8-KOther Events

SEMPRA 8-K Report, Corporate Update (May 25, 2016)

Filed May 25, 2016For Securities:SRESREA

Summary

This 8-K filing from Sempra Energy (SRE) on May 25, 2016, provides an update on the California Public Utilities Commission (CPUC) proposed decision for the 2016 General Rate Case (GRC) concerning San Diego Gas & Electric (SDG&E) and Southern California Gas Company (SoCalGas). The proposed decision largely adopts the terms of settlement agreements with intervening parties, but includes two key adjustments related to income tax. These adjustments reduce the adopted revenue requirements for both SDG&E and SoCalGas compared to the settlement amounts. Investor attention should be drawn to the financial impacts of these tax adjustments. Specifically, the decision requires a refund to ratepayers of $72 million for SoCalGas and $37 million for SDG&E related to excess income tax repair deductions from prior years. This will result in after-tax charges to earnings of $43 million and $22 million, respectively, expected to be recorded in the second quarter of 2016. Furthermore, a rate base reduction is proposed, impacting future revenues and earnings. While the company disagrees with certain aspects of the proposed decision and will seek further clarification or modifications, the final decision is anticipated in the second or third quarter of 2016 and will be retroactive to January 1, 2016.

Key Highlights

  • 1CPUC issued a proposed decision for SDG&E and SoCalGas' 2016 General Rate Case (GRC) on May 19, 2016.
  • 2The proposed decision largely adopts settlement agreements with intervening parties, but includes two income tax-related adjustments.
  • 3SDG&E's adopted revenue requirement for 2016 is $1.789 billion, $22 million lower than settlement proposals.
  • 4SoCalGas' adopted revenue requirement for 2016 is $2.199 billion, $20 million lower than settlement proposals.
  • 5A refund of $72 million (SoCalGas) and $37 million (SDG&E) for past excess income tax repair deductions to ratepayers is mandated, leading to after-tax charges of $43 million and $22 million respectively in Q2 2016.
  • 6The proposed decision includes a rate base reduction of $60 million for SoCalGas and $75 million for SDG&E, impacting future revenues and earnings.
  • 7The final CPUC decision is expected in Q2 or Q3 2016 and will be retroactive to January 1, 2016.

Frequently Asked Questions

The main financial impacts stem from income tax adjustments. These include a refund of $72 million for SoCalGas and $37 million for SDG&E to ratepayers for past excess income tax repair deductions, resulting in after-tax charges to earnings of $43 million and $22 million, respectively. Additionally, a rate base reduction will impact future revenues and earnings.

Certain financial impacts related to the income tax repairs allowance deduction matter, including the refunds and associated charges, will be recorded in the second quarter of 2016. The overall financial impact of the final CPUC decision, which is expected in the second or third quarter of 2016, will be reflected in the financial statements in the period the final decision is issued, and will be retroactive to January 1, 2016.

No, Sempra states that the proposed decision contains ambiguities and inconsistencies, and takes positions that the company disagrees with. They intend to work with the CPUC to address these matters, and there is no assurance that the final decision will be favorable or address their concerns.

The Z-Factor mechanism allows SDG&E and SoCalGas to seek cost recovery for significant, unforeseen cost increases incurred between rate case filings, subject to a $5 million deductible per event. The proposed decision continues this mechanism for years 2017 and 2018.