As the first of a two-part move to restructure the RBS Sempra Commodities joint venture trading business, the partners announced last Tuesday that they had agreed to sell their European and Asian operations to JPMorgan Chase & Co. for an expected $1.7 billion. The sale of the foreign holdings is a prelude to the disposition of the other major part of the business, North American natural gas and power trading.

In the next few weeks the two partners, Sempra and the Royal Bank of Scotland (RBS), will be restructuring their joint venture to establish what Sempra CEO Donald Felsinger called a "more equitable, 50-50" sharing of the profits from the business, which should allow Sempra to reduce further its capital investment in the business. The restructuring will be designed 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.

Felsinger said the "first and foremost" Sempra and RBS are "focused on maintaining the value of the remaining North American gas and power business. To that end, we and RBS expect to modify our partnership agreement." He said both companies are likely to reduce their capital levels in the business to reflect the smaller commodity trading business after more detailed analyses are completed. Overall, Sempra senior officials indicated they think they will be facing a different energy trading landscape with the sale of fully half of its JV trading operation.

"We're facilitating an end for the Royal Bank of Scotland [RBS] because, after all, they are not going to stay in this business long term," said Sempra CFO Mark Snell in a conference call. "We have looked at all the alternatives on how we might proceed, and taking down the cash in the business, reducing our exposure and giving us more flexibility in the our sides of our business clearly was the risk-adjusted outcome most favorable to our shareholders."

Both Felsinger and Snell said Sempra does not intend to shrink the business, but it is reducing its capital investment accordingly with the sale of what amounts to half of the JV now going to JPMorgan and with the prospect of a restructuring with RBS, which will allow the San Diego-based utility holding company to reduce its investment.

For its part, JPMorgan will now acquire the JV's global metals and oil businesses, and European natural gas and power businesses. Snell described the latter as being relatively small compared to the remaining North American energy trading.

Snell and Felsinger outlined three options for Sempra following the JPMorgan sale: (1) Sempra buying back the North American power/gas trading book, assuming it gets financial structuring help; (2) RBS finding a replacement partner for its share; and (3) the partners selling the business in its entirety to someone else.

"One of the options definitely on our radar screen is to buy out RBS's interest," Felsinger said. "We also have before us other growth opportunities, so we are probably at Stage One of a two-stage process. As we continue to work this deal through, it is obvious one of our options is to buy out RBS."

After giving an initial earnings guidance for this year in the $4.25-4.50/share range, Felsinger said if Sempra decides to sell the rest of the trading JV or to buy RBS's interest, the earnings guidance will be readjusted. In fact, he said the range will be "refined" most likely by the time of the year-end 2009 earning conference call this Thursday (Feb. 25).

The amount of the sale to JPMorgan Chase is subject to distributions prior to closing, which is expected to take about three months. More details are expected Thursday.

JPMorgan's final purchase price will be based on tangible book value for the business, along with a fixed premium of $468 million. Sempra said its proceeds from the deal are expected to be about $940 million. Including the premium, Sempra will have taken $2.6 billion out of the joint venture (JV) by the close of the sale, which will be a little more than two years after the JV was formed.

Closing of the sale is dependent on regulatory approvals from the UK Financial Services Authority, the Swiss government (if necessary) and various antitrust regulators, including approval under the U.S. Hart-Scott-Rodino Act, Sempra said.

Moody's Investors Service and Standard & Poor's Ratings Services (S&P) both affirmed Sempra's current credit ratings ("A2" and "BBB+," respectively), reflecting a relatively "neutral" impact from the JPMorgan deal on the San Diego-based energy holding company. S&P added that Sempra's credit profile "will benefit from an anticipated reduction in debt from the sale proceeds along with a lower percentage of consolidated cash flow associated with the commodities trading business."

Last November RBS said it would be selling its 51% share of the JV, kicking off almost weekly speculation about a deal (see NGI, Nov. 5, 2009). During that time Sempra officials reiterated their right to approve any deal and to have the first right of buying back the RBS interest. In a third quarter earnings conference call, both Felsinger and Snell emphasized that Sempra was in the trading business for "the long haul."

After initially drawing speculation about several global financial players, more recently the speculation has centered around JPMorgan (see NGI, Feb. 8).

A unit of JPMorgan has been retained by Sempra as its financial advisor to help the company examine all options.

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