European financial heavyweight Fortis became the latest banker to muscle into North America’s energy marketing business last week 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 will 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.

The acquisition by Fortis continues a trend among North American gas marketers that has been ongoing since Enron Corp. collapsed in late 2001. More financial institutions and cash-heavy oil and gas companies have taken over the physical energy trading narket using their financial wherewithal as leverage. And Peter Fusaro, CEO of Energy and Environment Capital Management, said last week he does not expect Fortis’ acquisition to be the last.

“We expect more bank investment as well as hedge fund investment along the energy value chain, including pipelines, storage, power stations, clean technology and renewables,” Fusaro said.

Last year, banks and brokerages alone generated an estimated $7 billion in revenue from energy and commodities trading, according to Ethan Ravage, a San Francisco-based financial consultant. Ravage said in a note to clients that the energy trading business in North America will grow about 15% annually through 2010.

The sale by Duke was not unexpected. In May Duke said it would sell Houston-based Cinergy Marketing and Trading LP and Calgary-based Cinergy Canada Inc., known collectively as CMT, along with CMT’s associated contracts (see NGI, May 29). 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 NGI, Aug. 1, 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 NGI, Feb. 3, 2003). The utility ceased reporting its quarterly gas sales, and last year it announced it would wind down its wholesale trading operations, which were housed in Duke Energy North America (see NGI, Sept. 19, 2005).

However, the financial problems that have beset some 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 in a conference call last week. “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. Dierckx said Fortis also plans to keep as many employees as possible from the Cinergy operation and perhaps expand the Houston-based office.

“We’ve made it clear we want to expand the business and do it with the professionals we have here already,” Dierckx said. “There’s no doubt we’re here to stay.”

“This is a real opportunity for our operations,” said CMT President Jim Fallon. “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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