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ICE Shares Reach Boiling Point Following IPO

Shares of IntercontinentalExchange (ICE) were a hot commodity last week in an initial public offering (IPO). The shares soared nearly 70% on Wednesday to a high of $44.21 before backtracking to around $35 by Thursday. In October, the online energy futures exchange had expected to sell shares at $18-20. A growing need to mitigate energy price risk clearly is a big reason for such market exuberance, according to analysts.

"It's the right time, right place, right exchange and right product," said David Menlow, president of IPOfinancial.com.

ICE's performance follows a significant run on Chicago Board of Trade (CBOT) shares after its IPO last month. And Menlow said this bodes extremely well for initial valuations of New York Mercantile Exchange (Nymex) shares. Nymex is preparing for an IPO in 2006 (see related story).

ICE operates a major electronic global futures and over-the-counter marketplace for trading energy contracts for crude oil, refined products, natural gas, power and emissions. It conducts its markets for futures trading through its regulated subsidiary, ICE Futures, formerly International Petroleum Exchange, Europe's largest energy futures and options exchange.

"We take great pride in the role we have played in bringing electronic trading to the global energy futures and over-the-counter markets, and we are pleased to be listing on the NYSE," CEO Jeffrey C. Sprecher said in a statement Tuesday night.

However, it remains to be seen whether ICE can hold its highs. "There's a lot of emotionally charged activity in the marketplace," said Menlow. "People are evidently thinking that the ICE offering is on par with the Chicago Mercantile Exchange and Chicago Board of Trade. But I think those kind of parallels are especially ambitious...You're talking about two other exchanges that basically own the space -- the Board of Trade with Treasury bonds, huge instruments and huge growth centers."

CBOT had its IPO on Oct. 18 and it was priced at $54/share. Four days later it reached a high of $134/share. It was trading around $115/share on Thursday.

"The ICE is a competing exchange that -- although they probably won't say it -- is trying to topple the New York Mercantile Exchange," Menlow noted. "They are coming in as supposedly the better mouse trap and it's a very different game than what the Chicago Merc and the Board of Trade do."

Ironically, the success of ICE's IPO may end up having a very positive impact on valuations given to its arch rival, Nymex. "I don't necessarily think that ICE stock is going to double-plus along those lines, but if ICE did have that 'we-own-the-space' aura, then that would probably bode better for them," said Menlow.

The major attraction obviously is the control that these exchanges have over energy prices and their ability to mold products to hedge energy costs. Since Hurricanes Katrina and Rita, commercial and industrial customers have scrambled to manage their energy exposure. Most companies are now being evaluated by investors based on their energy risk factor. "There's always been quantitative results and risks in the marketplace for interest rates...," said Menlow, "but now the same thing is true for energy."

Another example of the strong interest in energy futures exchanges was the sale of a Nymex seat last week for 96% more than the price paid one year ago. Nymex said last Monday that a seat on the Nymex Division of the exchange sold for a record $3.775 million, the most ever for a seat on any futures exchange (see related story). It also is the highest paid for a seat on any exchange -- futures or equity -- in the world. Ownership of a seat on the Nymex Division also represents a share of common stock in Nymex Holdings Inc. "This recent seat sale is a reflection of the confidence the energy and financial communities have in the exchange's risk management tools," said Nymex President James E. Newsome.

The underwriters in the ICE IPO have an option to purchase up to an additional 2.4 million shares. Morgan Stanley and Goldman Sachs are joint book-running managers of the offering, with William Blair & Co., Sandler O'Neill & Partners LP and SG Corporate & Investment Banking serving as co-managers.

Atlanta-based ICE was started up in 2000 by a consortium whose members included: BP Amoco, Royal Dutch Shell Group, Societie Generale Investment Banking, Totalfina Elf Group, Deutsche Bank, Goldman Sachs and Morgan Stanley Dean Witter. Once launched, multiple energy companies jumped on board, including Southern Co., American Electric Power, Utilicorp United, Duke Energy, El Paso Energy and Reliant Energy.

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