Sempra Energy/SDG&E/PE/SoCalGas 1st Qtr 2011 10-Q
 
 
 
 



  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2011
   
 
or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
   
to
 
     
 
Commission File No.
Exact Name of Registrants as Specified in their Charters, Address and Telephone Number
States of Incorporation
I.R.S. Employer
Identification Nos.
Former name, former address and former fiscal year, if changed since last report
1-14201
SEMPRA ENERGY
California
33-0732627
No change
 
101 Ash Street
     
 
San Diego, California 92101
     
 
(619)696-2000
     
         
1-3779
SAN DIEGO GAS & ELECTRIC COMPANY
California
95-1184800
No change
 
8326 Century Park Court
     
 
San Diego, California 92123
     
 
(619)696-2000
     
         
1-40
PACIFIC ENTERPRISES
California
94-0743670
No change
 
101 Ash Street
     
 
San Diego, California 92101
     
 
(619)696-2020
     
         
1-1402
SOUTHERN CALIFORNIA GAS COMPANY
California
95-1240705
No change
 
555 West Fifth Street
     
 
Los Angeles, California 90013
     
 
(213)244-1200
     
         
 
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
           
 
Yes
X
 
No
 

 
 
 
 


 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).
           
Sempra Energy
Yes
X
 
No
 
San Diego Gas & Electric Company
Yes
   
No
 
Pacific Enterprises
Yes
   
No
 
Southern California Gas Company
Yes
   
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
Large
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Sempra Energy
[  X  ]
[      ]
[       ]
[      ]
San Diego Gas & Electric Company
[       ]
[      ]
[  X  ]
[      ]
Pacific Enterprises
[       ]
[      ]
[  X  ]
[      ]
Southern California Gas Company
[       ]
[      ]
[  X  ]
[      ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
           
Sempra Energy
Yes
   
No
X
San Diego Gas & Electric Company
Yes
   
No
X
Pacific Enterprises
Yes
   
No
X
Southern California Gas Company
Yes
   
No
X
           
Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date.
           
Common stock outstanding on May 5, 2011:
         
           
Sempra Energy
239,445,387 shares
San Diego Gas & Electric Company
Wholly owned by Enova Corporation, which is wholly owned by Sempra Energy
Pacific Enterprises
Wholly owned by Sempra Energy
Southern California Gas Company
Wholly owned by Pacific Enterprises, which is wholly owned by Sempra Energy
 
 
 

 
 
 
 


SEMPRA ENERGY FORM 10-Q
SAN DIEGO GAS & ELECTRIC COMPANY FORM 10-Q
PACIFIC ENTERPRISES FORM 10-Q
SOUTHERN CALIFORNIA GAS COMPANY FORM 10-Q
TABLE OF CONTENTS
 
 
Page
Information Regarding Forward-Looking Statements
4
   
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
62
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
83
Item 4.
Controls and Procedures
84
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
85
Item 1A.
Risk Factors
85
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
85
Item 6.
Exhibits
86
     
Signatures
89
     

This combined Form 10-Q is separately filed by Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.

You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Part I - Item 1 sections are provided for each reporting company, except for the Notes to Condensed Consolidated Financial Statements. The Notes to Condensed Consolidated Financial Statements for all of the reporting companies are combined. All Items other than Part I – Item 1 are combined for the reporting companies.

 
 
 
 



 

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 date of this report.
 
In this report, when we use words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "contemplates," "intends," "depends," "should," "could," "would," "will," "may," "potential," "target," "goals," or similar expressions, or when we discuss our strategy, plans 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
 
§  
local, regional, national and international economic, competitive, political, legislative and regulatory conditions and developments;
 
§  
actions by the California Public Utilities Commission, California State Legislature, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, California Energy Commission, California Air Resources Board, and other regulatory, governmental and environmental bodies in the United States and other countries in which we operate;
 
§  
capital markets conditions and inflation, interest and exchange rates;
 
§  
energy markets, including the timing and extent of changes and volatility in commodity prices;
 
§  
the availability of electric power, natural gas and liquefied natural gas;
 
§  
weather conditions and conservation efforts;
 
§  
war and terrorist attacks;
 
§  
business, regulatory, environmental and legal decisions and requirements;
 
§  
the status of deregulation of retail natural gas and electricity delivery;
 
§  
the timing and success of business development efforts;
 
§  
the resolution of litigation; and
 
§  
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
 
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 Annual Report on Form 10-K and other reports that we file with the Securities and Exchange Commission.
 

 
 
 
 


 
 
 
 

PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 

SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
 
 
 
Three months ended March 31,
 
2011 
2010 
 
(unaudited)
REVENUES
 
 
 
 
Sempra Utilities
$
 1,881 
$
 1,912 
Sempra Global and parent
 
 553 
 
 622 
    Total revenues
 
 2,434 
 
 2,534 
EXPENSES AND OTHER INCOME
 
 
 
 
Sempra Utilities:
 
 
 
 
    Cost of natural gas
 
 (609)
 
 (758)
    Cost of electric fuel and purchased power
 
 (171)
 
 (148)
Sempra Global and parent:
 
 
 
 
    Cost of natural gas, electric fuel and purchased power
 
 (263)
 
 (338)
    Other cost of sales
 
 (23)
 
 (25)
Litigation expense
 
 (7)
 
 (168)
Other operation and maintenance
 
 (632)
 
 (576)
Depreciation and amortization
 
 (231)
 
 (210)
Franchise fees and other taxes
 
 (95)
 
 (90)
Equity earnings, before income tax
 
 1 
 
 15 
Other income, net
 
 43 
 
 8 
Interest income
 
 3 
 
 4 
Interest expense
 
 (108)
 
 (109)
Income before income taxes and equity earnings
 
 
 
 
    of certain unconsolidated subsidiaries
 
 342 
 
 139 
Income tax expense
 
 (109)
 
 (58)
Equity earnings, net of income tax
 
 31 
 
 19 
Net income
 
 264 
 
 100 
(Earnings) losses attributable to noncontrolling interests
 
 (4)
 
 8 
Preferred dividends of subsidiaries
 
 (2)
 
 (2)
Earnings
$
 258 
$
 106 
 
 
 
 
 
Basic earnings per common share
$
 1.07 
$
 0.43 
Weighted-average number of shares outstanding, basic (thousands)
 
 240,128 
 
 246,083 
 
 
 
 
 
Diluted earnings per common share
$
 1.07 
$
 0.42 
Weighted-average number of shares outstanding, diluted (thousands)
 
 241,903 
 
 250,373 
Dividends declared per share of common stock
$
 0.48 
$
 0.39 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
2011 
2010(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 1,219 
$
 912 
    Restricted cash
 
 318 
 
 131 
    Trade accounts receivable
 
 922 
 
 891 
    Other accounts and notes receivable
 
 136 
 
 141 
    Due from unconsolidated affiliates
 
 17 
 
 34 
    Income taxes receivable
 
 261 
 
 248 
    Deferred income taxes
 
 36 
 
 75 
    Inventories
 
 176 
 
 258 
    Regulatory assets
 
 73 
 
 90 
    Fixed-price contracts and other derivatives
 
 97 
 
 81 
    Settlement receivable related to wildfire litigation
 
 ― 
 
 300 
    Other
 
 171 
 
 192 
        Total current assets
 
 3,426 
 
 3,353 
 
 
 
 
 
 
Investments and other assets:
 
 
 
 
    Restricted cash
 
 ― 
 
 27 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 885 
 
 869 
    Regulatory assets arising from wildfire litigation costs
 
 348 
 
 364 
    Other regulatory assets
 
 932 
 
 934 
    Nuclear decommissioning trusts
 
 796 
 
 769 
    Investment in RBS Sempra Commodities LLP
 
 779 
 
 787 
    Other investments
 
 2,163 
 
 2,164 
    Goodwill and other intangible assets
 
 537 
 
 540 
    Sundry
 
 630 
 
 600 
        Total investments and other assets
 
 7,070 
 
 7,054 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 27,556 
 
 27,087 
    Less accumulated depreciation and amortization
 
 (7,356)
 
 (7,211)
        Property, plant and equipment, net ($510 and $516 at March 31, 2011 and
            December 31, 2010, respectively, related to VIE)
 
 20,200 
 
 19,876 
Total assets
$
 30,696 
$
 30,283 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
2011 
2010(1)
 
 
(unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Short-term debt
$
 566 
$
 158 
    Accounts payable - trade
 
 607 
 
 755 
    Accounts payable - other
 
 102 
 
 109 
    Due to unconsolidated affiliates
 
 37 
 
 36 
    Dividends and interest payable
 
 251 
 
 188 
    Accrued compensation and benefits
 
 211 
 
 311 
    Regulatory balancing accounts, net
 
 379 
 
 241 
    Current portion of long-term debt
 
 89 
 
 349 
    Fixed-price contracts and other derivatives
 
 91 
 
 106 
    Customer deposits
 
 131 
 
 129 
    Reserve for wildfire litigation
 
 489 
 
 639 
    Other
 
 701 
 
 765 
        Total current liabilities
 
 3,654 
 
 3,786 
Long-term debt ($352 and $355 at March 31, 2011 and December 31, 2010, respectively,
        related to VIE)
 
 9,174 
 
 8,980 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 132 
 
 154 
    Pension and other postretirement benefit obligations, net of plan assets
 
 1,114 
 
 1,105 
    Deferred income taxes
 
 1,633 
 
 1,561 
    Deferred investment tax credits
 
 49 
 
 50 
    Regulatory liabilities arising from removal obligations
 
 2,671 
 
 2,630 
    Asset retirement obligations
 
 1,469 
 
 1,449 
    Other regulatory liabilities
 
 130 
 
 138 
    Fixed-price contracts and other derivatives
 
 285 
 
 290 
    Deferred credits and other
 
 903 
 
 823 
        Total deferred credits and other liabilities
 
 8,386 
 
 8,200 
Contingently redeemable preferred stock of subsidiary
 
 79 
 
 79 
 
 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
    Preferred stock (50 million shares authorized; none issued)
 
 ― 
 
 ― 
    Common stock (750 million shares authorized; 239 million and 240 million shares
 
 
 
 
        outstanding at March 31, 2011 and December 31, 2010, respectively; no par
 
 
 
 
        value)
 
 2,052 
 
 2,036 
    Retained earnings
 
 7,472 
 
 7,329 
    Deferred compensation
 
 (6)
 
 (8)
    Accumulated other comprehensive income (loss)
 
 (332)
 
 (330)
        Total Sempra Energy shareholders' equity
 
 9,186 
 
 9,027 
    Preferred stock of subsidiaries
 
 100 
 
 100 
    Other noncontrolling interests
 
 117 
 
 111 
        Total equity
 
 9,403 
 
 9,238 
Total liabilities and equity
$
 30,696 
$
 30,283 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended
March 31,
 
2011 
2010 
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 264 
$
 100 
    Adjustments to reconcile net income to net cash provided
 
 
 
 
        by operating activities:
 
 
 
 
            Depreciation and amortization
 
 231 
 
 210 
            Deferred income taxes and investment tax credits
 
 88 
 
 61 
            Equity earnings
 
 (32)
 
 (34)
            Fixed-price contracts and other derivatives
 
 (9)
 
 ― 
            Other
 
 (13)
 
 7 
    Net change in other working capital components
 
 286 
 
 534 
    Changes in other assets
 
 (5)
 
 18 
    Changes in other liabilities
 
 (5)
 
 (8)
        Net cash provided by operating activities
 
 805 
 
 888 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (607)
 
 (446)
    Expenditures for investments
 
 (4)
 
 (74)
    Distributions from investments
 
 21 
 
 24 
    Purchases of nuclear decommissioning and other trust assets
 
 (45)
 
 (44)
    Proceeds from sales by nuclear decommissioning and other trusts
 
 46 
 
 46 
    Decrease in restricted cash
 
 160 
 
 14 
    Increase in restricted cash
 
 (320)
 
 (23)
    Other
 
 (7)
 
 7 
        Net cash used in investing activities
 
 (756)
 
 (496)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Common dividends paid
 
 (94)
 
 (86)
    Preferred dividends paid by subsidiaries
 
 (2)
 
 (2)
    Issuances of common stock
 
 15 
 
 14 
    Repurchases of common stock
 
 (18)
 
 (2)
    Issuances of debt (maturities greater than 90 days)
 
 803 
 
 12 
    Payments on debt (maturities greater than 90 days)
 
 (260)
 
 (507)
    (Decrease) increase in short-term debt, net
 
 (192)
 
 294 
    Other
 
 6 
 
 (3)
        Net cash provided by (used in)  financing activities
 
 258 
 
 (280)
 
 
 
 
 
Increase in cash and cash equivalents
 
 307 
 
 112 
Cash and cash equivalents, January 1
 
 912 
 
 110 
Cash and cash equivalents, March 31
$
 1,219 
$
 222 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SEMPRA ENERGY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended
March 31,
 
2011 
2010 
 
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 63 
$
 71 
    Income tax payments (refunds), net
 
 37 
 
 (73)
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 233 
$
 191 
    Dividends declared but not paid
 
 118 
 
 99 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 

SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
 
 
Three months ended March 31,
 
2011 
2010 
 
(unaudited)
Operating revenues
 
 
 
 
    Electric
$
 665 
$
 563 
    Natural gas
 
 175 
 
 179 
        Total operating revenues
 
 840 
 
 742 
Operating expenses
 
 
 
 
    Cost of electric fuel and purchased power
 
 171 
 
 148 
    Cost of natural gas
 
 83 
 
 89 
    Operation and maintenance
 
 273 
 
 232 
    Depreciation and amortization
 
 103 
 
 92 
    Franchise fees and other taxes
 
 47 
 
 43 
        Total operating expenses
 
 677 
 
 604 
Operating income
 
 163 
 
 138 
Other income, net
 
 16 
 
 ― 
Interest expense
 
 (36)
 
 (31)
Income before income taxes
 
 143 
 
 107 
Income tax expense
 
 (49)
 
 (31)
Net income
 
 94 
 
 76 
(Earnings) losses attributable to noncontrolling interests
 
 (4)
 
 8 
Earnings
 
 90 
 
 84 
Preferred dividend requirements
 
 (1)
 
 (1)
Earnings attributable to common shares
$
 89 
$
 83 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 272 
$
 127 
    Restricted cash
 
 318 
 
 116 
    Accounts receivable - trade
 
 266 
 
 248 
    Accounts receivable - other
 
 34 
 
 59 
    Due from unconsolidated affiliates
 
 1 
 
 12 
    Income taxes receivable
 
 59 
 
 37 
    Deferred income taxes
 
 113 
 
 129 
    Inventories
 
 67 
 
 71 
    Regulatory assets arising from fixed-price contracts and other derivatives
 
 54 
 
 66 
    Other regulatory assets
 
 6 
 
 5 
    Fixed-price contracts and other derivatives
 
 35 
 
 28 
    Settlement receivable related to wildfire litigation
 
 ― 
 
 300 
    Other
 
 38 
 
 50 
        Total current assets
 
 1,263 
 
 1,248 
 
 
 
 
 
 
Other assets:
 
 
 
 
    Deferred taxes recoverable in rates
 
 514 
 
 502 
    Regulatory assets arising from fixed-price contracts and other derivatives
 
 220 
 
 233 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 285 
 
 279 
    Regulatory assets arising from wildfire litigation costs
 
 348 
 
 364 
    Other regulatory assets
 
 72 
 
 73 
    Nuclear decommissioning trusts
 
 796 
 
 769 
    Sundry
 
 85 
 
 56 
        Total other assets
 
 2,320 
 
 2,276 
 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 11,551 
 
 11,247 
    Less accumulated depreciation and amortization
 
 (2,744)
 
 (2,694)
        Property, plant and equipment, net ($510 and $516 at March 31, 2011 and
            December 31, 2010, respectively, related to VIE)
 
 8,807 
 
 8,553 
Total assets
$
 12,390 
$
 12,077 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Accounts payable
$
 269 
$
 292 
    Due to unconsolidated affiliates
 
 44 
 
 16 
    Accrued compensation and benefits
 
 59 
 
 115 
    Regulatory balancing accounts, net
 
 72 
 
 61 
    Current portion of long-term debt
 
 19 
 
 19 
    Fixed-price contracts and other derivatives
 
 50 
 
 51 
    Customer deposits
 
 55 
 
 54 
    Reserve for wildfire litigation
 
 489 
 
 639 
    Other
 
 168 
 
 136 
        Total current liabilities
 
 1,225 
 
 1,383 
Long-term debt ($352 and $355 at March 31, 2011 and December 31, 2010,
    respectively, related to VIE)
 
 3,474 
 
 3,479 
 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 21 
 
 21 
    Pension and other postretirement benefit obligations, net of plan assets
 
 315 
 
 309 
    Deferred income taxes
 
 1,073 
 
 1,001 
    Deferred investment tax credits
 
 24 
 
 25 
    Regulatory liabilities arising from removal obligations
 
 1,443 
 
 1,409 
    Asset retirement obligations
 
 628 
 
 619 
    Fixed-price contracts and other derivatives
 
 236 
 
 248 
    Deferred credits and other
 
 356 
 
 283 
        Total deferred credits and other liabilities
 
 4,096 
 
 3,915 
Contingently redeemable preferred stock
 
 79 
 
 79 
 
 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
    Common stock (255 million shares authorized; 117 million shares outstanding;
 
 
 
 
        no par value)
 
 1,338 
 
 1,138 
    Retained earnings
 
 2,069 
 
 1,980 
    Accumulated other comprehensive income (loss)
 
 (10)
 
 (10)
        Total SDG&E shareholder's equity
 
 3,397 
 
 3,108 
    Noncontrolling interest
 
 119 
 
 113 
        Total equity
 
 3,516 
 
 3,221 
Total liabilities and equity
$
 12,390 
$
 12,077 
(1)
Derived from audited financial statements.
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SAN DIEGO GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended
 
March 31,
 
2011 
2010
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 94 
$
 76 
    Adjustments to reconcile net income to net cash provided by
 
 
 
 
        operating activities:
 
 
 
 
            Depreciation and amortization
 
 103 
 
 92 
            Deferred income taxes and investment tax credits
 
 75 
 
 9 
            Fixed price contracts and other derivatives
 
 (4)
 
 ― 
            Other
 
 (12)
 
 ― 
    Net change in other working capital components
 
 241 
 
 101 
    Changes in other assets
 
 7 
 
 5 
    Changes in other liabilities
 
 (3)
 
 (8)
        Net cash provided by operating activities
 
 501 
 
 275 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (348)
 
 (290)
    Purchases of nuclear decommissioning trust assets
 
 (44)
 
 (43)
    Proceeds from sales by nuclear decommissioning trusts
 
 42 
 
 40 
    Decrease in loans to affiliates, net
 
 ― 
 
 2 
    Decrease in restricted cash
 
 109 
 
 14 
    Increase in restricted cash
 
 (311)
 
 (23)
        Net cash used in investing activities
 
 (552)
 
 (300)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Capital contribution
 
 200 
 
 ― 
    Preferred dividends paid
 
 (1)
 
 (1)
    Issuances of long-term debt
 
 ― 
 
 3 
    Payments on long-term debt
 
 (3)
 
 (3)
    Increase in short-term debt, net
 
 ― 
 
 27 
        Net cash provided by financing activities
 
 196 
 
 26 
 
 
 
 
 
Increase in cash and cash equivalents
 
 145 
 
 1 
Cash and cash equivalents, January 1
 
 127 
 
 13 
Cash and cash equivalents, March 31
$
 272 
$
 14 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 17 
$
 10 
    Income tax payments (refunds), net
 
 24 
 
 (26)
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 145 
$
 80 
    Dividends declared but not paid
 
 1 
 
 1 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
 
 
Three months ended March 31,
 
2011 
2010 
 
(unaudited)
 
 
 
 
 
Operating revenues
$
 1,056 
$
 1,182 
Operating expenses
 
 
 
 
    Cost of natural gas
 
 531 
 
 674 
    Operation and maintenance
 
 288 
 
 261 
    Depreciation
 
 81 
 
 75 
    Franchise fees and other taxes
 
 37 
 
 37 
        Total operating expenses
 
 937 
 
 1,047 
Operating income
 
 119 
 
 135 
Other income, net
 
 3 
 
 4 
Interest expense
 
 (17)
 
 (17)
Income before income taxes
 
 105 
 
 122 
Income tax expense
 
 (37)
 
 (57)
Net income/Earnings
 
 68 
 
 65 
Preferred dividend requirements
 
 (1)
 
 (1)
Earnings attributable to common shares
$
 67 
$
 64 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 33 
$
 417 
    Accounts receivable - trade
 
 521 
 
 534 
    Accounts receivable - other
 
 63 
 
 49 
    Due from unconsolidated affiliates
 
 383 
 
 68 
    Income taxes receivable
 
 13 
 
 36 
    Inventories
 
 28 
 
 105 
    Regulatory assets
 
 10 
 
 12 
    Other
 
 37 
 
 39 
        Total current assets
 
 1,088 
 
 1,260 
 
 
 
 
 
Other assets:
 
 
 
 
    Due from unconsolidated affiliate
 
 505 
 
 502 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 596 
 
 586 
    Other regulatory assets
 
 124 
 
 123 
    Sundry
 
 49 
 
 36 
        Total other assets
 
 1,274 
 
 1,247 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 9,944 
 
 9,826 
    Less accumulated depreciation and amortization
 
 (3,854)
 
 (3,802)
        Property, plant and equipment, net
 
 6,090 
 
 6,024 
Total assets
$
 8,452 
$
 8,531 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Accounts payable - trade
$
 234 
$
 327 
    Accounts payable - other
 
 71 
 
 79 
    Due to unconsolidated affiliates
 
 85 
 
 96 
    Deferred income taxes
 
 27 
 
 16 
    Accrued compensation and benefits
 
 76 
 
 98 
    Regulatory balancing accounts, net
 
 307 
 
 180 
    Current portion of long-term debt
 
 9 
 
 262 
    Customer deposits
 
 73 
 
 73 
    Temporary LIFO liquidation
 
 66 
 
 ― 
    Other
 
 187 
 
 163 
        Total current liabilities
 
 1,135 
 
 1,294 
Long-term debt
 
 1,318 
 
 1,320 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 111 
 
 133 
    Pension and other postretirement benefit obligations, net of plan assets
 
 625 
 
 613 
    Deferred income taxes
 
 462 
 
 416 
    Deferred investment tax credits
 
 25 
 
 25 
    Regulatory liabilities arising from removal obligations
 
 1,216 
 
 1,208 
    Asset retirement obligations
 
 798 
 
 788 
    Deferred taxes refundable in rates
 
 130 
 
 138 
    Deferred credits and other
 
 199 
 
 180 
        Total deferred credits and other liabilities
 
 3,566 
 
 3,501 
 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
    Preferred stock
 
 80 
 
 80 
    Common stock (600 million shares authorized; 84 million shares outstanding;
 
 
 
 
        no par value)
 
 1,462 
 
 1,462 
    Retained earnings
 
 893 
 
 876 
    Accumulated other comprehensive income (loss)
 
 (22)
 
 (22)
        Total Pacific Enterprises shareholders' equity
 
 2,413 
 
 2,396 
    Preferred stock of subsidiary
 
 20 
 
 20 
        Total equity
 
 2,433 
 
 2,416 
Total liabilities and equity
$
 8,452 
$
 8,531 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended March 31,
 
2011 
2010
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 68 
$
 65 
    Adjustments to reconcile net income to net cash provided by
 
 
 
 
        operating activities:
 
 
 
 
            Depreciation
 
 81 
 
 75 
            Deferred income taxes and investment tax credits
 
 48 
 
 16 
            Other
 
 (2)
 
 (1)
    Net change in other working capital components
 
 177 
 
 339 
    Changes in other assets
 
 12 
 
 1 
    Changes in other liabilities
 
 (4)
 
 (3)
        Net cash provided by operating activities
 
 380 
 
 492 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (168)
 
 (114)
    Increase in loans to affiliates, net
 
 (295)
 
 (146)
        Net cash used in investing activities
 
 (463)
 
 (260)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Common dividends paid
 
 (50)
 
 (100)
    Preferred dividends paid
 
 (1)
 
 (1)
    Payment of long-term debt
 
 (250)
 
 ― 
        Net cash used in financing activities
 
 (301)
 
 (101)
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
 (384)
 
 131 
Cash and cash equivalents, January 1
 
 417 
 
 49 
Cash and cash equivalents, March 31
$
 33 
$
 180 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 8 
$
 9 
    Income tax refunds, net
 
 14 
 
 23 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Dividends declared but not paid
$
 1 
$
 1 
    Accrued capital expenditures
 
 76 
 
 52 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
 
 
 
Three months ended March 31,
 
2011 
2010 
 
(unaudited)
 
 
 
 
 
Operating revenues
$
 1,056 
$
 1,182 
Operating expenses
 
 
 
 
    Cost of natural gas
 
 531 
 
 674 
    Operation and maintenance
 
 288 
 
 262 
    Depreciation
 
 81 
 
 75 
    Franchise fees and other taxes
 
 37 
 
 37 
        Total operating expenses
 
 937 
 
 1,048 
Operating income
 
 119 
 
 134 
Other income, net
 
 3 
 
 4 
Interest expense
 
 (17)
 
 (17)
Income before income taxes
 
 105 
 
 121 
Income tax expense
 
 (37)
 
 (56)
Net income/Earnings attributable to common shares
$
 68 
$
 65 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$
 33 
$
 417 
    Accounts receivable - trade
 
 521 
 
 534 
    Accounts receivable - other
 
 63 
 
 49 
    Due from unconsolidated affiliates
 
 378 
 
 63 
    Income taxes receivable
 
 9 
 
 28 
    Inventories
 
 28 
 
 105 
    Regulatory assets
 
 10 
 
 12 
    Other
 
 36 
 
 39 
        Total current assets
 
 1,078 
 
 1,247 
 
 
 
 
 
Other assets:
 
 
 
 
    Regulatory assets arising from pension and other postretirement
 
 
 
 
        benefit obligations
 
 596 
 
 586 
    Other regulatory assets
 
 124 
 
 123 
    Sundry
 
 22 
 
 8 
        Total other assets
 
 742 
 
 717 
 
 
 
 
 
Property, plant and equipment:
 
 
 
 
    Property, plant and equipment
 
 9,942 
 
 9,824 
    Less accumulated depreciation and amortization
 
 (3,854)
 
 (3,802)
        Property, plant and equipment, net
 
 6,088 
 
 6,022 
Total assets
$
 7,908 
$
 7,986 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
 
March 31,
December 31,
 
 
2011 
2010(1)
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
    Accounts payable - trade
$
 234 
$
 327 
    Accounts payable - other
 
 71 
 
 79 
    Due to unconsolidated affiliate
 
 ― 
 
 11 
    Deferred income taxes
 
 28 
 
 17 
    Accrued compensation and benefits
 
 76 
 
 98 
    Regulatory balancing accounts, net
 
 307 
 
 180 
    Current portion of long-term debt
 
 9 
 
 262 
    Customer deposits
 
 73 
 
 73 
    Temporary LIFO liquidation
 
 66 
 
 ― 
    Other
 
 186 
 
 163 
        Total current liabilities
 
 1,050 
 
 1,210 
Long-term debt
 
 1,318 
 
 1,320 
Deferred credits and other liabilities:
 
 
 
 
    Customer advances for construction
 
 111 
 
 133 
    Pension and other postretirement benefit obligations, net of plan assets
 
 625 
 
 613 
    Deferred income taxes
 
 464 
 
 418 
    Deferred investment tax credits
 
 25 
 
 25 
    Regulatory liabilities arising from removal obligations
 
 1,216 
 
 1,208 
    Asset retirement obligations
 
 798 
 
 788 
    Deferred taxes refundable in rates
 
 130 
 
 138 
    Deferred credits and other
 
 198 
 
 178 
        Total deferred credits and other liabilities
 
 3,567 
 
 3,501 
 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
    Preferred stock
 
 22 
 
 22 
    Common stock (100 million shares authorized; 91 million shares outstanding;
 
 
 
 
        no par value)
 
 866 
 
 866 
    Retained earnings
 
 1,107 
 
 1,089 
    Accumulated other comprehensive income (loss)
 
 (22)
 
 (22)
        Total shareholders' equity
 
 1,973 
 
 1,955 
Total liabilities and shareholders' equity
$
 7,908 
$
 7,986 
(1)
Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Three months ended March 31,
 
2011 
2010 
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
    Net income
$
 68 
$
 65 
    Adjustments to reconcile net income to net cash provided by
 
 
 
 
        operating activities:
 
 
 
 
            Depreciation
 
 81 
 
 75 
            Deferred income taxes and investment tax credits
 
 48 
 
 16 
            Other
 
 (2)
 
 (1)
    Net change in other working capital components
 
 168 
 
 346 
    Changes in other assets
 
 12 
 
 1 
    Changes in other liabilities
 
 (4)
 
 (1)
        Net cash provided by operating activities
 
 371 
 
 501 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
    Expenditures for property, plant and equipment
 
 (168)
 
 (114)
    Increase in loans to affiliates, net
 
 (287)
 
 (156)
        Net cash used in investing activities
 
 (455)
 
 (270)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
    Common dividends paid
 
 (50)
 
 (100)
    Payment of long-term debt
 
 (250)
 
 ― 
        Net cash used in financing activities
 
 (300)
 
 (100)
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
 (384)
 
 131 
Cash and cash equivalents, January 1
 
 417 
 
 49 
Cash and cash equivalents, March 31
$
 33 
$
 180 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
    Interest payments, net of amounts capitalized
$
 8 
$
 9 
    Income tax refunds, net
 
 14 
 
 23 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
 
 
 
 
    Accrued capital expenditures
$
 76 
$
 52 
See Notes to Condensed Consolidated Financial Statements.

 
 
 
 


 
 
 
 

SEMPRA ENERGY AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1. GENERAL
 

 
PRINCIPLES OF CONSOLIDATION
 
 
Sempra Energy
 
Sempra Energy's Condensed Consolidated Financial Statements include the accounts of Sempra Energy, a California-based Fortune 500 holding company, and its consolidated subsidiaries and a variable interest entity (VIE). Sempra Energy’s principal subsidiaries are
 
§  
San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), which we collectively refer to as the Sempra Utilities; and
 
§  
Sempra Global, which is the holding company for Sempra Generation, Sempra Pipelines & Storage and Sempra LNG.
 
Sempra Energy uses the equity method to account for investments in affiliated companies over which we have the ability to exercise significant influence, but not control. We discuss our investments in unconsolidated subsidiaries in Note 4 below and Note 4 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
 
SDG&E
 
SDG&E's Condensed Consolidated Financial Statements include its accounts and the accounts of a VIE of which SDG&E is the primary beneficiary, as we discuss in Note 5 under "Variable Interest Entities." SDG&E’s common stock is wholly owned by Enova Corporation, which is a wholly owned subsidiary of Sempra Energy.
 
 
Pacific Enterprises and SoCalGas
 
Pacific Enterprise’s Condensed Consolidated Financial Statements include the accounts of Pacific Enterprises (PE) and its subsidiary, SoCalGas.  Sempra Energy owns all of PE’s common stock and PE owns all of SoCalGas’ common stock. SoCalGas’ Condensed Consolidated Financial Statements include its subsidiaries, which comprise less than one percent of its consolidated financial position and results of operations.
 
PE's operations consist solely of those of SoCalGas and additional items (e.g., cash, intercompany accounts and equity) attributable to serving as a holding company for SoCalGas.
 
 
BASIS OF PRESENTATION
 
This is a combined report of Sempra Energy, SDG&E, PE and SoCalGas. We provide separate information for SDG&E, PE and SoCalGas as required. In the Notes to Condensed Consolidated Financial Statements (except in Note 11), when only information for SoCalGas is provided, it is the same for PE. References in this report to "we," "our" and "Sempra Energy Consolidated" are to Sempra Energy and its consolidated entities, unless otherwise indicated by the context. We have eliminated intercompany accounts and transactions within the consolidated financial statements of each reporting entity.
 
We have prepared the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the interim-period-reporting requirements of Form 10-Q. Results of operations for interim periods are not necessarily indicative of results for the entire year. We evaluated events and transactions that occurred after March 31, 2011 through the date the financial statements were issued, and in the opinion of management, the accompanying statements reflect all adjustments necessary for a fair presentation.  These adjustments are only of a normal, recurring nature.
 
All December 31, 2010 balance sheet information in the Condensed Consolidated Financial Statements has been derived from our audited 2010 consolidated financial statements. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the interim-period-reporting provisions of GAAP and the Securities and Exchange Commission.
 
You should read the information in this Quarterly Report in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (the Annual Report), which is a combined report for Sempra Energy, SDG&E, PE and SoCalGas.
 
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. We follow the same accounting policies for interim reporting purposes.
 
The Sempra Utilities and Sempra Pipelines & Storage's Mobile Gas Service Corporation and Ecogas Mexico, S de RL de CV prepare their financial statements in accordance with GAAP provisions governing regulated operations, as we discuss in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 

NOTE 2. NEW ACCOUNTING STANDARDS
 

There are no recent accounting pronouncements that are anticipated to have an impact on or are related to our financial condition, results of operations, or disclosures.
 

 

NOTE 3. RECENT INVESTMENT ACTIVITY
 

 
SEMPRA PIPELINES & STORAGE
 
In the three months ended March 31, 2010, Sempra Pipelines & Storage contributed $65 million to Rockies Express, a joint venture to own and operate the Rockies Express Pipeline. The contribution was the last required for the construction phase of the project.
 
On April 30, 2010, Sempra Pipelines & Storage completed the acquisition of the Mexican pipeline and natural gas infrastructure assets of El Paso Corporation for $307 million ($292 million, net of cash acquired). Proforma impacts on revenues and earnings for Sempra Energy had the acquisition occurred on January 1, 2010 were additional revenues and earnings of $2 million and $6 million, respectively, for the three months ended March 31, 2010.
 
We provide information about Sempra Pipelines & Storage’s recent investment activity in Chile and Peru in Note 12.
 

 

NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
 

We provide additional information concerning all of our equity method investments in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 
 
RBS SEMPRA COMMODITIES
 
RBS Sempra Commodities LLP (RBS Sempra Commodities) is a United Kingdom limited liability partnership that owned and operated commodities-marketing businesses. We account for our investment in RBS Sempra Commodities under the equity method, and report our share of partnership earnings in Parent and Other.
 
We and our partner in the joint venture, The Royal Bank of Scotland (RBS), sold substantially all of the partnership’s businesses and assets in four separate transactions completed in July, November and December of 2010 and February of 2011. We expect our share of remaining proceeds to approximate $779 million, the amount of our investment in RBS Sempra Commodities as of March 31, 2011.
 
On April 15, 2011, we and RBS entered into a letter agreement (Letter Agreement) which amended certain provisions of the agreements that formed RBS Sempra Commodities.  The Letter Agreement addresses the wind-down of the partnership and the distribution of the partnership’s remaining assets.  In accordance with the Letter Agreement, we received a $329 million distribution on April 15, 2011.  This distribution included sales proceeds and our portion of 2010 distributable income totaling $357 million, less amounts to settle certain liabilities that we owed to RBS of $28 million.  The Letter Agreement affirms that RBS Sempra Commodities will consider additional distributions of capital after taking into account various factors including available cash, the need for prudent reserves, potential payouts to the purchasers of the partnership’s businesses, and any accrued or projected future operating losses or other wind-down expenses of the partnership.  The availability of cash is also impacted by the transfer of trading accounts to JP Morgan, one of the buyers in the sales transactions.  These transfers and the related collection of accounts receivable and net margin continue as planned, and will be done as promptly as practicable during 2011.  Future distributions will generally be made 51 percent to RBS, and 49 percent to us. The Letter Agreement also allows RBS Sempra Commodities to make capital calls to us, subject to certain limits, if necessary to support the remaining operations, for other liabilities or for other payments owed in connection with the sales transactions (subject to additional limitations). We do not anticipate any such capital calls.
 
In connection with the Letter Agreement described above, we also released RBS from its indemnification obligations with respect to the items for which JP Morgan has agreed to indemnify us.
 
For the three months ended March 31, 2011 and 2010, we recorded a pretax equity loss of $8 million and earnings of $7 million, respectively, from RBS Sempra Commodities.
 
We discuss the RBS Sempra Commodities sales transactions and other matters concerning the partnership in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
 

 

NOTE 5. OTHER FINANCIAL DATA
 

 
TEMPORARY LIFO LIQUIDATION
 
SoCalGas values natural gas inventory by the last-in first-out (LIFO) method. As inventories are sold, differences between the LIFO valuation and the estimated replacement cost are reflected in customer rates. Temporary LIFO liquidation represents the difference between the carrying value of natural gas inventory withdrawn during the period for delivery to customers and the projected cost of the replacement of that inventory during summer months.
 
 
VARIABLE INTEREST ENTITIES (VIE)
 
We consolidate a VIE if we are the primary beneficiary of the VIE. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess
 
§  
the purpose and design of the VIE;
 
§  
the nature of the VIE's risks and the risks we absorb;
 
§  
the power to direct activities that most significantly impact the economic performance of the VIE; and
 
§  
the obligation to absorb losses or right to receive benefits that could be significant to the VIE.
 
 
SDG&E has agreements under which it purchases power generated by facilities for which it supplies all of the natural gas to fuel the power plant (i.e., tolling agreements).  SDG&E’s obligation to absorb natural gas costs may be a significant variable interest.  In addition, SDG&E has the power to direct the dispatch of electricity generated by these facilities. Based upon our analysis, the ability to direct the dispatch of electricity may have the most significant impacts on the economic performance of the entity owning the generating facility because of the associated exposure to the cost of natural gas, which fuels the plants, and the value of electricity produced. To the extent that SDG&E (1) is obligated to purchase and provide fuel to operate the facility, (2) has the power to direct the dispatch, and (3) purchases all of the output from the facility for a substantial portion of the facility’s useful life, SDG&E may be the primary beneficiary of the entity owning the generating facility. SDG&E determines if it is the primary beneficiary in these cases based on the operational characteristics of the facility, including its expected power generation output relative to its capacity to generate and the financial structure of the entity, among other factors. If we determine that SDG&E is the primary beneficiary, Sempra Energy and SDG&E consolidate the entity that owns the facility as a VIE, as we discuss below.
 

Otay Mesa VIE
 
SDG&E has a 10-year agreement to purchase power generated at the Otay Mesa Energy Center (OMEC), a 605-MW generating facility that began commercial operations in October 2009. In addition to tolling, the agreement provides SDG&E with the option to purchase the power plant at the end of the contract term in 2019, or upon earlier termination of the purchased-power agreement, at a predetermined price subject to adjustments based on performance of the facility. If SDG&E does not exercise its option, under certain circumstances, it may be required to purchase the power plant at a predetermined price.
 
The facility owner, Otay Mesa Energy Center LLC (OMEC LLC), is a VIE (Otay Mesa VIE), of which SDG&E is the primary beneficiary.  SDG&E has no OMEC LLC voting rights and does not operate OMEC. In addition to the risks absorbed under the tolling agreement, SDG&E absorbs separately through the put option a significant portion of the risk that the value of Otay Mesa VIE could decline. Sempra Energy and SDG&E have consolidated Otay Mesa VIE since the second quarter of 2007. Otay Mesa VIE's equity of $119 million at March 31, 2011 and $113 million at December 31, 2010 is included on the Condensed Consolidated Balance Sheets in Other Noncontrolling Interests for Sempra Energy and in Noncontrolling Interest for SDG&E.
 
OMEC LLC has a loan outstanding of $362 million at March 31, 2011, the proceeds of which were used for the construction of OMEC. The loan is with third party lenders and is secured by OMEC's property, plant and equipment. SDG&E is not a party to the loan agreement and does not have any additional implicit or explicit financial responsibility to OMEC LLC. The loan fully matures in April 2019 and bears interest at rates varying with market rates. In addition, OMEC LLC has entered into interest rate swap agreements to moderate its exposure to interest rate changes. We provide additional information concerning the interest rate swaps in Note 7.
 
Other Variable Interest Entities
 
SDG&E's power procurement is subject to reliability requirements that may require SDG&E to enter into various power purchase arrangements which include variable interests. SDG&E evaluates these contracts to determine if variable interests exist and, based on the qualitative and quantitative analyses described above, if SDG&E, and thereby Sempra Energy, is the primary beneficiary. SDG&E has determined that no contracts, other than that relating to Otay Mesa VIE mentioned above, result in SDG&E being the primary beneficiary as of March 31, 2011. In addition to the tolling agreements described above, other variable interests involve various elements of fuel and power costs, including certain construction costs, tax credits, and other components of cash flow expected to be paid to or received by our counterparties. In most of these cases, the expectation of variability is not substantial, and SDG&E generally does not have the power to direct activities that most significantly impact the economic performance of the other VIEs. If our ongoing evaluation of these VIEs were to conclude that SDG&E becomes the primary beneficiary and consolidation by SDG&E becomes necessary, the effects are not expected to significantly affect the financial position, results of operations, or liquidity of SDG&E. SDG&E is not exposed to losses or gains as a result of these other VIEs, because all such variability would be recovered in rates.
 
Sempra Energy’s other business units also enter into arrangements which could include variable interests.  We evaluate these contracts based upon the qualitative and quantitative analyses described above.  We have determined that these contracts are not variable interests in a VIE and therefore are not subject to the requirements of GAAP concerning the consolidation of VIEs.


 
PENSION AND OTHER POSTRETIREMENT BENEFITS
 
 
Net Periodic Benefit Cost
 
The following three tables provide the components of net periodic benefit cost:
 
NET PERIODIC BENEFIT COST -- SEMPRA ENERGY CONSOLIDATED
(Dollars in millions)
 
Pension Benefits
Other Postretirement Benefits
 
Three months ended March 31,
Three months ended March 31,
 
2011 
2010 
2011 
2010 
Service cost
$
 22 
$
 22 
$
 7 
$
 7 
Interest cost
 
 43 
 
 43 
 
 17 
 
 15 
Expected return on assets
 
 (37)
 
 (36)
 
 (12)
 
 (12)
Amortization of:
 
 
 
 
 
 
 
 
    Prior service cost
 
 1 
 
 1 
 
 ― 
 
 ― 
    Actuarial loss
 
 9 
 
 8 
 
 4 
 
 2 
Regulatory adjustment
 
 (29)
 
 (29)
 
 2 
 
 2 
Total net periodic benefit cost
$
 9 
$
 9 
$
 18 
$
 14 

NET PERIODIC BENEFIT COST -- SDG&E
(Dollars in millions)
 
Pension Benefits
Other Postretirement Benefits
 
Three months ended March 31,
Three months ended March 31,
 
2011 
2010 
2011 
2010 
Service cost
$
 7 
$
 7 
$
 2 
$
 2 
Interest cost
 
 13 
 
 12 
 
 2 
 
 2 
Expected return on assets
 
 (12)
 
 (10)
 
 (2)
 
 (2)
Amortization of:
 
 
 
 
 
 
 
 
    Prior service cost
 
 1 
 
 1 
 
 1 
 
 1 
    Actuarial loss
 
 2 
 
 3 
 
 ― 
 
 ― 
Regulatory adjustment
 
 (9)
 
 (12)
 
 1 
 
 1 
Total net periodic benefit cost
$
 2 
$
 1 
$
 4