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Sempra Signing Renewable Contracts

Zacks Equity Research

San Diego Gas & Electric (‘SDG&E’), a subsidiary of Sempra Energy (NYSE:SRE - News), has signed a 25-year power purchase agreement for 150 megawatts (‘MW’) of solar power with Solar Gen 2 LLC, a private solar development company based in Greenwich, Connecticut.  It has also signed a one-year contract for 40 MW of geothermal power with Silicon Valley Power (‘SVP’).

The 150-MW solar project will be built in three phases of 50-MW each at separate sites on fallowed land in the Imperial Valley, California.  Delivery of power from the first phase is expected by summer 2012. On an average, it is expected to generate approximately 361 gigawatt-hours per year over the contract period with the use of solar photovoltaic panels with single-axis tracking. This represents approximately 2% of SDG&E's renewable portfolio over a full year.

The power purchase agreement will continue to add more diversity to the mix of green energy in the company’s renewable portfolio. This solar project will be transmitted to customers across the Imperial Irrigation District (‘IID’) transmission network to SDG&E.

The one-year power contract with SVP, a municipal utility that serves the City of Santa Clara, California, involves the delivery of 40 MW of electricity generated from underground steam heat. Through June 2012, it is expected to produce nearly 350 gigawatt-hours of electricity. This contract would add 1% to the renewable portfolio in both 2011 and 2012.

The SDG&E has already begun taking delivery of the geothermal power, which comes from SVP's ownership share of the geothermal units located in the Geysers region of Northern California from July 1, 2011.

Both aforementioned contracts require approval by the California Public Utilities Commission.  Since January 1, 2011, SDG&E has added more than 1,200 MW of clean, green energy to its renewable portfolio. The proceeds from the present contracts will be directly invested by the company for new renewable power.

Sempra Energy’s diversified basket of businesses insulates its operations to a significant degree from regulatory rate risks. This outlook is supported by stable utility earnings, steady progress at its LNG terminals, the Sunrise Powerlink transmission line, ongoing installations of smart meter and renewable power projects in the Pacific Southwest.

However, we are concerned about a lack of any near-term positive triggers, along with near-term trepidation in natural gas prices, an ongoing land dispute regarding its LNG terminal in Mexico 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. In the near term, we would advise investors to accumulate its short-term Zacks #1 Rank (Strong Buy rating) peer Crosstex Energy LP (NasdaqGS:XTEX - News).

Sempra Energy is a southern California-based energy services holding company involved in the sale, distribution, storage, and transportation of electricity and natural gas. The company’s businesses are broadly divided into Sempra Utilities and Sempra Global and parent.

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