Commodity trading is central to Sempra Energy's operations, and even with the exit of joint venture (JV) trading partner Royal Bank of Scotland (RBS), the San Diego-based holding company is confident it will find a new partner, or, if necessary, bring the trading arm back into the company, CEO Donald Felsinger told financial analysts last week.
With earnings increasing in the third quarter to $317 million, or $1.27/diluted share, from $308 million, or $1.24/diluted share, in the same period last year, Felsinger during a conference call stressed Sempra's "certainty of future growth" in all of its businesses, despite the current global economic and financial uncertainty. Earnings for the first nine months this year were $831 million, or $3.37/diluted share, up nearly 5% from $794 million, or $3.13/diluted share, in the first nine months of last year.
The RBS Sempra Commodities JV was among the Sempra businesses reporting strong earnings growth in the third quarter ($75 million in profits for this most recent quarter, compared to an $8 million loss for the third quarter in 2008). Driving the breakup of the highly profitable trading venture is the UK-based bank's need to enter into an Asset Protection Scheme (APS) related to bailouts it is receiving from the British government and European Commission.
Stressing several points at the outset of the conference call, Felsinger urged financial analysts to "remember this [trading] is a core business for Sempra and it operates in markets that we know and understand, it is highly profitable, and more importantly, we're committed to being in this business for the long term."
Felsinger said as RBS officials proceed with its plans to divest its share of the JV, "they are committed to providing all of the required capital and credit support, and finally, the [divestment] process will be orderly and significantly influenced by our participation."
Under the terms of the JV agreement that went into effect April 2008, Felsinger said RBS cannot unilaterally walk away without Sempra agreeing to it. "I'm certain we will manage through this transition in a way that is not only orderly, but creates value for our shareholders," he said. "Based on our discussions with [the global bank], we are convinced our interests are aligned."
Felsinger said he believes that Sempra's businesses will continue to grow "with a fair degree of certainty," citing as an example the two California utilities (San Diego Gas and Electric Co. and Southern California Gas Co.) which are expecting to increase capital spending by more than 50% next year.
"Our large four-year construction in our natural gas business is nearing completion, and that means a full year's benefit in 2010 from new cash flows and long-term contracts," Felsinger said. "What you can expect to see from us the rest of this year is to focus on areas where we can continue to assure the certainty of that growth story."
Felsinger said the commodity trading business is "well positioned to continue to grow with the right circumstances and the right partner," although he added the caveat that there are a lot of things to be learned from the still-unfolding divestiture by RBS.
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