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Cinergy Buys ProEnergy; Forms Alliance with Oryx, Apache

Cinergy Buys ProEnergy; Forms Alliance with Oryx, Apache

Cinergy Corp. took a huge step in growing its commodity marketing operation last week with the purchase of Producers Energy Marketing, LLC, (ProEnergy) from owners Oryx Energy and Apache Corp. for $42.5 million and with the signing of a 10-year marketing alliance that covers both producers' entire marketable gas supply, or 1.1 Bcf/d.

ProEnergy markets about 1.7 Bcf/d of gas to more than 200 large industrial buyers and local distributors. Wholesale gas marketing will be a new business venture for Cinergy. The company plans to combine the staff of ProEnergy with its rapidly growing wholesale electricity marketing business, Cinergy Capital and Trading, which reported a 200% increase in volume over the past two years, selling about 56.6 million MWh in 1997.

"Through integration with Cinergy's electric trading and marketing, financial risk management and origination services, this transaction gives us an additional platform for further growth through internal expansion and acquisition," said Cinergy CEO James E. Rogers.

"[It's] another step toward achieving our goal of being a top tier energy commodity provider which began with the creation of the Energy Commodities Business Unit two years ago. Since then, other steps have been taken, including the acquisition of Greenwich Energy Partners, the creation of Cinergy Capital Services, the selection of Cinergy by the New York Mercantile Exchange as a delivery point for futures contracts and expansion of our power marketing and trading business."

Cinergy recently completed a reorganization of its power and gas trading operations in the wake of former President J. Wayne Leonard's departure to Entergy Corp. Cinergy named Madeleine W. Ludlow as the new president of Cinergy Capital and Trading and brought on Michael J. Cyrus, an executive with Electric Clearinghouse, to assume the post of executive vice president overseeing power trading operations. A Cinergy spokesman said Cyrus now will head up both gas and power marketing and report to Ludlow.

The alliance with Oryx and Apache gives Cinergy a geographically diverse gas supply portfolio, which includes production in the southwestern U.S., Rocky Mountains, Gulf Coast, Gulf of Mexico, Michigan and Canada.

Oryx said it will realize proceeds from the sale of about $18 million and will recognize a net capital gain of $10 million. Apache will take its 57% stake in ProEnergy primarily in shares of Cinergy's common stock.

AG Edwards &amp Sons energy analyst Joseph M. Culp viewed the deal as a positive for the producers, particularly Apache, which has long viewed marketing as "kind of a necessary evil."

"Apache bought Natural Gas Clearinghouse from the investment bankers years ago because they thought the marketers had captured a lot more of the value but were taking very little of the risk during periods when there was a surplus and prices were soft. They always thought they would be able to get better profit for their gas if they owned a marketing arm. Then they sold NGC and made a profit. But then later on, they started this venture up because they are a very major supplier in certain markets, particularly the Oklahoma area, and if they could aggregate and find markets they could improve their price."

But several things happened since the formation of ProEnergy. One is the deflation of the gas supply bubble. "We seem to be in a market that the gas almost will sell itself," said Culp. Another factor is Apache's desire to continue focusing on E&ampP both in the U.S. and internationally and outsource noncore operations. Apache still will have a stake in the marketing operation because they took their portion of the company in stock.

"I think probably what they saw was that to be a real player [ProEnergy] probably needed to expand beyond its [supply side marketing operation]" into a multifuel, market oriented business because of unbundling and electric restructuring.

Cinergy has access to a large customer base. Its utility subsidiaries, Cincinnati Gas &amp Electric and PSI Energy, serve more than 14 million electric customers and 455,000 gas customers in Indiana, Ohio and Kentucky.

Rocco Canonica

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