Entergy 2002 Annual Report Download - page 21

ENTERGY CORPORATION AND SUBSIDIARIES 2002 19
its position as competitors left the market.
Trading across all products – including gas,
power, and weather – contributed to increased
EKT earnings in 2002. EKT continued to rank
among the top trading companies in gas, power,
and weather derivatives trading – based on
the votes of banks, brokers, end-users, and
traders worldwide.
EKT expanded its customer business into the
Western United States, signing an agreement
with a major natural gas local distribution
company. By managing gas and power positions
for its customers, EKT increases its earnings in
a low-risk business.
Gulf South Pipeline contributes stable
revenues in a regulated pipeline business. Gulf
South also benefits from a diverse customer
base and diverse supply sources. Gulf South’s
approximately 8,000-mile system has
connections to nearly 100 other pipelines.
Growth on a solid foundation
Entergy is committed to the energy trading
business. We see it as a necessary component
of our overall strategy, and we’re confident
that there will continue to be a robust energy
trading business in the future. The fact is,
gas and power are volatile commodities, and
companies will continue to need trading
services to manage commodity risks.
Trading is a good business for Entergy-Koch.
EKT has upside opportunities in both trading
and its customer businesses as competitors exit.
Entergy-Koch holds credit ratings of “A3”
from Moody’s and “A” from Standard & Poor’s
– the only ratings at this level issued to a trading
company without a guarantee from a parent
company. The strength of Entergy-Koch’s
ratings reflects a conservative balance sheet, a
disciplined trading approach, and superior risk
management practices. Strong credit ratings are
especially important to potential customers and
counterparties in the current market.
To maintain its strong credit as the trading
operation grows, Entergy-Koch must expand its
balance sheet. That means investing in assets that
earn more than the cost of capital, such as gas
pipelines and storage.
Investments through Entergy-Koch are a
key growth opportunity for Entergy. First, they
provide the return on the investment itself.
Second, by expanding the Entergy-Koch
balance sheet, they leverage expansion of its
profitable trading operation.
Gulf South plans to drive growth through
improved productivity and investments in
expanded pipeline and storage facilities with an
attractive rate of return.
In 2002, Gulf South announced development
of the Magnolia Gas Storage facility in Louisiana.
Salt dome storage capacity of 4.1 Bcf is expected
to be in service in early 2004, with expansion up
to 6.5 Bcf by 2007. Magnolia will complement
Gulf South’s existing storage capacity of 68.5 Bcf
at Bistineau and Jackson.
How Entergy-Koch is different
With all the problems that have hit energy
trading businesses, the exit of several of our
competitors, and the announcements of poor
results, how is Entergy-Koch different?
First, some trading companies engaged in
long-dated contracts with weak counterparties.
In contrast, EKT has maintained a trading
book of relatively short duration, and the
great majority of its trading partners have
investment grade credit ratings.
Second, well over half of Entergy-Koch
earnings are generated by more predictable
revenues: from the Gulf South Pipeline – an
asset-based, regulated business – and from
EKT’s customer businesses.
Third, EKT’s trading results are not based on
big bets and pure speculation. Its trades are
based on fundamental analytics supported by
information from its depth of market knowledge.
Entergy-Koch has not engaged in market
manipulation or simultaneous trading activities
designed to inflate volumes and revenues – and
is one of the only large trading companies to
have such an unblemished record.
Entergy-Koch Trading’s
discipline is reflected in
consistent results. Between
2000 and 2002, EKT
recorded gains on a
significant majority of
trading days. Most trading
days resulted in gains of
less than $5 million. EKT
didn’t have to count on big
wins to make money.
RECOGNITION
Leadership in
Energy Trading
Entergy-Koch Trading was
recognized for Corporate
Leadership of the Year in
the 2003
Energy and
Power Risk Management
Magazine
Awards.
The award noted that
EKT's "commercial success
over the past 12 months
has been impressive" and
that it "has grown from
a niche player into a
market leader."
80
60
40
20
0
EKT Trading Days
2000-2002
(number of days by
daily gain or loss)
loss days gain days