Assuming that banking and energy regulators in the UK and United States agree, Sempra Energy’s announcement Monday of a $2.65 billion joint venture with Royal Bank of Scotland (RBS) to run and capitalize the San Diego-based energy company’s trading operations (see Daily GPI, July 10) provides it with the best of both worlds. Sempra can use RBS’s financial heft to realize upside growth while at the same time lowering its risk.

Sempra stock closed Monday at $60.74/share, up $1.44, and two major ratings agencies affirmed Sempra would maintain its triple-B-plus (“BBB+”) credit rating, according to Sempra CEO Donald Felsinger, who spoke with financial analysts on a conference call. At one point in answering analysts’ questions, Felsinger described the company’s prospects of greater profits with lower risk as being akin to “clipping coupons” for well heeled bondholders.

In addition to trading, Felsinger and other Sempra senior executives indicated that other parts of its business can benefit from its newly created relationship with RBS, one of the world’s largest financial institutions and a leader in financing major energy and natural resource facilities. In addition, Sempra’s vision of trading emissions credits, ethanol and other expected offshoots of the global climate change initiative will be much more feasible with the size and scope of Edinburgh-based RBS.

As a bank, regulated in the United States by the Federal Reserve, RBS is limited in owning hard energy assets (tankage and liquefied natural gas facilities), so Sempra’s ability to take information from RBS and turn it into infrastructure projects provides the energy company with new opportunities, according to Sempra CFO Mark Snell.

Felsinger emphasized that he combination with RBS on trading will do four major things for Sempra, which has been looking at options for its trading business since the beginning of last year. It will:

In response to an analyst’s question, Felsinger said he didn’t anticipate the level of risk changing dramatically with the new venture and RBS’s obvious deep pockets.

“They like this business and the short-term nature of [our] book, and they like the opportunity of the different types of transactions they can bring to the [trading] business,” said Felsinger, who noted that he doesn’t expect any significant change — just a much bigger platform to work with.

In the joint venture, Sempra will maintain three of seven directors on the board overseeing the newly created RBS Sempra Commodities LLP, and Felsinger reiterated that Sempra plans to be “an active participant,” although the Connecticut-based commodities business will now report to a senior official at RBS in Scotland.

“We have grown this business over 10 years and it provides other benefits to Sempra, so you will continue to see at the board level Mark Snell [CFO], Neal Schmale [president/COO] and myself active on the board, looking at growth opportunities and working hand-in-hand with our new partners at RBS.”

With RBS’s role as a major financing source for liquefied natural gas (LNG) facilities globally, there is an opportunity for Sempra to grow further LNG infrastructure in the United States, Felsinger said in response to an analyst’s question.

“When we looked at what the opportunities were for us in this business because it was becoming so successful, when we began searching for partners, we concluded that of all the people we would like to have as a partner, RBS came out No. 1 in the ranking — first, because they are not in the energy business, and secondly, they are such a major financier for the types of projects we have an interest in (energy, natural resources, etc.)

“The fact that they have a seat at the table in loaning money to these assets also gives them the opportunity to attract commodity business. People that borrow money are often looking for help to hedge transactions. So they bring to this a lot of upside potential.”

Felsinger at one point called RBS the “world’s leading provider of project finance transactions,” noting it is a complementary strength to the energy trading expertise Sempra has built up over the past 10 years since it bought AIG Commodities, a family of commodity trading companies worldwide whose senior management has evolved from the so-called junk bond-specializing Drexel, Burnham & Lambert in the 1980s to AIG Trading Corp. in the mid-1990s to a part of the newly created Sempra in 1997.

With the AIG history, Sempra Commodities prides itself on its “Wall Street heritage.” RBS is betting it can expand that heritage more globally, particularly where RBS has a large banking presence.

Wall Street rumors fueled by some European commodity trading industry news reports last month predicted that Sempra and RBS were close to announcing a deal (see Daily GPI, June 20).

According to NGI‘s Top North American Natural Gas Marketers for 1Q2007 (see https://intelligencepress.com/features/rankings/gas/), Sempra Energy was the fourth largest, moving 9.1 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 Schmale, speaking May 31 at the Deutsche Bank Energy & Utilities Conference.

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