SEMPRA Material Event - What Happened

Hey there! Let's break down some news about Sempra, so you know what's going on and why it might matter to you. Think of this as me explaining it over coffee.

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1. What happened?

Okay, so Sempra, that big energy company, just announced a couple of significant updates regarding its California utilities, San Diego Gas & Electric (SDG&E) and Southern California Gas (SoCalGas), following decisions from the California Public Utilities Commission (CPUC).

First, the CPUC approved a final decision on the 'Cost of Capital' for SDG&E and SoCalGas. This is good news because it means they'll be allowed to earn a slightly higher return on their investments – specifically, their authorized return on equity (ROE) was increased by 5 basis points (that's 0.05%).

Second, and a bit more complicated, the CPUC didn't vote on a proposed decision related to SDG&E's 2024 General Rate Case (specifically, a 'Track 2' request). If this proposed decision were to become final as is, SDG&E estimates it would lead to a $471 million after-tax charge to Sempra's earnings in the fourth quarter of 2025. A big chunk of this ($437 million) relates to past years (2019-2024), and the rest ($34 million) to the first three quarters of 2025. SDG&E is still actively working through the regulatory process to improve this outcome.

Despite this potential charge, Sempra also updated its earnings outlook. They're now guiding to the high end of their previously announced adjusted earnings per share (EPS) range for 2025 ($4.30-$4.70) and are affirming their 2026 adjusted EPS guidance ($4.80-$5.30). However, their GAAP (standard accounting) EPS guidance for 2025 is lower, reflecting that potential $471 million charge.

2. When did it happen?

This news officially broke on December 18, 2023, when Sempra, SDG&E, and SoCalGas filed an update with the SEC.

3. Why did it happen?

Good question! These events stem from the ongoing regulatory process in California, specifically decisions made by the California Public Utilities Commission (CPUC).

• The Cost of Capital decision is a routine regulatory review where the CPUC determines the fair rate of return utilities like SDG&E and SoCalGas can earn on their investments. A slightly higher return helps them cover costs and invest in infrastructure.
• The Track 2 proposed decision is part of a larger 'General Rate Case' for SDG&E, which is how the utility gets approval for its operating expenses and capital investments, and ultimately, the rates it charges customers. This specific proposed decision likely relates to how certain past costs or investments are accounted for or recovered, leading to the potential charge.

4. Why does this matter?

This isn't just some boring corporate announcement; it actually has some real-world implications.

• Financial Hit (Potential): The estimated $471 million charge is a significant amount of money, which would impact Sempra's reported earnings for 2025 under standard accounting rules (GAAP).
• Regulatory Environment: It highlights the constant back-and-forth with regulators like the CPUC, which heavily influences how much profit utilities can make and how they recover costs.
• Mixed Signals: While there's a big potential charge, the slightly higher authorized return on equity is a positive, and Sempra's confidence in its adjusted earnings guidance (even hitting the high end for 2025) suggests they believe the underlying business performance remains strong, or that the market should look past the one-time charge for adjusted earnings.

5. Who is affected?

When big companies make big moves, different groups of people feel it in different ways:

• Customers: For customers of SDG&E and SoCalGas, there's likely no direct, immediate change from these specific announcements. However, regulatory decisions like these ultimately influence future utility rates and the quality of service, as they determine how much the utilities can invest and recover.
• Employees: The company's filing didn't mention any direct impact on employees from these specific decisions.
• Investors/Shareholders: This is a big one for investors.
  • The potential $471 million charge will significantly reduce Sempra's reported GAAP earnings for 2025.
  • However, the improved Cost of Capital decision is a long-term positive.
  • Sempra's updated guidance, especially affirming adjusted EPS, provides some reassurance, but investors will be watching closely for the final outcome of the Track 2 decision and how it affects future profitability and dividends.
• Local Communities: The financial health of SDG&E and SoCalGas, influenced by these regulatory decisions, impacts their ability to invest in infrastructure, safety, and community programs in San Diego and Southern California.

6. What happens next?

This isn't the end of the story. Here's what we can expect to see unfold:

• Track 2 Decision: The most immediate thing to watch is the final decision on SDG&E's Track 2 request. The CPUC didn't vote on it yet, and SDG&E is actively trying to improve the outcome. A final decision is expected in 2026. The actual charge could be different depending on that final vote.
• Earnings Calls: Sempra's upcoming earnings calls will be crucial for more details on the financial impact and their strategy moving forward, especially regarding the $471 million estimate.
• Regulatory Landscape: Sempra will continue to navigate the complex California regulatory environment, which will always be a key factor for its California utilities.

7. What should investors/traders know?

If you're looking at Sempra stock or just following the market, here are a few things to keep in mind:

• GAAP vs. Adjusted Earnings: Understand the difference. The $471 million charge will hit GAAP earnings hard in Q4 2025, but Sempra is still guiding to the high end of its adjusted EPS for 2025 and affirming 2026. Adjusted earnings often exclude one-time items like this charge, which some investors focus on for the company's ongoing performance.
• Uncertainty Remains: The $471 million charge is an estimate based on a proposed decision that hasn't been finalized. There's still a chance for the outcome to change, which could impact the final financial hit.
• Regulatory Risk: This event underscores the significant regulatory risk associated with utility companies, especially in California. Positive and negative decisions from the CPUC can have substantial financial implications.
• Long-term View: The slight increase in authorized return on equity is a positive for the long-term profitability of SDG&E and SoCalGas, even if overshadowed by the potential charge in the short term.

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Hope that helps clear things up! This kind of news shows how regulatory decisions can really shape a company's financial picture, especially for utilities. Keep an eye on those future CPUC decisions and Sempra's earnings updates for the full story.