With its acquisition of Duke Energy's commercial marketing and trading business now closed, European merchant bank Fortis says it has a full slate of energy capabilities and is poised to climb to the upper ranks of natural gas and power marketers.
"We were a major lender to the [energy] sector," Fortis Americas CEO Waldo Abbott told NGI. "Increasingly we have been equity investors in the space, either direct or sometimes through funds as we co-aligned our banking and global markets capabilities. We were increasingly cross-selling financial derivative-type products, but we could see that there was tremendous demand and opportunity for expanded energy products, specifically on the physical side."
Faced with the decision of whether to buy or build its physical energy capabilities, Fortis came upon the opportunity to acquire CMT, which was composed of Houston-based Cinergy Marketing and Trading LP and Calgary-based Cinergy Canada Inc. CMT was put on the block by Duke earlier this year following Duke's merger with Cinergy (see Daily GPI, May 15).
The deal has given Fortis a stable of Houston-based traders and related employees about 225 strong with another 25 in Calgary devoted to energy trading. David Jones, co-head of Fortis North American Energy Marketing and Trading, said the firm will be growing to about 250 in Houston.
"Rather than building generic products, we want to build very specific products that are of the most relevance to our clients," Abbott said. That's why CMT was "a great acquisition for us."
Fortis, with the closure of CMT transaction (see Daily GPI, Oct. 3), can now provide financing, long-term commodity hedging, and physical fuel procurement and dispatch services. Take, for example, a client that wants to buy several thousand megawatts of power. Fortis can provide the loan, do the long-term hedge to take the commodity price risk out of the loan and then also ensure delivery of fuel to and dispatch of power from the generating plant, explained Jones.
The Fortis executives said their firm is one of four companies that have similar physical and financial gas and power capabilities and balance-sheet strength in the energy business. However, prior to the CMT purchase, Fortis had been following the traditional bank model in its North American energy activities.
"We were trading exclusively financially settled transactions against some of the major points, Henry Hub, WTI and Brent, and some of the power points in the liquid power pools...," said Jones. "With the acquisition of CMT we're able to price competitively at any major and minor point in North America. That's including Canada, and we do that for both gas and power.
"Where we really see the value off the trading operation is to be able to take [CMT's] platform of delivery capabilities in North America and put on top of that our marketing connections, our client relationships and our ability to do long-term structured deals. That's the real key for us, and that's where we're going to be of the most value to our clients."
Going forward, Jones said Fortis sees two avenues by which to grow its energy trading business. First, look for growth on the marketing side and on the long-term structured-deal side in natural gas and power now that Fortis' balance sheet strength has been added to the CMT capabilities. Second, where CMT was only trading gas and power, Fortis now brings crude oil and refined products to the table, what Jones says is another significant leg of the energy stool. "We're going to be looking to build out that side of the business to a size and scope that will complement the gas and power business," he said. "We're looking at being strong across North America in all three commodities."
Another asset Fortis acquired with the CMT acquisition is the latter firm's proprietary software to support energy trading. "It allowed us to really jump start versus build from scratch," Abbott said. "From a best-practice perspective, CMT brought robust systems, risk and all of the support areas that you need to have a business like this."
CMT had taken an off-the-shelf software package and rewritten the code. "As a matter of fact, the original vendor doesn't even support their version of the code anymore," said Jones.
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