As summer arrived, Sempra Energy continued to downplay as pure uninformed speculation the reports this month that the Royal Bank of Scotland (RBS) wants to get a piece of Sempra’s successful energy trading business. RBS and any other suitors might want to consider what the San Diego-based holding company has said previously: partnership is a possibility, but a sale is not likely.

A West Coast financial analyst who watches Sempra very closely said he was not surprised by the reports — 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. “In that context, it is not entirely a surprise. They’ve said they might be looking at partnering with a financial institution.”

In more than one call after the reports surfaced naming RBS, Sempra’s San Diego-based spokesperson was reluctant to make any comment. He would only reiterate what he had said earlier to financial press inquiries, that the company was looking at three basic options — status quo, getting a partner, or spinning off the unit so it would have its own credit ratings.

The western 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 of European companines it made several years ago. That part of Sempra 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, Sempra Energy was the fourth largest in the first quarter, 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 UK-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.”

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 (see NGI, Feb. 12). Saying his company had produced a cumulative total return of more than 100% over the past three years, Snell told analysts at Vail that the natural gas markets are changing, and Sempra has “an execution plan focused on building our leadership position where we see the highest growth.” For its trading unit, Snell said Sempra would seek a partner(s) that can add capital to greatly expand that area of it business while seeking to have it stand alone from a credit standpoint.

At analysts conferences in 2006, Sempra senior executives several times stressed that they didn’t think Wall Street was giving the company enough credit for the results it had achieved, particularly in the energy trading sector. Therefore, they stressed at that time, the sale of any of its major business units, including Sempra Commodities, would not likely occur before 2008, when some of the company’s major liquefied natural gas and pipeline/storage projects begin providing new revenue streams.

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