While it has been reported that the Royal Bank of Scotland (RBS) wants to get a piece of Sempra Energy's successful energy trading business, RBS might want to consider what the San Diego-based holding company has said previously: partnership is a possibility, but a sale is not.

A West Coast financial analyst who watches Sempra very closely was not aware of the latest report, but not surprised by it -- given that company executives have said for some time that the trading business in the long run would get too big for the company. "Sempra is currently supporting trading exclusively in terms of capital infusion and liquidity," the analyst told NGI Tuesday. "In that context, it is not entirely a surprise. They've said they might be looking at partnering with a financial institution."

Two calls to Sempra's spokesperson were not returned as of press time.

The analyst was not aware of other specific banks or U.S. companies that have expressed interest in the Sempra trading business, although he thinks it would be unlikely that one of the banks that already has a large energy trading businesses (Goldman Sachs or Morgan Stanley) would be interested. "Who would be most attracted to taking a stake in Sempra Commodities? It would likely be some bank that does not already have a major presence," the analyst said. "Certainly the Royal Bank of Scotland is not a major presence in the U.S., but there are others, too, in the United States that don't have such a big presence."

Sempra's trading operation includes metals based on some acquisitions it made several years ago of European companies, and that part of Sempra Commodities is based in London. Generally its energy trading, based in Connecticut, operates widely throughout the United States, Canada, Europe and Asia. According to NGI's Top North American Natural Gas Marketers for 4Q2006 (see http://intelligencepress.com/features/rankings/gas/), Sempra Energy was the fourth largest, moving 9.4 Bcf/d. It has a 10-year record of consistently increasing profits, topping off at a half-billion dollars last year, and producing returns averaging about 20% annually, according to Sempra President Neal Schmale, speaking May 31 at the Deutsche Bank Energy & Utilities Conference.

It was a metals trade publication that surfaced the current speculation that United Kingdom-based RBS is seeking to invest in the Stamford, CT-based Sempra trading unit. A San Diego-based Sempra corporate spokesperson would not comment specifically about RBS in a Reuters report, but generally repeated what Schmale and other senior executives have told analysts in meetings this year as they continue to ask about the future of the highly valued trading unit.

Schmale made it clear that to continue growing the trading operations might begin to impinge on the capital needs of Sempra's other businesses, and therefore, now is the time to bring in a partner.

In response to questions on its capital spending strategy at the May 31 conference, Schmale said Sempra is focusing on "making sure its capital structure will support the volatility of the trading business. We have done a lot of planning the last two years and realize this trading business is pretty large for a company like Sempra, so we are looking at a number of possibilities to make sure things are appropriate.

"We would consider taking a partner, or we would continue to do-what-we-do, which carries the implicit consideration that we would have to ration capital from time to time, or finally, we have said we would consider pursuing a stand-alone credit rating for the trading operations. And that is really all I can elaborate on."

Back in February, Sempra CFO Mark Snell told a session at the Credit Suisse Energy Summit in Vail, CO, that his company might seek partners for its commodity business. Wall Street increasingly is viewing Sempra's business profile as changing to a "higher-growth, higher-multiple" business as it shifts from being a "purchaser of cheap energy assets to a premier developer of energy assets," AG Edwards said in an analysis completed at the same time in which the firm acknowledged it expects to do some investment banking with part of Sempra this quarter and it did business with an affiliated Sempra unit during the past year (see Daily GPI, Feb. 8).

"Commodities are still a huge and growing asset," Snell told the Vail audience. If and when a partner(s) is found, it will be a combination of Sempra monetizing some of its trading assets and also expanding the capitalization for the business, Snell said. "We would still keep a significant amount of capital invested in the business, although it may not be the full $2.7 billion we have now. Essentially, what we would be looking for is a partner to grow the business and take it to the next level.

"The key to us is our continued participation in this, and what we would really like to do is free the parent company from the leverage constraints that we have by maintaining a commodities business. If we could get it on a stand-alone basis with its own credit profile, then the rest of the Sempra businesses could take a leverage profile that is more similar to other players in our industry.

"Near-term volatility in the commodities' markets is probably likely to continue, so we would expect superior performance out of our commodities unit in the next few years until new gas supplies reach the United States," he said, noting that at year-end 2006 Sempra had $2.7 billion invested in commodities, with $7 billion in unused bank lines of credit. "This is a business that we are always going to be in."

In the previous year at analysts conferences, Sempra senior executives several times stressed that in 2006 they didn't think that Wall Street was giving the company enough credit for the results it has achieved, particularly in the energy trading sector. Therefore, they stressed at that time that sale of any of its major business units, including Sempra Commodities, is unlikely to occur before 2008 when some of the company's major liquefied natural gas (LNG) and pipeline/storage projects begin providing new revenue streams.

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