San Diego-based Sempra Energy Monday announced it will partner its successful energy-metals trading business with Royal Bank of Scotland (RBS) in a complex deal in which each company will put in $1.30-1.35 billion. The joint venture will be called RBS Sempra Commodities LLP and expects to double its profits over the next five years with the UK-based bank taking over a majority interest and the day-to-day trading operations.

The transaction is subject to what Sempra called “customary closing conditions and regulatory approvals,” including from the United Kingdom Financial Services Authority, U.S. Federal Reserve Board and the Federal Energy Regulatory Commission.

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).

“The joint venture will be a significant expansion of the activities of RBS’s Global Banking & Markets Division in this important asset class and provides excellent opportunities for further growth,” RBS said in announcing the deal.

RBS currently has no energy trading business in its global commodities unit.

RBS Director Johnny Cameron said the joint venture will give the global bank, which currently makes many loans to major energy projects but has no energy industry experience, “immediate global leadership in another important asset class that will complement those leading positions.”

Sempra CEO Donald Felsinger said the new partnership will provide Sempra with “unlimited opportunities” to provide expanded transactions that have been limited to it in the past because of its relatively small balance sheet. “We’ve basically shed all risk here” in the way the partnership is structured.

Having grown its trading business into “one of the most successful companies in its sector,” Felsinger said the joint venture will “allow for faster international expansion of our commodities business into new markets, benefiting from RBS’s strong presence in North America, Europe and Asia, and access to greater capital resources.

“With RBS’s additional financial support, RBS Sempra Commodities will expand its leadership position in the commodities sector on a global scale. The new joint-venture structure will provide us with more predictable earnings and cash flows from our commodities business, while eliminating trading guarantees and credit support.”

As part of the transaction, Sempra will repurchase $1.5-2 billion of its common shares and raise its annual dividend to $1.40/share, along with increasing its five-year earnings-per-share growth rate (reducing it for 2008 to a range of $3.65-3.85/share and increasing it for 2011 to $5.15-5.45/share from a previous range of $4.85-5.15/share.).

Sempra and RBS will share the pre-tax joint venture income under a prescribed formula:

In response to questions, Sempra’s Felsinger said the new joint venture allows Sempra to “essentially shed all risk” that it has carried increasingly as its trading operations have grown into one of the most successful in the sector, yielding a half-billion dollars in annual profits.

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 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 Sempra President Neal Schmale, speaking May 31 at the Deutsche Bank Energy & Utilities Conference.

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