Sempra in a Bunch of Green Projects - Analyst Blog

San Diego Gas & Electric (SDG&E), a subsidiary of Sempra Energy (SRE), has entered into two solar power purchase agreements, for 25 years each, for a total of 80 megawatts (MW) of electricity. It has also revised its agreement to buy power from NaturEner's Rim Rock wind farm project in Montana.

Under the first 25-year contract with subsidiaries of Sol Orchard LLC, SDG&E will purchase up to 50 MW of locally produced solar energy. Under the agreement, 21 individual, ground-mounted photovoltaic plants mainly with a capacity of 2 MW and some with a capacity of 4MW will be built mainly in rural communities in San Diego County over the next two years.

Under the second 25-year agreement SDG&E has signed three contracts with subsidiaries of Soitec Solar Development, LLC ensuring a combined capacity of 30 MW of solar energy. The electricity will be generated at three solar power plant sites in San Diego County. The solar facilities will use Soitec ConcentrixTM technology while the concentrator photovoltaic (CPV) technology modules will be manufactured in a new Soitec factory to be built in the San Diego region. Soitec Solar Development, LLC is a renewable energy company managed by Soitec SA (SLOIF).

These three contracts with Soitec will produce renewable solar energy sufficient to serve more than 11,200 households a year. Soitec will implement capacity investments and pursue options for related financing to construct its San Diego area factory. At full capacity, Soitec's operations will generate up to 450 direct jobs and more than 1,000 indirect jobs. Soitec's delivery of the CPV systems for these three new solar energy facilities in San Diego County will begin in 2013 and close in 2014.

In a span of just three months, SDG&E has signed five renewable contracts that has improved its renewable portfolio by nearly 550 MW and has increased the total amount of renewable resources under contract to more than 29% of forecast retail sales by 2015.

In a separate development, SDG&E has revised its agreement with NaturEner to purchase power from the latter's Rim Rock wind farm project in Montana. The decision followed successful settlement discussion with the Division of Ratepayer Advocates (DRA), an independent branch of the California Public Utilities Commission (CPUC), and the consumer group, The Utility Reform Network (TURN).

The settlement discussion includes several changes from what was originally filed. The contract size has changed from 309 MW to 189 MW, capital cost in rate base has been restricted to $250 million on 64.99% of the project cost, whichever is less, contribution from NaturEner has increased to at least 25% of project costs and Sempra shareholder contribution has increased to a minimum of 10% of project costs.

Sempra Energy appears to be well positioned given stable earnings through its utility subsidiaries, which cater to more than 20 million customers residing in central and southern California. The company is also implementing infrastructure improvement programs focused mainly on system reliability, smart grid technology and compliance with California's renewable energy mandate. Going forward, the company's regulated utilities are proactive in asking for rate hikes.

However, we are maintaining our long-term Neutral recommendation on the company due to 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 #2 Rank (Hold).