European financial heavyweight Fortis muscled into North America’s energy marketing business on Tuesday with the estimated $415 million purchase of Duke Energy’s commercial marketing and trading business. Fortis, which ranks among the 20 largest financial institutions in Europe, will pay Duke $210 million for the business and agreed to pay an amount equal to the value of Duke’s portfolio of contracts and net working capital associated with the business when the transaction closes.

Duke, which completed its merger with Cinergy earlier this year, announced in May it wanted to sell Houston-based Cinergy Marketing and Trading LP and Calgary-based Cinergy Canada Inc., known collectively as CMT, and wanted to sell the associated contracts managed by CMT (see Daily GPI, May 15).

“The decision to exit the commercial marketing and trading business is another step in our ongoing effort to restructure the risk profile of Duke Energy and to focus our attention on businesses that can be expected to contribute steady, stable earnings and dividend growth,” said Duke CEO James E. Rogers. “We are pleased to have reached an agreement with Fortis that is a real win-win for both companies.”

Duke expects pretax cash proceeds from the sale to be at least $350 million. The transaction is expected to reduce Duke’s ongoing earnings per share by 3-5 cents. Duke plans to continue its power, gas and coal marketing and trading operations to optimize its portfolio of wholesale power generation assets, consisting of 8,700 MW, which are located primarily in the Midwest.

Cinergy’s energy trading operations have been a perennial leader in NGI‘s quarterly Top North American Gas Marketers. In 1Q2006, Cinergy was ranked seventh with 5 Bcf/d in sales. In 2005, Cinergy was ranked sixth overall, with 5.34 Bcf/d in sales, up from 4.51 Bcf/d in 2004. However, even before the Duke merger was completed, Cinergy began to scale back its wholesale gas trading operations after betting on lower prices and losing last year (see Daily GPI, July 29, 2005).

Duke at one time also was one of North America’s top energy traders. However, when Enron Corp.’s bankruptcy led to a meltdown across the energy sector, Duke’s gas sales in 2002 fell dramatically (see Daily GPI, Jan. 29, 2003). The utility ceased reporting its quarterly gas sales, and last year it announced it would wind down its wholesale trading operations, which are housed in Duke Energy North America (see Daily GPI, Sept. 14, 2005).

All of the problems that have beset other utility-based merchant operations are expected to have little effect on Fortis, which is based in Brussels and Amsterdam.

“CMT will give Fortis the physical trading capacities it needs to become a key player in energy banking in North America and to enhance its products on a global basis,” Fortis Merchant Banking CEO Filip Dierckx said Tuesday. “We are impressed by the skills and accomplishments of the CMT employees, and they will play a key role in the further development of our goal to become a leading player in the financial and physical trading markets.”

Under Dierckx’s direction in the past five years, Fortis’ energy trading operations have grown steadily. Eight months ago, Fortis opened a North American trading operation, with about 30 employees based in New York and Dallas. North America, said Dierckx, will now become a “key growth area,” and could provide a model to expand energy trading across Europe.

The CMT acquisition will move Fortis into the “second tier” of energy merchant companies in North America. “We can say and we can debate a long time about who is where. But in the first tier, there is Goldman Sachs, Merrill Lynch…they are in a range of grossing over $500 million” in energy trading, Dierckx said. “In the second layer, you have players like Barclays, Deutsche, UBS, even Citigroup, where you are between $200 million and $500 million in sales. With this acquisition, what we have and what CMT has, we are in the second tier group, which has the full capabilities and is only somewhat behind the biggest investment banks.”

Dierckx said, “Clearly the deal which we are explaining today is going to mean a big leap forward in energy trading. Like we have said, if we go into this niche opportunity, evidently, we have to have the activity that is sustainable…a reasonable market share. In CMT, we have this platform in order to have a good development, and we believe very much we will be able to increase this market share. CMT has been constrained, and as a result, it has limited its activity. We expect a combination of our balance sheet and skills will improve even further our market share in the coming years.”

Fortis’ takeover of the CMT business will only strengthen energy trading in North America, he said. “With the weakened standing of utilities in the U.S., it has driven clients to financial institutions…We have a AA-minus rating…a strong balance sheet. Fortis will be able to leverage the infrastructure to its full extent because of the strong rating.”

Dierckx would not comment about whether Fortis may expand and try to buy other energy merchant operations. He stressed that Fortis wanted to complete the CMT project “perfectly” before attempting anything else.

CMT President Jim Fallon said, “This is a real opportunity for our operations. We have a very solid operational platform, and the combination with Fortis will allow for substantial leverage of the business through its financial strength, as well as its marketing and structuring capabilities.” Fallon will co-head the Fortis North American operation with David Jones, U.S. head of energy trading at Fortis. The Houston office, which employs 200, and the Calgary office, which employs 25, will remain open.

The sale, expected to close in about three months, still has to be approved by the Federal Energy Regulatory Commission, Federal Reserve Board and Canadian regulatory officials. The new subsidiary is expected to add to Fortis’ earnings in the first year and yield a return on investment of about 15% by 2009.

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