In a two-part deal involving North American natural gas and electricity assets as one part, along with its little-talked-about retail energy services unit, Sempra Energy should exit its joint venture energy trading business by the end of the third quarter, according to senior company officials.

In the meantime, the energy holding company is focused on its strong California utilities and its independent energy businesses, all of which are cranking out quarter-over-quarter profits. San Diego-based Sempra has a lot of upside from its liquefied natural gas (LNG) and pipeline/storage businesses, Sempra CEO Donald Felsinger said during a second quarter earnings conference call last Tuesday.

Sempra reported increased quarter-over-quarter profits, but only break-even for the remainder of its joint trading business with the Royal Bank of Scotland, RBS Sempra Commodities.

Sempra reported second quarter earnings of $222 million, or 89 cents/share, compared with $198 million, or 80 cents/share, for the same period in 2009. (Second quarter results last year included a $64 million, or 26 cents/share, asset writedown related to independent pipeline and storage operations.)

Both Felsinger and CFO Mark Snell said the disposition of the rest of the joint venture trading business has been delayed by the uncertainty over what was happening in Congress regarding financial industry reform. Now that legislation has been passed and signed into law, Sempra expects to wrap up two separate sales of the remaining assets and to realize close to another $1 billion in net proceeds as it did in its July 1 announcement on the sale of the RBS Sempra metals, oil and European power/gas businesses.

Felsinger characterized the national debate on financial reform as now "all clear and behind us," noting that the joint venture has "had a lot of people look at our books." He sensed everything now would be sold "within the next month or two."

Also during the analysts' conference call, Felsinger downplayed a legal fight over the company's LNG terminal in North Baja California, Mexico, whose operations he predicted would not be interrupted by the dispute. A hearing set for last Thursday in a Mexican court was postponed, a Sempra spokesperson told NGI late that day.

Felsinger said he didn't expect to lose the court fight with a would-be adjacent landowner, but if the company received an ultimate adverse ruling, it would be prepared to buy whatever additional adjacent lands it needed. None of the adjacent land is necessary now to satisfy Sempra LNG's operating permits at the LNG receiving terminal, he said.

"I think longer term we still expect LNG will have the pricing opportunity to compete with domestic supplies," Felsinger said. "Long term we feel good about our position, and are looking for opportunities to bring in additional cargoes [at Baja and the Cameron facility in Louisiana]."

As for the Baja lawsuit involving a disgruntled former landowner, Ramon Eugenio Sanchez Ritchie, who has filed lawsuits first in Mexico and more recently in the U.S. District Court in San Diego, Felsinger said the issue is "not one of much importance," seeking to put the ongoing legal dispute in perspective in responding to an analyst's question.

Regarding Sempra's exit from trading, Felsinger said he did not think that Sempra would buy back any portion of the assets, and the sale should be for book value, or $2 billion out of its portion of the deal. Snell also acknowledged that in recent periods the profitability of the North American gas and power operations has been low, and therefore Sempra reported a break-even result in the second quarter.

Along with the financial reform debate in Washington, DC, the softer nature of the markets for gas and power also had something to do with potential buyers taking more time in reassessing the trading landscape, Snell said. "But the biggest thing was probably the financial reform."

Sempra said on the call it was going to move ahead with a $500 million share buy-back program funded by proceeds from the joint venture trading sale.

For its pipeline/storage operations, Felsinger and CFO Snell cautioned that there will not be a lot of storage profits until the market settles and more building of added capacity at the Mississippi Hub storage facility is possible. Longer term, though, Felsinger said he saw storage as providing $200 million annually in earnings before interest, taxes, depreciation and amortization earned on a $1.6 billion investment. Some analyst questions suggested that this part of Sempra's operations was underperforming.

For the first half of this year, however, the combined Sempra pipeline and storage businesses showed increased profits ($39 million for the second quarter, compared with $27 million for the same period in 2009.

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