Bear Stearns, Calpine Form Venture to Trade Energy (Update5) 2005-09-08 12:57 (New York) (Updates shares in 11th paragraph.) By Bradley Keoun Sept. 8 (Bloomberg) -- Bear Stearns Cos., lagging Morgan Stanley and Goldman Sachs Group Inc. in an energy-trading market that brought Wall Street $8 billion last year, formed a venture with power producer Calpine Corp. to trade natural gas and electricity. CalBear Energy LP, based in Houston, will use capital from Bear Stearns and about 200 Calpine traders, the companies said today. Bear Stearns, which will provide about 15 executives and risk managers, didn't say how much it will invest. Bear Stearns can ``go from almost no business to having a potentially big business in fairly short order,'' Chief Financial Officer Sam Molinaro said in an interview. Goldman and Morgan Stanley, the fastest banks to expand in energy trading after Enron Corp.'s 2001 collapse, each generated $1 billion of revenue from the business last year, according to estimates by Sanford C. Bernstein & Co. analyst Brad Hintz. Calpine, though saddled with $17.4 billion in junk-rated debt, offers Bear Stearns the largest U.S. network of natural gas- fired power plants. The venture ``does pose some risk for Bear Stearns because of Calpine's tenuous financial position,'' said Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute. ``But Calpine has a lot of physical assets, so they see a lot of what's going on in the marketplace.'' Entergy Merrill Lynch, the world's No. 2 securities firm, paid Entergy Corp. and Koch Industries Inc. $800 million last year to buy their energy-trading joint venture, a business that now has about 300 employees. Citigroup Inc. and JPMorgan Chase & Co. have hired energy-trading executives from Enron and Morgan Stanley and say they plan to keep recruiting. Banks are trying to muscle into a market that Hintz estimated generated Wall Street $8 billion a year in revenue and is expanding by about 15 percent annually. Bear Stearns, based in New York, and Calpine, based in San Jose, California, declined to discuss revenue or profit projections. The venture is slated to begin trading upon approval from the Federal Energy Regulatory Commission, expected in October. Hedge funds, buyout firms and municipalities that are already Bear Stearns customers increasingly want to trade electricity and natural gas, either for speculation or to hedge their energy costs, Molinaro said. 1990s Expansion The 50-50 profit-sharing plan applies only to trades that aren't related to Calpine's own power sales, such as speculative trades or risk-management on behalf of clients. The agreement allows Calpine to retain all profits from sales of its own power. Shares of Bear Stearns fell 46 cents to $104.16 as of 12:51 p.m. in New York Stock Exchange composite trading. Calpine stock jumped 8.5 percent to $3.19. Calpine's stock in April tumbled as low as $1.32, from a high of $58.04 in 2001, on concern it might have to file for bankruptcy amid soaring fuel prices and a glut of generating capacity. Founder and Chief Executive Peter Cartwright expanded in the late 1990s after federal regulators passed rules forcing utilities to allow competition in their service areas. Debt jumped eightfold as the company borrowed money to pay for the new generators. Capacity Surplus Many other producers also built plants, boosting total U.S. capacity by 138,657 megawatts from 1999 through 2004 and creating a surplus that depressed wholesale electricity prices even as credit agencies tightened rating standards in the wake of Enron's bankruptcy. Rivals, including Mirant Corp. and National Energy & Gas Transmission, also declared bankruptcy. Under the agreement with Bear Stearns, Calpine will be aided by a $350 million ``credit enhancement facility.'' Calpine will be able to buy natural gas and electricity as if it had Bear Stearns's A credit rating from Standard & Poor's. Calpine, which lost $724.9 million during the six quarters through June amid soaring fuel costs, has a rating of B-, six levels below investment grade. Because of concern about Calpine's ability to deliver power under a default, a limited number of utilities and traders had been willing to buy its electricity, said Paul Posoli, 35, president of Calpine Energy Services, the company's power sales and energy-trading and marketing arm. In many cases the restriction made it impossible for Calpine to get the highest price for its power, he said. ``Many companies have been trying to figure out the right credit-enhancement structure, and we're confident that we've found it,'' said Posoli, who will run Calpine's side of the venture. $300 Million Collateral Calpine will transfer its trading employees to a new subsidiary, Calpine Merchant Services Co., which will have an independent board and be insulated from the threat of bankruptcy, Posoli said. The agreement also will allow Calpine to get back more than $300 million in cash that the company had posted as collateral with trading partners, Posoli said. Calpine expects to have about 28,000 megawatts of generating capacity by the end of this year, enough for about 22 million average homes. Many investment banks ``know how to make markets and find price discovery and provide liquidity to the professional investor community,'' Molinaro said. ``The hard part is cracking into the physical end of the energy business.'' --Editor: McCabe. Story illustration: To track Bear Stearns earnings, type {BSC US ERN }. To compare Bear Stearns's share price against other indexes, click on {BSC US COMP YTD }. To contact the reporter on this story: Bradley Keoun in New York at (1) (212) 617-2310 or bkeoun@bloomberg.net. To contact the editor responsible for this story: Erik Schatzker at (1) (212) 617-3849 or eschatzker@bloomberg.net. [TAGINFO] BSC US CN CPN US CN JPM US CN C US CN GS US CN MWD US CN NI SCR NI COS NI FIN NI BNK NI UTI NI ELC NI NRG NI CMD NI TOP NI MNA NI WNEWS NI NY #<225452.75636.25># -0- Sep/08/2005 16:57 GMT