Bear Gets Physical

"I'm sure you'll understand my point of view
We know each other mentally
You gotta know that you're bringin' out
The animal in me."
-- Olivia Newton-John, "Physical"

That animal, of course, is Bear Stearns (NYSE:BSC). Yesterday, the bank's energy trading subsidiary Bear Energy announced that it is getting physical with its power trading. No longer content with merely manipulating ones and zeros on a computer screen, it wants to get its hands dirty.

Thus, Bear has agreed to buy the power assets of Williams (NYSE:WMB) for roughly half a billion dollars. Now, in addition to engaging in the derivative trades of your typical trading desk (futures, swaps, puts, etc.), Bear will also be selling that energy directly to end-users.

Well, maybe it's not quite as physical as it sounds. Bear won't actually own the power plants, just the contracts on those plants' output, which is north of 7,500 megawatts of power. But the move indicates that Bear sees a lot of upside in an environment of constrained generation capacity.

The deal definitely looks like a win-win, because Williams gets to take huge trading liabilities off its books and faces the prospect of getting its credit rating raised by firms like Moody's (NYSE:MCO) and McGraw-Hill (NYSE:MHP) subsidiary Standard & Poor's. The firm is slimming down and sticking to what it does best: exploration and production, midstream operations, and gas pipelines.

I'm very interested to see how this move plays out for Bear. Pretty much everybody involved in Enron-era power trading got burned, but the long-term fundamentals seem strong, particularly in capacity-constrained regions like California and the mid-Atlantic. Of course, the energy trading unit is but one piece of a larger animal, but if the power market tightens up, it'll be gettin' hard holdin' this back. If you know what I mean.

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• Merchant Power Companies Juiced
• TXU's Nuclear Ambitions

Fool contributor Toby Shute looks forward to ordering burgers Animal Style out in California. He doesn't own shares in any company mentioned. Moody's is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.