Regulators Nod to Sempra-PG&E Deal

The 25-year contract between Sempra Generation, a subsidiary of Sempra Energy (SRE - Analyst Report) and Pacific Gas and Electric Company (PG&E), a subsidiary of PG&E Corporation (PCG - Analyst Report) has received formal approval from the California Public Utilities Commission. Post approval, PG&E is eligible to buy renewable power from Sempra’s 150 megawatts (MW) Copper Mountain Solar 2 project that is located in Boulder City, Nevada.

The solar project will use First Solar, Inc.’s (FSLR - Analyst Report) ground mounted thin film panels. First Solar will also act as the engineering, procurement and construction contractor for the solar project.

The construction of the 150-MW project will begin in 2011 at a 1,100-acre solar plant. Of 150-MWs, the first 92 MW of solar panels at Copper Mountain Solar 2 are expected to be installed by the end of 2012 and the rest is expected to be installed by 2015. However, as per the contract, PG&E has the authorization to decide if it wants to hasten the commercial operation date of the second phase.

Sempra generation is working towards fulfilling the regulations provided by the Public Utilities Commission. As per the mandates, the utilities should derive 20% of their generation from renewable resources by the end of 2013, 25% by the end of 2016 and 33% by the end of 2020.

This project is in line with the regulations and is expected to generate enough electricity to power approximately 45,000 homes with no toxic emissions. Sempra expects to increase the amount of solar capacity currently installed by more than 5 times to approximately 300 MW by early 2013.

Sempra Generation is a leading developer of solar and wind facilities that serve U.S. markets and is engaged in operation and maintenance of natural gas-fueled power plants. In January 2012, Sempra Generation and Sempra Energy's other U.S. operations that are outside of its two California utilities are expected to be consolidated into a new business unit called Sempra U.S. Gas & Power.

Sempra Energy is a southern California-based energy services holding company involved in the sale, distribution, storage, and transportation of electricity and natural gas. Its diversified nature insulates its operations to a significant degree from regulatory rate risks. We believe Sempra Energy presents a lower risk profile relative to its peers.

However, we are concerned about a lack of any near-term positive triggers, along with near-term trepidation in natural gas prices, and pending regulatory cases. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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