California Energy Circuit, September 23, 2005
Investment banker Bear Stearns� desire to become involved in energy market is providing Calpine with the financial means to again be a major energy trader. The deal not only allows for adding volume in the trading market, it also cuts Calpine�s capital needs by providing a credit line to cover the cost of power plant fuel until the electricity is paid for weeks later.
Under an agreement announced early this month, Bear Stearns has formed an energy trading subsidiary � CalBear Energy. CalBear will use the services of a new Calpine unit � Calpine Merchant Services (CMS) � as the exclusive agent for power and natural gas trades the investment banker�s clients make through CalBear.
CMS is being formed from the Houston-based staff and systems of Calpine Energy Services (CES), which will conduct its trading through CalBear using a $350 million credit line provided by Bear Stearns.
Calpine�s venture "reintroduces a major player" to the Western power market, said Gary Ackerman, Western Power Trading Forum executive director. The $350 million credit line got Ackerman's attention.
"Credit buys everything," he said. The Bear Stearns credit line will allow Calpine to again trade electricity in the forward market, adding volume - - and increased liquidity - - to the market.
While Calpine�s 41 gas-fired and geothermal power plants provide about 10 percent of California�s electricity, credit restraints have limited Calpine�s participation in the state�s power market, said Calpine Energy Services President Paul Posoli. He explained the company is paying for a large portion of its fuel daily while not getting paid for power until the 20th day of the following month.
Sam Molinaro, Bear Stearns� Chief Financial Officer, explained the credit provides Calpine with the ability to sell power and acquire gas up to 61 days in advance through CalBear.
Replacing the Calpine Energy Management credit facility now being used to finance the power payment delay with trading through CalBear is expected to free up at least $200 million by the middle of 2006, Posoli said.
He told California Energy Circuit CalBear trading is expected to start in November following approval of the venture by the Federal Energy Regulatory Commission, which is expected in mid-October.
In addition, CalBear will allow Calpine to provide liquidity for those looking to invest in power generation assets, Posoli said.
�A lot of capital� has been looking for such opportunities over the last two or three years, he said, noting an increase in such searches over the past 12 months.
When CalBear was announced, officials of both Calpine and Bear Stearns explained the venture would pay for CMS� services with half of CalBear�s profits. CMS will also earn trading fees from CES and will pay any earnings to Calpine Corp.
The venture structure allows �Calpine to retain our people and systems, and retain full control over the (company�s) generating assets and their related economics,� Posoli told analysts. �Bear Stearns avoids significant barriers to entry and gets an immediate presence in the growing energy markets.�
Through CalBear, Molinaro said, Bear Stearns �will be able to take advantage of this compelling market opportunity without the need to incur significant startup costs or to make risky and expensive acquisitions.�
Jim Brumm