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A PG&E Corporation (PCG - Analyst Report) unit, Pacific Gas and Electric Company got the green signal from the city council of Hercules, Calif. to buy the assets of Hercules Municipal Utility (“HMU”).

Owned and operated by the City of Hercules, HMU is a municipal electric utility founded early in the past decade. The deal includes all HMU consumers ranging from residential to industrial and is subject to regulatory approval.

The City of Hercules decided last year to offload this money-losing utility to Pacific Gas in order to concentrate on its core city services. The City intends to retire the HMU bond debt with the proceeds from the sale.

As of May 2013, HMU has 694 residential customers who are paying about 30% more than what Pacific Gas charges. Hence, following the deal, the City of Hercules customers would avail of the lower rates offered by Pacific Gas.

PG&E has a long and successful record of serving this region. In fact, HMU used to reallocate the power, procured from Pacific Gas, to the region. The City was looking for a utility company capable of providing more efficient, reliable, and affordable electric services. PG&E will start providing its services upon the completion of the transaction.

San Francisco, Calif. based PG&E Corporation is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. Going forward, PG&E will continue to invest new capital, consistent with California's focus on clean energy. The company is mandated by the state’s renewable energy portfolio standard to raise its renewable generation. California’s renewable portfolio standard requires utilities to generate 33% of power from renewable sources by the year 2020.

We believe favorable decisions from regulators, long-term supply contracts, diversification into alternative power sources and infrastructure improvement programs (such as Cornerstone and Smart Meter) will bode well for the company.

These positives, however, will be partially offset by risks, including the present tepid macro backdrop, headwinds in the California economy, earnings dilutive issuances and power-price volatility.

We have a Zacks Rank #3 (Hold) on the stock. This implies that the stock is expected to perform in line with the broader U.S. equity market over the next 1–3 months.

In the near term, we would advise investors to focus on its Zacks Rank #1 (Strong Buy) peers CPFL Energia S.A. (CPL - Snapshot Report) and Companhia Paranaense de Energia (ELP - Analyst Report), and Zacks Ranked #2 (Buy) DTE Energy Company (DTE - Analyst Report).

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