Marketer rankings by volume clearly do matter; otherwise energy companies wouldn’t go out of their way to deceive investors and counterparties by doing “round-trip” or “wash” trades, which are purely designed to boost volumes and trading revenues. Reliant, Dynegy and CMS last week all admitted to round-trip trading, in which two companies buy and sell back a given volume of gas or power at the same price to give the appearance of larger trading operations.

Most of the round-trips trades disclosed were power trades. Reliant admitted to wash trades in gas, but said the practice ended last year. Despite all the talk about profitability being most important, volumes are at least a close second in importance. And judging from first quarter profitability of many marketers, or lack thereof, volume growth apparently was goal No. 1 in 1Q2002. In natural gas trading volumes were way up, while marketer profitability was way down from the same quarter last year.

However, it should be noted that trading companies had to battle against perhaps one of their best quarterly performances ever in 1Q2001, when gas prices went to record highs and power prices soared as well, and they had to do it during a quarter (1Q2002) in which weather was much warmer than normal and prices were falling sharply.

NGI’s quarterly marketer ranking shows the sales of the top 20 gas marketers by volume substantially increased, with a 27.2% jump from 1Q2001 to 1Q2002 and a 13% increase from the fourth quarter of 2001 to 191.9 Bcf/d of total sales in the first quarter of this year. Only five companies out of the top 20 (El Paso, Coral, Sempra, Entergy-Koch and Anadarko) showed a decrease in volume compared to 1Q2001 and only four showed a decrease compared to the fourth quarter.

Meanwhile, profitability was way down for many energy traders as warm weather and falling prices made it tough to beat the strong 1Q2001 results. American Electric Power, which had the largest sales volume increase over the course of the year — 10.6 Bcf/d, or 184%, to 16.4 Bcf/d — said it is not one of the companies that boosts volumes for volumes’ sake. It is focused like a laser on profitability.

“Great timing for a ranking,” Pat Hemlepp, AEP’s spokesman, quipped. “But if you compare our volumes to fourth quarter 2001 and compare that to third quarter 2001 and then second quarter 2001, you will see steady growth each time. It’s not a sudden jump. We’ve been growing. We picked up Houston Pipe Line in the middle of the year last year, and the information and ability to optimize around that pipe and the Bammel storage facility has allowed us to increase growth. No, it’s not wash trading.”

AEP announced Friday that to the best of its knowledge, its traders were not involved in any wash trades. “We have a corporate policy that prohibits transactions like that,” said Hemlepp. “This has given us an opportunity to reemphasize that policy. We’ve never focused on volume; we’ve focused on profitability,” he said.

Nevertheless, the company reported a loss from gas marketing and trading in the first quarter. “We were kind of on the wrong side of the market,” said Hemlepp.

Although many companies will say volume growth is not important, being in the top tier of wholesale marketers has tremendous benefits in the marketplace. If a marketer is in the top tier, it will have a much better opportunity to attract trading counterparties and large customers who want large structured transactions.

“Our focus is really on profitability, but being the industry’s leading gas marketer [by sales volume] supports our commitment to deliver quality, cost-efficient, reliable products and services to our customers,” said Mirant spokeswoman Jamie Stephenson. Mirant was No. 1 in the NGI ranking with 21.1 Bcf/d of gas sales, 67% more than 1Q2001 and 37% more than the fourth quarter. “It helps us accomplish our goal and use our business model, which is integrating assets with risk management and marketing and delivering the products and the prices that our customers are looking for,” Stephenson added.

She noted that Mirant grew volumes last year primarily by purchasing the bulk of TransCanada’s trading and marketing operations, adding about 5.1 Bcf/d of gas sales to its portfolio.

However, Mirant’s profitability clearly suffered. As is the case with most energy marketers, Mirant’s gas, power and generation profitability isn’t clearly identifiable; in fact all of the financials are thrown together in one big hodgepodge of gas and power results. In the first quarter, the whole operation was significantly less profitable than in 1Q2001. Mirant said net income from North American wholesale generation, marketing and trading was $77 million or 18 cent/diluted share compared to $174 million or 49 cents/share in 1Q2001.

“Basically the income reduction is primarily due to lower power and gas margins and prices across the U.S. and Canadian operations,” said Stephenson.

“You have to realize last year was one of the best quarters we’ve had, so it’s difficult to compare with this quarter when gas prices were down and it was one of the warmest winters on record,” said Aquila spokesman Al Butkus. “No matter how much trading you do, you are fighting for less.” Aquila was the third largest marketer by volume in the first quarter and has consistently been among the largest marketers in North America. Butkus said, however, that “volume for volume’s sake has never been the objective,” and Aquila has not engaged in any wash trading.

Duke Energy, the fifth largest marketer by volume with 13.8 Bcf/d of gas sales, said less than 1% of its trading revenue over the past two years came from round-trip trades and those trades were done to “validate real-time prices” not to increase volumes. “Our trading operation is measured on and fully focused on profitability and value creation,” said Jim Donnell, CEO of Duke Energy North America. “We engage in trading for three purposes — to serve customers’ needs, to profitably grow our business and to optimize the value of our energy assets. All of our business activities are done with the express goal of generating earnings.”

Nevertheless, Duke has remained among the top marketers by volume for years, climbing from sixth place to fifth in the latest quarter.

There was little positional movement in this quarter’s ranking compared to the fourth quarter. Most companies moved up or down a notch or two. Dominion jumped from 15 to 12, while Engage moved up to 19th place from 27th. However, Engage will be moving off the ranking in the second quarter and becoming part of Duke Energy as part of Duke’s purchase of Westcoast this year.

*Volumes represent North American physical natural gas sales and exclude financial transactions. Sales volumes were provided by company officials. Numbers in ( ) indicates fourth quarter 2001 ranking.

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