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Sempra Selling Energy Trading JV Interest

With the prospect of walking away with more than $2 billion, Sempra Energy now plans to sell its remaining interest in its joint venture (JV) energy trading business with the Royal Bank of Scotland (RBS), CEO Donald Felsinger said last Thursday. Absent a trading arm, Felsinger said Sempra most likely will build a new program internally around its existing businesses, particularly in the natural gas sector.

Both the UK-based bank and Sempra are anxious to sell and are talking now with a number of parties, Felsinger told financial analysts during an earnings conference call. The company reported essentially flat year-end 2009 profits and reduced earnings in trading business RBS Sempra Commodities.

For the fourth quarter, Sempra net income was $288 million, or $1.16/diluted share, compared with $319 million, or $1.30/diluted share, for the same period in 2008. For the trading JV, profits were $71 million, compared with $164 million for the fourth quarter of 2008. For all of 2009, earnings were $1.12 billion, or $4.52/diluted share, compared with $1.11 billion, or $4.43/diluted share, in 2008. In the JV, 2009 earnings were $345 million, basically the same as in the previous year.

Earlier in February, Sempra announced as the first of a two-part JV restructuring that the partners were selling their European and Asian operations to JPMorgan Chase & Co. for an expected $1.7 billion. They stressed that the sale of the foreign holdings was a prelude to the disposition of the other major part of the business -- North American power and gas trading.

Going forward Felsinger said the bank and Sempra would be restructuring their joint venture to help RBS more readily find a replacement buyer for its share of the JV and to better position both partners to sell the entire business, if they decide to do so.

In response to a question about filling the void assuming the remainder of the trading unit is sold by year-end, Felsinger said the company planned to cover this area in detail in a scheduled analysts' meeting in San Diego in late March. "We have a lot of natural gas assets with our pipelines and storage, generation and LNG business, so you should think of us building up either an optimization program or a natural gas trading program around out existing businesses," he said, adding that it would not be very capital-intensive and Sempra would not try to replicate its past trading units during the past decade.

In terms of the prospective sale, Felsinger said he was confident the business will "not be discounted" and will sell at a healthy premium, so the option of Sempra buying RBS's remaining JV North American natural gas and electricity trading business is not as good an option. "We're fairly optimistic that we'll get a good price," said Sempra CFO Mark Snell.

"In the current market we no longer believe that we can find a cost-effective, long-term alternative to equity, so because of this [conclusion], the sale of the business is now our preferred outcome," Felsinger said. "We have several interested parties and believe a transaction can be completed quickly and in a fashion that will deliver the best results for our shareholders. Total cash proceeds to Sempra should be in the neighborhood of $2 billion or more."

Felsinger said the JV partners have already started talks with prospective buyers. He promised to "have more feedback" on those talks when Sempra holds an annual analysts conference in San Diego March 25. "The plan is to move as quickly as possible on this, and now that we have made our decision, I think we'll make this happen sooner rather than later."

With proceeds of $2 billion, Sempra plans to fund "new growth, reduce debt and at the time of its exit from the trading business a [common stock] share repurchase," Felsinger said. The energy holding company expects the transaction to be completed by the end of this year, with the trading bringing in profits of about $250 million for Sempra this year.

When asked if there is a fall-back plan in case the trading unit cannot be sold, Felsinger and CFO Snell indicated they would most likely wind down the business eventually, but it was a highly unlikely scenario. "It is hard for me to see how we would stay in this business, just looking at the robust [buyers'] interest that has already been expressed," Felsinger said.

"The premise is quite remote, but if it were the case that we couldn't sell it, we could wind down the business and I don't think we would have any problem getting our book value out of it in a worst case scenario," Snell said. "Generally, we think that is a very, very remote outcome; it just makes so much sense for so many different parties to step into this thing at this time."

Most of the money is already in cash, so there is only about another $500 million that Sempra has tied up in the trading unit at this time. The business could be wound down in less than two years, he said.

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