Bear Stearns's
Trading Unit
Draws Interest
J.P. Morgan Plans
Commodity Expansion
With Energy Business
By ANN DAVIS
April 5, 2008; Page B1
One little-known bonus for J.P. Morgan Chase &
Co. in its hastily arranged acquisition of Wall Street's Bear Stearns
Cos. is a two-year-old energy-trading company that can transform and
expand the bank's presence in commodities. Michael Cavanagh, J.P.
Morgan's chief financial officer, has called it one of the deal's "nice
add-ons."
J.P. Morgan has reason to be pleased: Despite federal
legislation that effectively restricts commercial banks from operating
in the power industry, it expects to be able to keep key assets owned by
Bear Energy. The unit trades natural gas and power and also controls the
operations of several power plants.
Under the law, the Fed must deem such nonfinancial
activity "complementary" to the bank's financial activities or the bank
must divest or close the business within two years.
The Fed's Board of Governors has not formally said that
J.P. Morgan can hold the assets indefinitely, but people familiar with
the matter say the bank has been assured by Fed officials that they are
comfortable with its acquisition of Bear Energy. (See
related article1.)
This could be yet another advantage accorded J.P.
Morgan in its extraordinary buyout of the 85-year-old investment bank.
When the J.P. Morgan-Bear deal was struck in mid-March, the Fed hadn't
yet approved another commercial bank's foray into the type of long-term
power deals Bear was doing.
Less than two weeks after this deal was brokered, the
Fed approved another commercial bank's application to enter into power
agreements similar to Bear's. But that bank, Royal Bank Group PLC of
Scotland, had to go through a lengthy review over several months. Now
other banks contemplating similar businesses are likely to ask for a
quick answer, people in the commodities business say.
Across Wall Street, investment banks have been diving
into physical gas and power trading. Brokerage firms such as Morgan
Stanley, Goldman Sachs Group Inc. or Bear aren't restricted
like commercial banks from owning power plants or signing long-term
deals that give them the right to control their output.
Like Bear, many have entered into risky, long-term
agreements both to supply fuel and buy power from plants at set prices
for up to 20 or 30 years, known as tolling agreements. Such deals once
were the domain of Enron Corp. and other energy merchants.
Tolling agreements can be lucrative, but the banks also
are assuming billions of dollars in hard-to-value liabilities. The deals
typically require a bank to have solid credit because they involve
long-term lease payments and collateral obligations. Unlike energy
merchants that entered into such deals -- and ended up being penalized
by credit-rating agencies for doing them -- investment banks often carry
some of the liabilities off their balance sheets, making the impact of
the deals on a firm's finances harder to determine.
Bear Stearns wasn't active in energy trading until
recently. In 2005, it tried forging a power- and gas-marketing joint
venture with Calpine Corp., but the pact broke up in the wake of the
power company's subsequent bankruptcy proceedings. Afterward, Bear hired
the head of Calpine Energy Services, Paul Posoli, to start a similar
business at Bear. He has built the Houston-based organization into a
more-than-200-person operation.
Bear owns interests in power plants outright through
another subsidiary. Bear Energy has mainly focused on long-term power
"tolling" agreements that give it the right but not the obligation to
deliver fuel and buy back power from plants.
Bear purchased a portfolio of such agreements from
Williams Cos. last year for $496 million, allowing Williams to reduce
its debt by $2.4 billion and prompting an upgrade in Williams's credit
ratings. People familiar with the deal say Bear Stearns already is
generating more cash from the agreements and related transactions than
it owes in lease obligations.
Meanwhile, the assets themselves are more sought after
than when they were owned by Williams because the nation's power supply
is growing tighter and constructing new plants is getting more
expensive.
Outside a congressional hearing Thursday, J.P. Morgan
Chief Executive James Dimon emphasized that he was eager to keep Bear
Energy's business. It appeals to the firm, people familiar with the
matter say, because it goes well beyond Morgan's mostly financial bets
on energy futures and other commodities. The bank has said this is one
of the pieces of Bear that fills "gaps in our franchise."
Write to Ann Davis at
ann.davis@wsj.com2
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