Item 8.01 Other Events.
2016 General Rate Case Proposed Decision
On May 19, 2016, the California Public Utilities Commission (CPUC) issued a proposed decision in the 2016 General Rate Case (2016 GRC) of San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas) (SDG&E and SoCalGas are collectively referred to in this report as the California Utilities) that the California Utilities filed jointly in November 2014. This proposed decision (2016 GRC PD), if approved as drafted, adopts substantially all of the terms of the settlement agreements entered into between SDG&E and SoCalGas and eight of the eleven intervening parties in the 2016 GRC. However, the proposed decision makes two income tax-related adjustments to the settlement agreement revenue requirements for both SDG&E and SoCalGas, the first relating to income tax benefits associated with flow-through repair allowance deductions and the second with respect to the extension of bonus depreciation. With these adjustments, the proposed decision adopts a test year 2016 revenue requirement of $1.789 billion for SDG&E’s combined operations ($1.482 billion for its electric operations, and $0.307 billion for its gas operations). The adopted revenue requirement for SDG&E is $22 million lower than the $1.811 billion proposed in the settlement agreements. For SoCalGas, the proposed decision’s adjustments would result in a 2016 revenue requirement of $2.199 billion. The adopted 2016 revenue requirement for SoCalGas is $20 million lower than the $2.219 billion proposed in the settlement agreements.
The adjustment made in the 2016 GRC PD for the extension of bonus depreciation represents the only significant change to the settlement agreements (the settling parties did not reach agreement on the matter relating to the income tax benefits associated with flow-through repair allowance deductions). This adjustment is incorporated as a rate base reduction and is included in the reduced revenue requirements, as described above.
Consistent with the settlement agreements, the 2016 GRC PD adopts subsequent annual escalation of the adopted revenue requirements by 3.5% for years 2017 and 2018 and continuation of the Z-Factor mechanism for qualifying cost recovery. The Z-Factor mechanism allows the California Utilities to seek cost recovery of significant cost increases, under certain unforeseen circumstances, incurred between GRC filings, subject to a $5 million deductible per event. The proposed decision also denies the separate agreement between the Office of Ratepayer Advocates (ORA), SDG&E and SoCalGas requesting a four-year GRC period and instead adopts a three-year GRC period (though 2018).
The 2016 GRC PD will result in certain accounting impacts associated with the income tax repairs allowance deduction matter. In general, the 2016 GRC PD considers that the income tax benefits obtained from income tax repairs deductions exceeded amounts forecasted by SDG&E and SoCalGas from 2011 to 2015, and that they were attributed to shareholders during that time. The 2016 GRC PD seeks to reallocate the economic benefit of this tax deduction forecasting difference to ratepayers. Accordingly, revenues corresponding to income tax repair deductions that exceeded forecasted amounts relating to 2015, which have been tracked in memorandum accounts, are ordered to be refunded to customers. The 2015 amounts total $72 million for SoCalGas and $37 million for SDG&E. Pursuant to this proposed refund requirement, we anticipate recording regulatory liabilities for these amounts in the second quarter of 2016, resulting in after-tax charges to earnings of $43 million and $22 million for SoCalGas and SDG&E, respectively. In addition, the 2016 GRC PD contemplates reducing rate base by $60 million at SoCalGas and $75 million at SDG&E, which will correspond to reductions in the 2016 revenue requirement of $7 million at SoCalGas and $9 million at SDG&E (which reductions are included in the adopted 2016 revenue requirement amounts described above). This rate base reduction is intended to mitigate the impact on ratepayers for the economic benefits associated with tax repair deductions that were previously provided to the shareholders for the period of 2012-2014 for SoCalGas and 2011-2014 for SDG&E. This rate base reduction will not result in an impairment of any of our reported assets, but will impact our revenues and earnings prospectively. The 2016 GRC PD also requires us to notify the CPUC if the 2012-2015 repairs deductions estimated in this GRC are different from the repairs deductions that SDG&E and SoCalGas ultimately claimed on their tax returns. Finally, the 2016 GRC PD requires the establishment of a two-way income tax expense memorandum account to record any revenue differences between the income tax expense forecasted in the GRC and the income tax expense incurred by SDG&E and SoCalGas during 2016 through 2018. The account will remain open, and the balance in the account will be reviewed in subsequent GRC proceedings until the CPUC decides to close the account.
The 2016 GRC PD contains ambiguities and inconsistencies as well as takes positions that we disagree with and we will work with the CPUC to address these matters in the final decision or earlier. There can be no assurance that the CPUC will make any changes to the 2016 GRC PD or that any changes that are made will reflect our current interpretations or properly address our disagreements. As a consequence, we may record further adverse adjustments to the amounts described above in the second quarter of 2016 or upon the final CPUC decision.
We expect a final CPUC decision, which will be made effective retroactive to January 1, 2016, in the second or third quarter of 2016. The financial impact of the final CPUC decision, retroactive to January 1, 2016, will be reflected in the California Utilities’ financial statements in the period in which the final CPUC decision is issued. However, certain financial impacts related to the income tax repairs allowance deduction matter, as discussed above, will be recorded in the second quarter of 2016. Because a final decision for the 2016 GRC was not issued by March 31, 2016, the California Utilities recorded revenues in the first quarter of 2016 based on levels authorized in 2015. To the extent the final CPUC decision differs from the 2016 GRC PD, we will adjust our accounting treatment accordingly.
We provide additional information regarding the 2016 GRC in Note 14 of the Notes to Consolidated Financial Statements in the combined Annual Report on Form 10-K for the year ended December 31, 2015 for Sempra Energy, SDG&E and SoCalGas, in Note 10 of the Notes to Condensed Consolidated Financial Statements in the combined Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (Form 10-Q), and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report and Form 10-Q.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this report that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are necessarily based upon assumptions with respect to the future, involve risks and uncertainties, and are not guarantees of performance. These forward-looking statements represent our estimates and assumptions only as of the filing date of this report. We assume no obligation to update or revise any forward-looking statement as a result of new information, future events or other factors.
In this report, when we use words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “contemplates,” “intends,” “assumes,” “depends,” “should,” “could,” “would,” “will,” “confident,” “may,” “potential,” “possible,” “proposed,” “target,” “pursue,” “goals,” “outlook,” “maintain,” or similar expressions, or when we discuss our guidance, strategy, plans, goals, opportunities, projections, initiatives, objectives or intentions, we are making forward-looking statements.
Factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include
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local, regional, national and international economic, competitive, political, legislative, legal and regulatory conditions, decisions and developments;
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actions and the timing of actions, including general rate case decisions, new regulations, issuances of permits to construct, operate, and maintain facilities and equipment and to use land, franchise agreements and licenses for operation, by the California Public Utilities Commission, California State Legislature, U.S. Department of Energy, California Division of Oil, Gas, and Geothermal Resources, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, California Energy Commission, U.S. Environmental Protection Agency, Pipeline and Hazardous Materials Safety Administration, California Air Resources Board, South Coast Air Quality Management District, Mexican Competition Commission, cities and counties, and other regulatory, governmental and environmental bodies in the United States and other countries in which we operate;
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the timing and success of business development efforts and construction, maintenance and capital projects, including risks in obtaining, maintaining or extending permits, licenses, certificates and other authorizations on a timely basis and risks in obtaining adequate and competitive financing for such projects;
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the resolution of civil and criminal litigation and regulatory investigations;
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deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers, and delays in regulatory agency authorization to recover costs in rates from customers;
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the availability of electric power, natural gas and liquefied natural gas, and natural gas pipeline and storage capacity, including disruptions caused by failures in the North American transmission grid, moratoriums on the ability to withdraw natural gas from or inject natural gas into storage facilities, pipeline explosions and equipment failures;
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energy markets; the timing and extent of changes and volatility in commodity prices; and the impact on the value of our natural gas storage and related assets and our investments from low natural gas prices, low volatility of natural gas prices and the inability to procure favorable long-term contracts for natural gas storage services;
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risks posed by decisions and actions of third parties who control the operations of investments in which we do not have a controlling interest, and risks that our partners or counterparties will be unable (due to liquidity issues, bankruptcy or otherwise) or unwilling to fulfill their contractual commitments;
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capital markets conditions, including the availability of credit and the liquidity of our investments, and inflation, interest and currency exchange rates;
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cybersecurity threats to the energy grid, natural gas storage and pipeline infrastructure, the information and systems used to operate our businesses and the confidentiality of our proprietary information and the personal information of our customers and employees; terrorist attacks that threaten system operations and critical infrastructure; and wars;
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the ability to win competitively bid infrastructure projects against a number of strong competitors willing to aggressively bid for these projects;
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weather conditions, natural disasters, catastrophic accidents, equipment failures and other events that may disrupt our operations, damage our facilities and systems, cause the release of greenhouse gasses, radioactive materials and harmful emissions, and subject us to third-party liability for property damage or personal injuries, fines and penalties, some of which may not be covered by insurance or may be disputed by insurers;
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disallowance of regulatory assets associated with, or decommissioning costs of, the San Onofre Nuclear Generating Station facility due to increased regulatory oversight, including motions to modify settlements;
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expropriation of assets by foreign governments and title and other property disputes;
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the impact on reliability of San Diego Gas & Electric Company’s (SDG&E) electric transmission and distribution system due to increased amount and variability of power supply from renewable energy sources and increased reliance on natural gas and natural gas transmission systems;
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the impact on competitive customer rates of the growth in distributed and local power generation and the corresponding decrease in demand for power delivered through SDG&E’s electric transmission and distribution system;
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the inability or determination not to enter into long-term supply and sales agreements or long-term firm capacity agreements due to insufficient market interest, unattractive pricing or other factors; and
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other uncertainties, all of which are difficult to predict and many of which are beyond our control.
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We caution you not to rely unduly on any forward-looking statements. You should review and consider carefully the risks, uncertainties and other factors that affect our business as described in this report and in our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on a combined basis for Sempra Energy, SDG&E and SoCalGas.