The 50/50 joint venture will be the exclusive energy marketing and trading vehicle for both parties in North America, effectively creating an “Aa3/A+” rated entity through a guarantee from a CSFB company. The energy marketing entity will market and trade power, natural gas and other energy-related commodities in North America.

While establishing a potential growth platform, the new entity would allow TXU to achieve one of its strategic priorities — reducing risk — by limiting TXU’s aggregate exposure to the marketing and trading business. TXU will be working with CSFB to finalize definitive documentation for the new entity over the coming months, with a goal of beginning operations early this fall.

As an interesting side note, TXU CEO John Wilder, who took over in February, is Entergy’s former CFO (see NGI, Feb. 24).

To be sure, Entergy-Koch has the business, but not necessarily the strong financial footing of other energy merchant units, which include some heavy-hitting producers. In the latest NGI market rankings for natural gas, Entergy-Koch ranked fifth behind BP, Sempra, ConocoPhillips and Coral in the first quarter 2004 with an average sales volume of 7.30 Bcf/d, down 6% from the 7.80 Bcf/d in 1Q2003 (see NGI, June 7).

Even though strategic alternatives are under consideration, the statement stressed that Entergy-Koch “remains focused on creating value through operational excellence, providing the highest possible level of service to its customers and offering challenging opportunities for its employees.”

As an Entergy affiliate, Entergy-Koch may find its activities restricted under the Federal Energy Regulatory Commission’s new market power screens and proposed rulemaking involving utility power-purchasing, both designed to increase competition and restrict the market power and trading of the dominant utilities in a region (see Power Market Today, April 15).

Following the release of a FERC staff report in March 2003 on wholesale natural gas and power “wash” trades, Entergy-Koch began a review of its gas and power trading activities over 2000 and 2001. FERC staff reported that Energy-Koch was the counterparty for 16% of the total wash trades in natural gas (61 wash trades) on EnronOnline during the period. A wash trade, in which a product is sold to a counterparty and then bought back at the exact same price, may be designed to inflate revenues and trading volumes or possibly to manipulate gas prices and price indexes.

In April 2003, the Commodity Futures Trading Commission (CFTC) subpoenaed the company for information on its trading operations (see NGI, April 14, 2003), and last August, Entergy Corp. disclosed in a quarterly report that Entergy-Koch Trading “has become aware that some of its employees may have misreported prices and volumes to energy industry publications.” In January, it reached a settlement with CFTC, and agreed to pay a civil penalty of $3 million without admitting or denying CFTC’s findings.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.