Three years after its high-profile exit from energy trading in 2001, Merrill Lynch is getting back into the business in a big way, announcing yesterday that it is buying the energy trading operations of Entergy-Koch L.P.

The terms of the deal were not disclosed, but in a press release, Entergy said it expects $1 billion in proceeds from the sale of joint venture and an

unrelated oil pipeline. Entergy-Koch – a joint venture between electric utility Entergy Corp. in New Orleans and Wichita, Kan.-based commodities trader Koch Industries – earned $180.1 million last year.

The purchase gives securities giant Merrill the clout to compete with Morgan Stanley and Goldman Sachs – the two firms with the largest energy trading groups – in the highly profitable energy-trading sector, analysts said.

Merrill Lynch’s previous attempt to be a factor in the energy-trading sector ended in March 2001 when it sold its 260-person trading operation to Allegheny Energy for $490 million.

The two firms are embroiled in litigation over the sale, with Merrill claiming that it has not been fully paid and Allegheny counter-claiming that Merrill concealed weaknesses in the energy trading unit’s finances.

The energy sector has been a sore spot for Merrill.

In the past year, five former Merrill energy-unit executives were indicted for allegedly making millions of dollars in sham transactions between 1999 and 2000. In the most egregious example, in December the former head of the company’s Global Energy Markets trading unit, Daniel Gordon, pled guilty to embezzling $43 million from the firm in a series of complex hedging transactions with a company he secretly controlled.

Moreover, in March the Securities and Exchange Commission fined Merrill Lynch $80 million alleging that four of its most senior bankers helped Enron falsify earnings through the sale of several electricity-generating Nigerian barges.

The four are awaiting trial on those charges.

Merrill’s purchase is a winner for Entergy-Koch, according to a veteran energy industry observer.

“From Entergy’s standpoint, the sale makes sense since investors see this as a boom and bust business and [that perception] weighed on the stock price,” said a Jefferies & Co. energy analyst, Paul Fremont.

“In Koch’s view, they have huge energy trading operations in other sectors, so they could get out at a profit and focus on trading oil, where the big profits lie.”

Also, because of the volatility of the energy trading business, the ratings agencies required Entergy-Koch to maintain cash reserves so large that its ability to grow profits was being hindered, Mr. Fremont said.

Merrill, however, has the scale to maintain the required cash reserves and grow the business.

A Koch Industries spokeswoman, Mary Beth Jarvis, said the sale of the profitable unit was done to allow the company to focus on Koch Trading and Supply,its 400-person core oil and energy related derivatives trading effort. She said approximately 300 people will join Merrill Lynch’s energy operations in Houston and London.

A Merrill Lynch spokeswoman, Jessica Oppenheim, declined to comment.

Entergy-Koch traded options, futures and derivatives in natural gas and electricity and was a market maker in weather derivatives, a rapidly growing risk management tool for agricultural and insurance companies.

Describing the structure of the joint venture, Ms. Jarvis said Koch provided the people, infrastructure, and expertise and Entergy provided the necessary capital.